Profit E-Magazine Issue 57

welcome

THERE IS MORE TO THE IMF THAN BAILOUTS It is not an often-appreciated fact, but politicians actually do try to keep most of their major campaign promises, at times regardless of whether those promises are worth keeping. For instance, Nawaz Sharif was obsessed with improving electricity availability in urban areas of Pakistan because that is what he promised voters. Asif Ali Zardari named every possible thing he could after his late wife because he ran on the memory of Benazir Bhutto. And Imran Khan is obsessed with not turning to the International Monetary Fund (IMF), even if it means making his otherwise perfectly intelligent finance minister look like a bumbling idiot to everyone who remembers him from days as a titan of Corporate Pakistan.

In recent days, the government appears to be finding its rhythm finally, after months of what appeared on the surface to be inactivity, but what we now know was essentially the time it took them to complete an intense international begging tour to all countries that still give the government of Pakistan some attention and respect. It also looks like the government might actually be able to achieve its goal: get a combination of both short-term current account and fiscal support from so-called friendly foreign governments, avoid going to the IMF for a bailout which would likely come with many strings attached, while also building the breathing room to enact difficult, but necessary, structural reforms.

Except that this image is not at all true. Indeed, the Imran Khan Administration might well be mortgaging future of the next generation of Pakistanis to foreign governments whose agenda is far from clear, and whose economic and political interests in Pakistan

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are far from benign.

Let us consider the most charitable interpretation of what the government is seeking to achieve.

Firstly, the government wants to avoid an IMF bailout because that typically comes with conditions that the government considers too harsh, and not tailored to the Pakistani economy’s needs. Nonetheless, the government does recognise that the balance of payments crisis in has hit an acute phase, and the economy needs an immediate injection of dollars from somewhere. And so, it is following through with the second prong of its agenda: seeking balance of payments support, through a combination of deferred oil payments and government loans and deposits from the governments of Saudi Arabia and the United Arab Emirates, and the prospect of support from some other governments such as China and Qatar.

And then lastly, the government claims to enacting structural reforms through what is being termed a “mini-budget� but is really more of an omnibus statement of economic priorities on the part of the Imran Khan Administration.

Here are some questions that we would like to ask the government about its strategy:

why do we not know how to negotiate with the IMF? We have been through nearly two dozen rounds of negotiations for IMF bailouts before in our history. Why does the finance ministry still not have the kind of competent staff that could negotiate a bailout package that is flexible enough for the needs of the Pakistani economy?

On the question of the alternatives to the IMF, we also have concerns about the government’s strategy, as well as some questions. For instance, the balance of payments support it has been able to get from Riyadh and Abu Dhabi is for between one and two years. What happens when that period ends and the money needs to be paid back? Where will the money come to replace the outflow?

We would like to dig deeper on this question: what exactly are Saudi Arabia and the United Arab Emirates getting in return for their financial support of the government of Pakistan? Will Pakistani troops be sent to fight the Saudi crown prince’s vicious war in Yemen?

Will the independence of Pakistan’s relationship with Iran or any other country be affected? What exactly is the price Pakistan is paying for this money and will be paid in Pakistani blood?

And then there is the question of the so-called structural reforms laid out in the mini-budget. If there were any, please let us know, because we found precisely zero policies announced by Finance Minister Asad Umar that would address any of the long term structural challenges facing the Pakistani economy.

It was more of the same: a few crowd-pleasers mainly designed to appeal to Pakistan’s upper middle class and business owners. Nothing that forces the tax-evading wealthy to pay their fair share. Nothing that addresses the growing – and by now perennial – problem of intercorporate circular debt in the energy supply chain. Nothing to level the playing field for smaller businesses seeking to develop globally competitive, exportoriented companies in Pakistan that happen to not be in the dominant but sclerotic textile sector.

Is this what passes for structural reform under the Imran Khan Administration? Is this the very best that the brilliant Asad Umar can do? Is it?

We are not angry or frustrated with Asad Umar. Just disappointed. He should know better. And he probably does. But he lacks the courage of his convictions to speak truth to power. He should remember that history tends to be very unkind to those who make their talents subservient to their hunger for proximity to power.

There is a big difference between the Saudi government seeking to build a multi-billion-dollar refinery in Pakistan because Riyadh seeks to wield political influence over Islamabad and a multinational company that decides to set up a subsidiary in Pakistan because it genuinely believes in the prospects of the Pakistani market.

The reason why the IMF is a better option that money from Saudi Arabia or the UAE is that, unlike the Saudi and Emirati money, the IMF money comes with a “good-housekeeping seal of approval”. Global investors look at a successful implementation of an IMF bailout programme as a sign that an economy is finally turning the corner and undertaking the structural reforms it needs to take.

And what, pray tell, is so wrong with the IMF’s conditions. While there are lots of specifics, the IMF’s fundamental purpose comes down to getting the government to stop wasting money on subsidising the inefficient energy consumption of the upper middle class, and tax the people who actually should be taxed in the country. What is so wrong with that?

And as to the charge that the IMF does not customise its policy prescriptions for Pakistan, that is only because Pakistan’s problems are completely identical to those of other badly run economies. We lack originality even in the nature of our economic crises!

Asad Umar is seeking to undertake a highly complicated maneuver to bypass the IMF. It is possible he may achieve some short-term success. But the long-term cost of that will be paid by every Pakistani under the age of 40. It is a big disappointment to see this inanity come from a man who used to inspire and empower young people to do great things.

Farooq Tirmizi Managing Editor

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

FROM THE MANAGING EDITOR

Readers Say Such a lengthy thesis on milk in Pakistan, the fact remains that packaged milk available is not affordable for 90% of the consumers. Neither it is technically ideal, as developed countries have left this technology and by and far use pasteurized milk.

As the proverb goes ‘canals of milk flowing in a non agriI country like UK’, whereas in Pakistan, a predominantly agri country, the biggest challenge is to make pure milk for the majority of population available on affordable prices. In Pakistan, billions of rupees are spent on ads making the product attractive, whereas hardly any penny is spent on ads of milk and milk products in UK or European countries.This phenomena obviously make poor Pakistanis victim of multinationals. That is pathetic. (Apropos: The next phase of the milk wars) M.Aslam Chaudhary A good analysis but the fact is that these milk companies in Pakistan need to be honest about their offerings and get certified for halal and quality of their products.

Many milk products in Western countries are now getting Halal certified. (Apropos: The next phase of the milk wars) Kamran Ali Very Well Written Article by By Shoaib Pervaiz and Farooq Tirmizi. The detail you guys have put in the article are absolutely true. Good work guys and keep it up.

(Apropos: The next phase of the milk wars) Shahid Ayub

How to ContaCt

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

COMMENTS

Nestle knows its product is sub-standard.

They have been fooling the Pakistani masses: duping them into believing the white chemical they drink is milk. I don't care about Olpers, but at least their ad was exposing Nestle’s chemical poison, that we feed our kids. And the ad itself does not mention or categorically show Nido. However, if Nido assumes that the product showcased in the ad was theirs, it kind of proves the point in the ad. Pakistanis are foolish, they think anything foreign must be better or healthier, but it's a multinational scam. (Apropos: The next phase of the milk wars) Jimmy Khan I think a major question is not whether people have preference for female ori-

ented ride-hailing services. The question arises regarding those who are interested, are they willing to pay the premium for that? If people are willing to pay a premium, ride-hailing services can introduce a feature of women safe drivers, those who are registered with local police and have their background checked. This will make them have a certain premium over others.

(Apropos: Can women-only ride-hailing services solve the harassment problem?)

Anas A comprehensive article on the status of e-commerce in Pakistan which delves deeply into how the sector has evolved since its inception in the early 2000’s. The author has covered the various facets of the country’s nascent e-commerce sector and it depicts the immense potential that still remains untapped and requires development on part of the government to stimulate growth in it. Also, such kind of an analysis is a welcome development and such evaluations should be done on a frequent basis, so it provides venture capitalists and angel investors which segment would most likely be ripe for investment.

(Apropos: All you wanted to know about Pakistan’s e-commerce scene (but didn’t know who to ask) Anonymous Nice article about the diminishing of cotton crop growth in the country and the preference of agriculturists to grow sugarcane instead due to offering better returns.

The author rightly highlights the failure of successive governments to invest into seed research and the ramifications of it has seen the seed being planted in Pakistan being out of date with global norms. Additionally, the economics of cotton and how other crops have overtaken it is a cause of immense concern, as imports of the commodity are rising putting pressure on the foreign exchange reserves and making the country’s textile sector uncompetitive globally. To improve competitiveness, the government needs to take appropriate measures and offer incentives for farmers to grow cotton, invest in research and provide much needed value-addition to enhancing exports. (Why Pakistan’s cotton value-chain has begun to atrophy) Anonymous

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Sindh Chief Minister Syed Murad Ali Shah

QUOTE

“Going forward, my government intends to introduce technology and quicker procedures to assist investors”

“It is not a new budget, but an economic reform package aimed at laying a strong foundation for the country’s economy” Finance Minister Asad Umar

$10b

oil refinery is being planned to be set up by Saudi Arabia in Pakistan’s deepwater port of Gwadar, said the Saudi Energy Minister. Pakistan wants to attract investment and other financial support to tackle a soaring current account deficit caused partly by rising oil prices. Last year, Saudi Arabia offered Pakistan a $6 billion package that included help to finance crude imports. “Saudi Arabia wants to make Pakistan’s economic development stable through establishing an oil refinery and partnership with Pakistan in the China Pakistan Economic Corridor,” Saudi Energy Khalid al-Falih told reporters in Gwadar. He said Crown Prince Mohammad bin Salman would visit Pakistan in February to sign the agreement. The minister added that Saudi Arabia would also invest in other sectors.

Beijing has pledged $60 billion as part of the China Pakistan Economic Corridor (CPEC) that involves building power stations, major highways, new and upgraded railways and higher capacity ports, to help turn Pakistan into a major overland route linking western China to the world. The Saudi news agency SPA earlier reported that Falih met Pakistan’s petroleum minister and Maritime Affairs Minister Ali Zaidi in Gwadar to discuss cooperation in refining, petrochemicals, mining and renewable energy. It said Falih would finalize arrangements ahead of signing memorandums of understanding.

Rs36.4b

have been recovered by the Sindh Excise department during July-December 2018, said Sindh Excise, Taxation, Narcotics Control and Parliamentary Affairs Minister Mukesh Kumar Chawla. The ET&NC minister was presiding over a meeting in his office. Sindh Excise & Taxation and Narcotics Control Secretary Abdul Rahim Shaikh, Excise and Taxation Director General Shabbir Ahmed Shaikh and other directors also attended the meeting. Briefing the meeting, Director General Shabbir Ahmed Shaikh said that Rs3.5 billion were recovered through motor vehicle tax, Rs28.5 billion through infrastructure cess and Rs247 million through professional tax. Similarly, he said, Rs146 million were recovered through cotton fee, Rs1.37 billion through property tax, Rs32 million through entertainment duty while remaining amount was recovered through other taxes.

On the occasion, Sindh Minister for Excise & Taxation and Narcotics Control and Parliamentary Affairs Mukesh Kumar Chawla asked officers to work harder and bring improvement in collection of property tax.

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15pc

increase in oil import bill was recorded during the first half (July-December) of current financial year 2018-19 to $7.6 billion from $6.675 billion in the corresponding period of 2017, data released by Pakistan Bureau of Statistics (PBS) revealed.

According to PBS data, imports from approximately all of the categories leaving agricultural and petroleum groups contracted in the first half of current FY18-19.

As per the data, the fall in total import value was more intense in December as it declined 8.88% year-on-year (YoY). In December last year, the value of petroleum and agricultural group imports marginally rose by 0.92% and 2.21%, whilst food bill fell by 4.36%, machinery 22.16%, transport 38.26% and textile 4.01%. The half-yearly increase in petroleum group imports was contributed by a rise in crude oil (+38.15%), liquefied natural gas (LNG) 95.08%. And petroleum products registered a decline of 12.01% and petroleum gas (liquefied) 29.20% respectively during the period under review. A 35.7% plunge in petroleum products and 9.72% in crude in terms of quantity imported was registered during the period under review. Moreover, for the first half of current FY18-19, machinery imports declined by 18.67% to $4.47 billion compared to $5.5 billion in the corresponding period of 2017.

“Effective steps are being taken to steer Pakistan Post out of deficit and make it a profitable entity” Minister for Communications and Postal Services Murad Saeed

$107

QUOTE

0.6pc

decline was registered in power generation year-on-year (YoY) to 7,719 gigawatt-hour (gWh) (10,375MW) in December compared to 7,763 GWh in December 2017. In the calendar year (CY) 2018, power generation rose by 8.7% YoY and major contributors during December last year remained gas, coal, hydel, regasified liquefied natural gas (RLNG), furnace oil and nuclear. The share of RLNG based generation rose to 12.4% against 5.1% in the same period last year (SPLY). However, the share of furnace oil (FO) based generation exhibited a significant decline to 12.1% from 29% in December 2017. Hydel-based generation showed a rise of 8.4% YoY, on the back of new additions in the system i.e.

37pc

month-on-month (MoM) increase was registered in current account deficit to $1.7 billion in December 2018 as compared to $1.2 billion in November 2018, according to data released by State Bank of Pakistan. However, during the first half (July-December) of the current financial year 2018-19, the current account deficit declined by 4% yearon-year (YoY) to $8 billion compared to corresponding period of FY17-18 when it was recorded at $8.4 billion. According to Topline Securities CEO Muhammad Sohail, “The current account deficit was much higher than our expectations of $1 billion.” In brief comments, he added, “Further tightening in near-term through interest rate hike and rupee devaluation cannot be ruled out. The government should also implement significant additional taxation measures in next weeks mini-budget to curtail both demand and the burgeoning fiscal deficit.” The major rise in CAD has been fueled by a 12% ($574 million) MoM rise in total imports to $5.5 billion compared with $4.9 billion in the previous month.

is the minimum wage of Pakistanis according to a report released by Renaissance Capital, dropping from $127 in June last year due to the devaluation of the rupee. It observed how the gap between Pakistan and Bangladesh had lessened in the past year or so, considering that wages were around 100% higher previously in the former and now are just 13% higher. According to the report, as Pakistan gets cheaper it would provide more competition to Bangladesh where the minimum wage stood at around $95, up from $63 in 2018 after a hike just weeks before the election. A year ago, wages in Pakistan were $136 vs $64 in Bangladesh and now the difference stood at $107 compared to $95 currently and it has made big strides in becoming regionally competitive again, said Renaissance Capital. Although, the report highlighted that the data available for these countries may be a mix of gross or net wages and may not be so reliable. Interestingly, the minimum wages for workers in Bangladesh have exhibited a rise and are almost at parity with their Pakistani peers, which has encountered a significant erosion due to rupee devaluation.

Renaissance Capital projected the rupee might further depreciate by another 10%.

Moreover, it noted that existing factories were not about to pick up and leave Bangladesh, however, these figures indicate a potential change in future foreign direct investment (FDI) investment flows. According to the report, Bangladesh’s textile exporters will still attract a successful cluster of FDI, however, when wages exhibit such a tangible shift, investors may contemplate looking to Pakistan or other countries.

“As recently as mid-2018, the figure of $63 in Bangladesh was just $18 above Ghana and three times Ethiopia – now the gap over Ghana has doubled to $36 and is more than four times above Ethiopia. Note Ethiopia may be much cheaper than Ghana, but its electricity and literacy rates are way lower too,” said the report. The government has taken various measures to enhance Pakistan’s exports and its competitiveness which has included lowering the electricity and gas tariffs for zero-rated industries.

$200m

is being committed to be invested

by Cargill, the global agriculture giant over the next three to five years in Pakistan. The announcement was made soon after Cargill’s global executive team, led by Cargill Asia Pacific Chairman and Global Strategy head Marcel Smits and Cargill Agricultural Supply Chain President Gert-Jan van den Akker met Prime Minister Imran Khan, PM’s Advisor on Commerce Abdul Razak Dawood, Parliamentary Commerce Secretary Shandana Gulzar and other senior government officials to discuss the company’s future investment plans.

Being a global food and agriculture producer with a strong focus on Asia, Cargill aims to partner on Pakistan’s growth by bringing its global expertise and investment into the country.

BRIEFING

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I

By Adam Dawood

n my last article [titled “All you wanted to know about Pakistan’s e-commerce scene (but didn’t know who to ask)”, published in Profit on January 14, 2019] we discussed how Pakistan’s retail e-commerce sector has not expanded as rapidly or as widely as one might have expected it to. This rings particularly true when you compare its growth to other e-commerce verticals in similar regional markets like India, Indonesia, Philippines and Thailand.

We therefore continue our analysis where we will look at the challenges that the retail e-commerce sector faces, understand the potential solutions and strategies enemies at the gate may use to disintermediate marketplaces altogether.

Current Challenges

A

t this moment, there are a number of challenges that face e-commerce players.

While the list can be fairly detailed and granular, we will focus primarily on the core challenges that affect both customers and e-commerce merchants on a day-to-day basis.

Product information

C

ustomers visit e-commerce sites for multiple reasons. These may range from pre-purchase research, comparison shopping, discovering new products, to directly purchasing a specific item. Regardless of what brings the user to the website, what they seek before

all else is product information. Unfortunately, in Pakistan this vital part of the user experience has been given the least amount of attention, where today, the majority of marketplaces are not able to provide customers with little more than basic product information. Whatever information does exist on most product pages does not exceed that which you get from viewing a singular image on the website.

When shopping online in Pakistan, most of the time you will only find the product name, its

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price, and one photo. This negligence towards product content exists primarily because priority is given to getting as many products online (a.k.a growth in assortment) and at the lowest possible cost. The examples below show the difference between good and bad product descriptions. Keeping in mind that good product content drives sales and poor content will likely kill them, it is perplexing that marketplace leaders bemoan poor traffic conversion rates but persist with providing poor product content. Enriched product descriptions are a core component of the user experience and a building block of sales and marketing functions.

Enriched product data has been proven to increase the conversion rate of e-commerce stores. However good product data is tough to obtain and expensive to create at scale. Some studies have found that 20% of purchase failures are potentially a result of missing or unclear product information.

Payments

I

f a customer does end up purchasing a product and adding it to their cart, then the primary decision they need to make is their payment method. While the majority of customers choose cash-on-delivery (COD), over the last two years we have seen a strong trend towards online payment channels with larger marketplaces doing a large proportion of their sales via electronic pre-payment methods.

With most banks not allowing their debit cards to be used for online transactions (most only allow it after a call to their helpline), most custom-

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ers see payments online as a hassle in itself. Mobile wallets could remove this hurdle. However, it is not a ubiquitous form of money right now.

In response to the hacking at BankIslami, the State Bank of Pakistan (SBP) has placed overly burdensome security measure on banks. This greatly reduces the chance of Pakistanis converting their cash habits towards the formal banking sector.

Payments are also challenging for merchants who now have a myriad of payment gateways to choose from but not necessarily the time or resources to integrate all of them at once. When EasyPay was launched in 2015, we felt it was a great incremental addition because in one integration an e-commerce merchant could offer a mobile wallet, over-the-counter (OTC) payments and a credit/debit card gateway all at once. However, now with rise of new wallets such as JazzCash, SimSim and services such as Keenu, FonePay etc, the number of integrations required now are much greater.

If these gateways are not integrated, then customers who are starting to slowly shift towards online payment methods will not be able to pay with their preferred payment partner.

Vendors

W

hen the purchase is complete, we come to our vendor base, which in our opinion is the key bottleneck to growth within the e-commerce industry today. The majority of vendors in Pakistan do not have the proper tools for accurate inventory manage-

ment at the SKU level, let alone being able to connect inventory levels in real time with marketplaces.

In a recent article it was reported that less than 10% of businesses use an enterprise resource planning (ERP) software system. It is because of this lack of real time inventory-level information flowing through the supply chain that a large portion of orders for e-commerce marketplaces go unfulfilled. As is inherent in legacy businesses in the midst of transformation, it is common place for even a brand’s own website to not have visibility of, or connectivity to, their warehouse or retail inventory management solutions.

Having said that, over the last six years, we have seen many vendors, brands and resellers transform themselves very rapidly to cater to this increasing demand for quality information. Many have exhibited the wherewithal and appetite to learn and invest time in making the necessary changes needed to carve a place for themselves on the e-commerce arena. A fair number have set up new divisions specifically to focus on e-commerce marketplaces and have invested in getting the right technology infrastructure in place to make their mark. Brands and vendors have also started to realise that online marketplaces are an inevitability. Like the largest malls, they attract a lot of customers even if it is only to window-shop and brands cannot afford to not have a store to display their products.

Logistics

I

f the product is available the next step is to enter the logistics sector and last mile delivery. Pakistan has a large number of logistics players offering package deliveries and COD services. We have one of the strongest line haul and last mile services when compared with countries in South Asia such as Sri Lanka, Bangladesh, and Nepal.

However, the current infrastructure is still primarily built for letter delivery and not package delivery with a cash collection component.

Parcel delivery is currently conducted by two types of companies: generalists like TCS, LCS, M&P and specialists like BlueEx and Forrun. Generalists are delivering parcels through the legacy channels of courier riders while specialist companies are not able to scale

the market as much as they would like to.

What is shocking as well is that the standards of the industry for delivery is about 1-3 business days.

At present 15-20% of deliveries are returned to the sender due to one of two main reasons: the customer did not want the item or was consistently not available to receive the item over multiple attempts.

This inefficiency is partly driven from the fact that planning is still done manually on the ground rather than conducted through dynamic route planning. Picking products from vendors can take 2-3 days and repayment of collected funds between 7-30 days. All of these systems can and should be automated. Otherwise, the e-commerce industry will continue to face significant hurdles in its ability to scale much faster in the future.

The unit economics of parcel delivery is also heavily geared towards the last mile which can take up 50% of the total cost. This can occur due to multiple factors, such as customers not having visibility for when the order will be delivered, or couriers not having the exact change ready to end the transaction in a timely fashion. Incidentals such as these and more have led to a first-delivery delivery success rate of 55-65% and an overall success rate after three delivery attempts of between 70-80%.

With each attempt the cost of fuel, salary, etc. is compounded and this leads to a very high cost rate.

New players are looking to scale their unit economics by focusing on the optimization of rides rather than scale.

By focusing on giving customers and

vendors real time updates on deliveries, dynamic route optimisation and delivery algorithms, they are looking to increase the first-delivery success rate and bring down average delivery times from 12-15 mins down to just a few minutes.

The Future Builders

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hile there is no doubt, that there are serious challenges that in the industry hasn’t yet even begun to solve, there are plenty of reasons to be hopeful. Firstly, the large marketplaces are still investing within the industry and will continue to do so for the foreseeable future.

Secondly, there are a group of startups that have formed in the last year or so who are working on solving a lot of the problems faced directly by both large and small e-commerce marketplaces. These startups are also by and large funded and have founders who have a lot of experience within their respective sectors.

These new startups that are coming up are aiming to become aggregators and consolidators within the e-commerce industry which has the potential to help both the large and small e-commerce ventures across the country.

Vendor management

T

echnifai, a startup focused on providing close integrations between a brands e-commerce site and marketplaces. The integration works by taking all product data from a brand store such as Ego, including images, product name, price, stock quantity, etc. and then sending

it to marketplaces such as Daraz and Yayvo.

When marketplaces get an order for Ego’s products, Technifai sends the order details to Ego’s brand store who then process it like any other order and send a confirmation of dispatch to the marketplace all the while keeping inventory levels and prices synced between all other marketplaces that might have the same product listed.

The key challenges that Technifai solves is the issue of brands having to update their product and stock details to multiple marketplaces, multiple times a day. And marketplaces love it as their inventory is then a live replication of the brand’s store meaning they are able to market the products with minimal chance of order cancellation.

Product information management

P

roduct information management (PIM) is a major challenge for any e-commerce company, and one that is generally ignored due to the large investment and complexity required to get it right. At its core, retail e-commerce is about selling a product without being physically present.

In the absence of the physical product, enriched and accurate content is essential.

Brandverse is a product information management startup that will be going live in the first quarter of 2019.

They will work directly with providing brands, and with retailers, to create, maintain product information data.

Marketplaces and anyone else who requires it will be able to get fully enriched product listings including its volumetric weight, content description and high resolution and 3D photographs.

As it scales, the service will start to become invaluable to all ecosystem players, from marketplaces, to concierge e-commerce and logistics providers. Customers will benefit from the enriched content to help their purchase decisions, brands will gain consistent representation of their products across all digital touchpoints, webstores will benefit as their conversion rate will increase as will their assortments, at incrementally lower costs, fulfilment will become more accurate, and sellers across the country, whether they are online or offline sellers, will be able to

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sell their products online without creating content.

Payments

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hile e-commerce payments are still primarily processed through COD, over the course of the next 2–3 years we predict a much faster shift towards electronic pre-payments within the industry. There are now too many payment providers, and it is difficult for an e-commerce merchant to incorporate all of them.

APPS is one startup that is working on creating a master payment gateway for e-commerce merchants.

With one integration merchants will be able to offer their customers payment options ranging from credit/debit cards, Easypaisa Wallet, JazzCash Wallet, SimSim, Bank Transfer, Keenu, and so on.

Logistics

W

hile the typical logistics letter delivery services are very strong within the country, their services are still not optimised and geared for e-commerce deliveries.

Logistics companies do not provide open box deliveries, scheduled deliveries, or live updates on deliveries.

Where these services are attempted, they are not integrated directly into web-stores with application programming interfaces (APIs). For a large number of store owners, plugins are also not available by which merchants can in one click start printing air-way bills to dispatch orders and hence this requires lengthy processes.

E-commerce requires a much greater degree of logistics support than is fully available right now, and some local startups such as TPL Logistics and Trax are attempting to overcome some of these challenges directly.

The Future Builders we mention will all go on to support both large and small e-commerce companies and help them become more customer centric.

However, the traditional e-commerce marketplaces face a potentially very large and dangerous challenge in the years to come by fintech and banking plays that aspire to seamlessly combine payments and retail, much like WeChat & Paytm.

The biggest challengers to the marketplaces will most likely come in

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the form of fintechs such as SimSim & FonePay, telco-backed wallets such as EasyPaisa & JazzCash, or from bank-led apps, such as Alfa by Bank Alfalah, HBL Konnect, DigiSilk from SilkBank et al.

All of these companies are looking to create Pakistan’s first SuperApp.

The SuperApp challengers

T

he SuperApp is a concept that began in China with the development of TenCent’s WeChat. This revolutionary app has reshaped the entire country’s digital landscape ushering in unprecedented change in the economy both in terms of scale and speed of business. At its core it is just an instant messaging app, however, with microservice architecture built into it.

The app can serve as a payment portal as well as provide lending, ride-hailing, and food delivery services, including many others. It can even book your doctor’s appointments for you. This and so much more has been built right into the app.

In Pakistan, three names stand out right now when it comes to creating a SuperApp: EasyPaisa, JazzCash and SimSim. China’s Ant Financial, owned by TenCent’s main rival Alibaba, recently made a massive $184 million investment in EasyPaisa, to grow the overall financial base in Pakistan and bring them onto their app.JazzCash is vying for a competitive position in creating the SuperApp through its parent company Veon which does not want to be left behind in this race. They are investing a large sum over the next few years to expand their services.

Meanwhile SimSim is the fintech challenger who wants to move fast and make all consumer payments free. They were the first to incorporate a marketplace within their app and have plans to include food delivery and other services as well.

What makes each of these challengers a threat to retail marketplaces is that both EasyPaisa and JazzCash have a huge lead already in terms of their customer base when compared to Daraz.

With an active customer base which is already more than ten times greater, the ability to sell products directly to them can be achieved without much effort.

SimSim has already proven this as they have over two hundred thousand products on their app.

While SimSim might not have the customer base that the telco-backed wallets do, it has the ability to move quickly and by attracting customers to their wallets thanks to its always free promise. By offering free banking facilities, it is able to attract customers who are tired of paying fees at the traditional banks. It then uses its marketplace model and payroll systems it has developed as a way to build on its revenue model of providing payday loans and short-term credit to wallet holders.

The fintech marketplace

B

eing a nimbler startup, SimSim has already created a marketplace product using Technifai’s API’s. They have over two hundred thousand products available for any of their customers to purchase using their SimSim balance. Non-wallet holders can make their purchases with a credit card. The entire purchase journey on banking applications has the potential of being much faster given that payments methods are integrated and the customers names and home addresses are already saved within the Bank’s information vaults.

Even though SimSim has launched their marketplace service, it is not expected to be their core business. They are using the marketplace as means to attract and own customers attention by bringing them to their platform. Their strategy is to own the customer channel

and then monetise them with multiple other services such as micro-loans in the future. All banks need to look at diversifying their revenue models for the future.

A large chunk of their current profitability stems from investing deposits and interest earned on loans. For instance, in China customers use their banks primarily to receive their salaries. After this they quickly transfer all their money into AliPay or WeChat for spending or investment purposes.

Banks most definitely need to rethink their business models for millennials. A new age of banking could provide all these services on a unified platform, ensuring their customers not only bank with them, but shop, eat, and travel through their own portals.

Bank Alfalah provides a great example as they are pursuing an aggressive digital strategy to offer multiple services directly within their app. In the last six months, they have integrated Yayvo, Eat Mubarak and Bookme.pk directly into their app and will continue to build out their platform in the months to come.

their marketplace transactions.

We can already see the start of this battle as this year Pakistanis have been pushed towards more and more app download campaigns than ever before.

Daraz and EasyPaisa are currently leading the pack with roughly 5 million and 3.5 million downloads each.

Conclusion

Globally the e-commerce sector accounts for ~10% of the total retail sector.

In Pakistan this figure stands at less than 1%. Even though e-commerce revenues are doubling annually, the retail e-commerce sector in particular has a lot of challenges that need to be addressed now. With all the difficulties currently faced by the sector, its ability to scale while keeping customers happy will be a tough journey but one with unfathomable rewards at the end of it. Many new

startups which have recently launched are luckily addressing a lot of these challenges head on. By focusing on creating local solutions for local problems, the future could still be bright for the industry.

Even though no one can say for certain what the retail e-commerce landscape will look like two years from now, we do know that the SuperApp contenders will play a major role in in its development. Not only will they push the marketplaces to improve their service quality as a result of the increased competition, but they will also create customer awareness. By educating their considerably large customer base and bringing them on board towards e-commerce they will greatly increase the number of first-time orders and in doing so will expand the entire industry itself.

We, as an industry, need to focus on prioritising the customers’ needs first and more specifically on increasing the number of return customers. This will only happen if customers enjoy their online shopping experience and find it rewarding and meaningful. One fulfilled customer can provide immeasurable positive and, more importantly, free marketing for their e-commerce provider. Positive word of mouth marketing will be a key ingredient for the industry to take on a life of its own and grow at the 5-10x speed that it is easily capable of achieving. n

The author has been running eCommerce companies for the last 6 years.

Currently serving as the Head of Yayvo, his prior experience includes being the Managing Director of Kaymu.pk and the Product Manager at Daraz.pk.

Adam is also the Founder of DYL Ventures a startup consultancy.

Fight for revenue or customers?

O

ne of the key differentiators between all the fintech players and marketplaces is that the marketplaces that SimSim, JazzCash etc. will create will not end up being their key revenue driver. Instead they simply want to keep customers active on their app. Daraz and other marketplaces, on the other hand, derive key revenue and potential profitability primarily from

E-COMMERCE

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B

By Taimoor Hassan

y now, it is abundantly clear that the Pakistani economy is not working, at least not for the overwhelming majority of the people in the country, and perhaps not even for the politically well-connected rent-seeking elite for whom the entire economic structure has been distorted in the first place. What, then, is the way forward? The Imran Khan Administration’s economic team, led by Finance Minister Asad Umar, appear to be taking a long time in getting settled in, and appear indecisive about what to do next. We at Profit thought we might try to help them along.

Profit contacted five of the top experts on the economy to get their version of what is the right thing to do to put economy on the right track in the backdrop of falling exports and balance of payments crisis. All five have either directly worked in the government, or else been in a position to advise the government or key figures in the country’s ruling political parties.

And four out of the five have doctoral degrees in economics or related disciplines.

These accounts were narrated individually to Taimoor Hassan. They are presented here, without comment from Profit’s usually opinionated editorial staff.

[Editor’s Note: That seems harsh. True, but harsh.]

MACROECONOMIC POLICY

STABILISE THE

MACROECONOMY,

THEN FOCUS ON POVERTY ALLEVIATION

Reduce taxes, rein in government spending, and then prioritise poverty alleviation through programs to incentivise and fund entrepreneurship

P

Shaukat Tarin

akistan’s long-term economic strategy should focus on the welfare of the common man. The economy should be tweaked so that in the long run, economic benefits such as higher income levels and lower unemployment could be passed on to the common man.

The medium to long-term strategy to achieve these ends requires stabilizing the macroeconomic environment to attract investors who are willing to invest on a long-term basis. Key macroeconomic indicators such as inflation should be brought down and exchange rate should be stabilized, complemented with lower interest rates.

Presently, our fiscal side is totally out of line with our expenditures exceeding our income. The government takes most of the money and there is nothing left for the private sector and businesses. There is a need to increase our revenues on a war footing.

Our tax-to-GDP ratio is very low so if we plan our economy to grow at a rate of 6-8%, the tax-to-GDP ratio needs to be increased to 20%, from the present around 13%, in the next five years. The tax collection should be done across the board with a primary emphasis on introducing new tax filers in

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the tax net instead of increasing taxes on those who are already in the tax net.

If we increase the number of taxpayers to 10 million in the next five years, we stand a chance.

Secondly, the rate of sales tax should also be reduced from 17.5%.

Overall, we should introduce a progressive tax regime in which all incomes are taxed, all consumptions are taxed and any exemptions are expunged.

In the same spirit, we have to rationalise our expenditures, with the debt payments among them being the most sizeable after defence expenditure. A major revenue affliction comes from our public sector companies which incur losses to the tune of Rs700-750 billion per year. These commercial organisations should be turned into profit-making entities through proper structural reforms to enable them to earn profits to contribute towards the national exchequer. Expenditures need to be rationalised and all unnecessary expenditures like the number of ministries and divisions should be cut.

On the external side, we always run into a problem when we run out of dollars and during the past five years, our trade deficit has doubled. Instead of increasing, our exports have decreased and this happened despite the fact that our oil imports decreased due to a slump in oil prices and commodity prices also decreased. This is the height

of our under-performance. The problem lies in the fact that we don’t have a proper export base which needs to be broadened.

We need to work on our imports side and curb frivolous and unnecessary imports. We also need to work more on our exports.

The issue with our exports is that we don’t have an exports base which needs to be broadened. We need to export agriculture, IT and engineering products and explore new areas where our export competitiveness can be increased. Our existing exports should be more value added so that we don’t lose competitive edge in the market for existing exports. In textiles, which are around 60% of our exports, we are converting one million bales into $1 billion whereas China converts the same one million bales into $4 billion. They are able to do that because they add value to their products. If we convert one million bales into $4 billion, we will be able to add over $45 billion through the 14 million bales in just textile exports. The government should provide subsidies to the industries as long as they are making value additions to their products.

The problem with value addition is that it requires consolidating. Presently, businesses in Pakistan are being run by families and there are no foreign investors in the exports sector. This essentially means that no capital comes into

Pakistan from outside and there is no solid connection with the international markets. It all needs to be consolidated.

The bankruptcy law, that we call Corporate Restructuring Act (CRA), needs to be made active.

Smaller companies need to be consolidated and foreign investors need to be brought in as they will bring the capital, technology and access to the international markets. Moreover, the Special Economic Zones (SEZs) that China has made should be encouraged to export.

Pakistan should produce goods where it has vertical competitiveness. We should also scale up the production of goods that are essential for us to meet the domestic demand and then also export them. Foreign currency reserves can also be beefed up through remittances by introducing diaspora bonds to encourage the professionals who chose to keep their money outside of Pakistan to bring it back to the country.

Then there is Foreign Direct Investment (FDI). The Board of Investment (BoI) needs to be strengthened to be able to provide a one-stop shop for investors so that all of their problems are solved at one place. The office of the BoI should ideally be located in the office of the prime minister, should be high-powered and be formed of people with high credibility.

The government should also provide a stimulus to the housing sector which further stimulates at least 40 other industries which can generate a lot of jobs and generate economic growth that will be widespread.

Once the macroeconomic environment has been stabilized and the housing sector has been stimulated, the agriculture sector needs to be reformed.

The first step into developing the agriculture sector would be to increase productivity that can be done through the usage of better quality of seeds and improving irrigation techniques. The Zarai Taraqiati Bank Ltd (ZTBL), instead of just lending the money, should have an attached services division in which experts advise people about seeds, water, levelling of land and marketing of agricultural products etc. There is a need to strengthen institutions altogether.

Once the main trajectory is set, Pakistan needs to alleviate poverty.

Poverty should not just be left to the trickle-down effect. The lowest levels of our society, which form about 6-6.5 million households, should be enabled to stand on their feet through encouraging entrepreneurship in them rather than making them beggars. They should be given money to start small businesses so that they can be bread earners for themselves and others instead of just

being beggars.

An overarching set of measures would be required for administrative reforms to implement the policies in the right way.

Having said all that, all plans made by the government should have a buyin of the stakeholders. From operating ministries down to the common man, they should be a part of the plan. If the government is mulling over a policy concerning agriculture, it should engage all stakeholders including the farmers. If a policy is being devised about industries, the government should involve the industrialists as well as the private sector, workers and buyers and sellers for their input about particular problems faced by the industry.

The whole process, however, requires political will and competent people. As long as mediocre people are hired to run policies, mediocre results will be produced. The government institutions should be revamped by hiring very good and competent people who should then be allowed the space to work. They should also be held accountable provided that they are given the required authority and space they need to do their work in the first place.

Shaukat Tarin is a banker and former federal finance minister.

MOVE OUR

EXPORTS UP THE VALUE CHAIN The government should formulate a clear trade strategy, and then subsidise industries that can compete globally

I

Dr Hafiz A. Pasha

n the short term, we have no other option but to stabilise the country and the economy. Hopefully, once we have stabilised it, in the next two or three years, we can probably move on to somewhat higher growth trajectory of about 5-6%.

At this point in time, we would probably go down in terms of growth to about 3.5-4% at the maximum. Historically, we have ended up with a balance of payment crisis because we followed a policy of import substitution, which has limits to it in terms of internal market growth. Had we followed an external ex-

MACROECONOMIC POLICY

port-led growth strategy, we would probably have found ourselves in a better position. Other countries like India, in the ‘90s, switched to an export-led growth strategy and their exports went up almost six times in just a decade. Bangladesh has done well and they have very solid results. Their per capita income has, more or less, caught up with Pakistan and they have been able to sustain their international transactions.

The defect lies in the strategy which was not focused on sustainable external relations through export-led growth.

The other problem we have had historically, which doesn’t explain the business cycle but explains the longterm growth rate, is that our investment rates are relatively low. In the Musharraf period, the investment rate approached to about 20%. In the Ayub Khan period in the ‘60s, it was between about 20-25%. Now we are down to about 15-16%. Pakistan’s two big constraints have been a lack of export-led growth and a lack of relatively high level of investment.

The problem with the import-substitution strategy is that although we are a very large country, our per capita income hasn’t been going up very rapidly. And then there are limits to market growth.

The other thing with the import substitution strategy is that it is doomed to failure in the presence of free trade agreements (FTA) especially with China, which counts to about 60-70% of our manufactured imports excluding POL products. There is no way we can compete with the Chinese, particularly with the FTA. They have wiped out a whole set of industries in Pakistan. They have access to concessional tariffs and in some cases zero tariff.

More importantly there is a massive under-invoicing going on. The only hope we have is high-value added agriculture and value-added textiles.

We have about 20 products where our exports are $100-250 million dollars.

That is where we need to diversify our exports. Import substitution cannot work unless we cancel or renegotiate the FTAs. Another sector where we have hope is the information technology (IT) sector. It has a lot of potential. Indian technology companies want access to Pakistan’s IT labor force because the

24

Indian IT sector is overdeveloped. The result is that the IT technologists and engineers in India are extremely highly paid whereas our salaries for these IT engineers and graduates are today one half or less than what Indian technologists are getting.

But Indian companies are unable to enter the Pakistani market because we don’t have an agreement yet on services. We really need to expand trade with India especially in the IT sector because it will open up opportunities for Pakistani technologists and engineers. There is scope there but while the South Asia Free Trade Agreement (SAFTA) is partly functional and SAARC Agreement on Trade in Services (SATIS) is non-functional.

Moreover, Pakistan has not yet granted MFN status to India and maintains a negative list with its neighbor.

We have a trade deficit with India which is about 2.5 times what we export to India. The problem is that we never really had a very strong medium to long-term strategic trade policy.

There is no orientation towards exploiting international opportunities and developing our agriculture and trade in line with market opportunity. A shocking fact is that Indian export of jewelry is more than Pakistan’s total exports.

There was a time when Pakistan was able to get its export of jewelry up to $1 billion, which is now less than $10 million. Pakistan never had a strategic orientation towards developing ex-

ports.

One of the lessons of the development history is that small and medium enterprises are often at the cutting-edge. That is where you really see the innovation, the ground-level transfer of technology. Even to this day, 40% of South Korea’s exports are by small enterprises. That is where our focus should be [for exports]. Even today, SMEs of Pakistan, especially the ones located in Punjab, export up to 60% of their output, whereas for our manufacturing industry (large scale industrial units), their exports are not even 25% of their output.

The government has an important role to define industrial development but it should only be to the extent that there should be regulations to prevent emergence of monopolies and cartels. We need to have a very effective Competition Commission and the Securities and Exchange Commission to check the manipulation going on in our industries. Take the example of sugar, automobiles, cement, pharmaceuticals and all these big industries. They are engaging in monopoly and transfer pricing and we are doing nothing about it.

The government should, however, provide subsidies to agriculture. It is something that is done globally. Following Partition, we exported agricultural products to India. Today, we are importing cotton from them in large quantities. That is because India has

massively subsidised agriculture. India provides $27 billion in agriculture subsidies, including $15 on fertilizer. Consequently, the price of urea in India is less than half in Pakistan in dollar terms.

To manage the external accounts, import rationalization measures can also help achieve certain goals. We have tried a few things in the past. The first thing we need to do, which we did after sanctions were imposed upon us following the nuclear explosions and it worked very well, is that we need to use the increasing interest rates more effectively to control imports. We need to introduce cash margins of 10-30% across the board except for three items: petroleum products, fertilizers and medicines. We have introduced some cash margins on luxury goods but that is a very small import base.

We have to do this across the board.

The second thing we need to do is check the under-invoicing of Chinese

products by imposing minimum import prices. We used to have a regime of international trade prices in the late ‘90s but that was more to control valuation by customs. We have to go for minimum import prices on key imports from China like iron and steel for example. India is levying minimum import prices on 28 critical items, including some items from China and a few items in FTA with Sri Lanka. This is admissible within WTO rules and regulations.

We also need to have stronger National Tariff Commission which can explicitly identify under-invoicing.

We also need to adopt a managed float regime to manage our exchange rate. At no stage must our real effective exchange rate get overvalued. In the Ishaq Dar era, our currency was 27% overvalued against a weighted average of a few currencies including the dollar. After the latest devaluation, our currency is more or less correctly

valued.

There are so many things that we can do to improve our revenue side.

But we need to have a revitalized revenue authority [to collect taxes]. Our Federal Board of Revenue (FBR) needs fundamental reform. There is enormous scope on the revenue side. Pakistan’s tax gap is close to 3-4% of the GDP. Enhancing revenues does not require revolutionary steps. Through sensible and rational steps, we can improve our tax-to-GDP ratio and extract an additional Rs1 trillion at least, for the national exchequer.

Unfortunately, however, Pakistan at this point in time does not have the capacity either to conceive or implement strong structural reforms.

Dr Hafiz A Pasha is Professor Emeritus at Beaconhouse National University, former UN Assistant Secretary General and former federal finance minister.

TO SOLVE THE LONG-TERM BALANCE OF PAYMENTS PROBLEM, FIX

EDUCATION FIRST

The key determinant of long-term economic growth of the country is the depth and range of innovations that take place within that society

T

Dr Akmal Hussain he fundamental reason why Pakistan goes to the IMF repeatedly has to be sought in the structural features of Pakistan’s economy. The pattern of Pakistan’s eco-

nomic growth is what can be called a ‘stop-go’ pattern. There are periods of relatively high GDP growth followed by very slow growth, where per capita income is either stagnant or even negative in some cases.

The literature on new institutional economics shows that the distinguish-

ing feature between the developed and undeveloped countries is that the developed countries are able to sustain their GDP growth rates and their per capita income growth rates over long periods of time whereas the undeveloped countries are unable to do so.

Starting from Ayub period, or even

MACROECONOMIC POLICY

earlier, whenever Pakistan had high rates of growth, it ended up with a balance of payments crisis and that is what lands it in the lap of the IMF. The fact that Pakistan grows in spurts followed by periods of slow growth is intimately linked with the fact that we keep going to the IMF. Their loans provide temporary relief and governments are able to avoid the difficult task of making the structural changes necessary to become independent of IMF bailout packages. The reason why high growth periods come to an end with a balance of payments crisis is because of Pakistan’s exports structure, where the growth of exports is incapable of keeping pace with the import expenditures that are associated with the high GDP growth.

Whenever there is high GDP growth, there is a high import expenditure. More machines have to be imported, more fuel, equipment and industrial raw materials are imported to maintain economic growth. If the growth of exports is slow as compared to imports, then inevitably – as we have seen from our experience – we will end up with essentially a balance of trade crisis which translates into a balance of payments crisis. Therefore, one of the hallmarks of Pakistan’s inability to sustain high GDP growth, and indeed one of the hallmarks of Pakistan’s underdevelopment, is that we can’t export enough and so our import capacity is constrained.

Since independence, our exports have been concentrated in the textile industry and it has predominantly been in the low-value end of the textile range. Internationally, the textile industry is known as a ‘sunset industry’ because as global demand for goods and services increases, a smaller and smaller percentage of increased demand goes into expenditure on textiles. So growth of the global export demand for textiles is low.

On top of that, Pakistan has not even adequately graduated from the low-valued added end to the high-value-added end of the textile range, let alone diversify out of textiles altogether. Even within the textile sector, Pakistan is losing its share to the competitors. That is because our exports are not only low-value-added, our cost of production is very high. We are inefficient in the production of textile exportable and the quality is very poor as compared to our competitors,

26

which is why our export capacity is so insufficient that we cannot finance the import requirements of high growth.

In the medium term, we have to diversify our exports out of textiles into high-value-added, knowledge-intensive goods and services because an increasing share of the global exports is coming in the form of demand for knowledge-intensive goods and services. Predominantly, our export policy should concentrate on diversification of exports towards high-value-added, knowledge-intensive goods and services, which will require hard decisions on the part of the government and decisions which require deliberations outside the narrow thinking of mainstream economics. Within orthodox economic thinking it is difficult to grasp what is involved in export diversification towards knowledge-intensive goods.

Recent work by Professor Aghion and others at Harvard University has shown that the key determinant of long-term economic growth of the country is the depth and range of innovations that take place within that society. In other words, the capacity to generate long-term growth, and hence the ability to maintain high rates of export growth, is dependent on the depth and range of innovations in the country. So when we talk about export diversification, we are really talking about developing the capacity for innovation in the country.

Innovation requires research and building an innovation infrastructure in the country. That essentially means bringing about a transformation of the education system to produce people who have the capacity to do critical thinking and do original work, in whatever field that is. Unless the

schools and colleges and universities are reconfigured, so as to produce such minds that are capable of original thinking, Pakistan will not be able to develop an innovation infrastructure.

Strangely enough, education reforms are necessary to solve the balance of payments problem in the long-run and a necessary dimension of export policy. And the research has to be at the cutting-edge of knowledge in every field. Mediocrity in research will simply not do. Therefore, to boost exports and growth, there is a need to build new kinds of schools which train students and children to do original thinking and build universities which are capable of producing world-class research.

Presently, the government is trying to support the textile industry by giving them subsidies. This is a policy that is misconceived and counter-productive. It is misconceived because if the aim is diversification of exports, giving subsidies to the industries that are inefficient, low-value-added and which are not competitive in the international market, is throwing good money after bad. It is also counter-productive because the more subsidies you give to such industries, the more difficult it will be to diversify exports.

If the government wants to subsidize industries, it should do it in an intelligent way. An example is South Korea. They first worked out which particular industrial units had the ability to innovate, to improve their technologies and had the capacity to become export-competitive. It was not just a particular industry but precisely the particular industrial units that were supported by the government through subsidies.

At the moment, the category of industry which has to be given subsidy is not textiles but industries such as software, electronics, renewable energy. If the government cannot provide subsidies to tech startups, it can at least provide subsidized credit to young talent freshly graduated with ideas to work on these startups.

The government also needs to think of subsidizing small-scale industries. Because of their smaller size and management structure, these industries are much more likely to be innovative than a very large industry, in Pakistan at least. The agrarian products such as high value dairy products, packaged meat fruits and vegetables also have considerable potential for exports.

Subsidizing inefficient industries like textiles is a rent you are giving them. Rent can be seen in terms of unearned income. It is a rate of return on an asset including skills which is higher than what you would get in the best alternative use. So if you have an

industry that would otherwise go into loss and you start giving them subsidies, and it starts generating profit on the basis of the subsidies, that profit is actually unearned. And that is a kind of rent.

Unfortunately, Pakistan’s institutional structure has been set up in such a way which systematically generates rents for a small coalition of elites. This is the other fundamental issue that needs to be addressed. If Pakistan wants to get out of underdevelopment, get out of this repeated going back to the IMF for loans and avoid getting into repeated balance of payments crisis, the rent-based institutional structure that prevails in the economy needs to be changed. It has deliberately been set up by power elites in such a way that unearned income or rents can be generated for them.

Prime Minister Imran Khan’s original vision was that Pakistan’s longterm development has to be based on its people through the provision of health, education and social protec-

tion for all so that the capabilities and potential of Pakistan’s people can be actualized and brought to bear for development. That’s the sort of development we want. But if Pakistan goes to the IMF, it will be going in the opposite direction because the IMF will require cutting down public expenditure. They are going to try to control the import expenditures through contracting the growth rate of the economy. When interest rates are increased they knock out the dynamic, innovative export oriented industrial units that are usually highly leveraged.

So a misconceived short term policy further undermines our potential for exports and increases our dependence on foreign loans in the long run.

Slowing down growth will also eventually lead to higher levels of poverty and unemployment.

Dr Akmal Hussain is a Distinguished Professor and Dean, School of Humanities and Social Sciences at the Information Technology University (ITU).

FOR THE PAKISTANI ECONOMY TO TRIUMPH, WE MUST

DEVELOP OUR CITIES

We need to deregulate our cities to allow more construction and high-rise development

P

Dr Nadeemul Haque

akistan’s economic strategy started with the Harvard Advisory Group and Dr Mahboobul Haq. However, we never changed it, nor did it evolve. We are still stuck there. That was a very simple

strategy. We were a new country. The international development world had just started. They wanted to mend and look after us like parents look after little babies. They created a model of which Dr. Mahboobul Haq was a part. The model included development through establishing infrastructure on borrowed money. They

wanted to give us money as we were a low savings country. Sadly enough, the world has changed, and we are still pursuing the old model.

But while we are a resource constrained economy dependent on foreign aid, we borrow to postpone reform. We are also in love with vanity projects. Successive governments in

MACROECONOMIC POLICY

Pakistan prefer external borrowing to finance ill-planned and unnecessarily expensive projects like Metro buses, Orange Line trains, Islamabad airport and an excessive expansion of universities.

Everywhere, cost-benefit analysis is carefully done and considered before projects are undertaken. In the past this was done. Now politicians and civil servants realize projects are a gravy train and refuse to do any real cost-benefit analysis. Without a serious cost-benefit analysis, the Planning Commission is rendered useless.

Projects now follow political expediencies. And that too on borrowed money.

No wonder we repeatedly experience a balance of payments crisis and need the IMF. It is not surprising that research, both inside the Planning Commission and in academia, has found that the returns on the PSDP are low and perhaps even negative.

Economics has moved on. Planning is not considered useful or doable. Developing industry at any cost or merely looking for dollars is considered old style “mercantilism.”

These old policy ideas have now been replaced with new thinking where growth is no longer considered to be arising merely from projects and industry. Instead the economy grows when entrepreneurial and innovative activity thrives. Note an entrepreneur is not a man with money who got some license and cheap land and credit to set up an industry. An entrepreneur is a person who sets up a new business or businesses, taking on all financial risks without any help from the government. Do you ever see Bill Gates or Steve Jobs asking for government help?

The government should also stop acting like a father and tell people what to do. In a society, entrepreneurs, thinkers and innovators should be allowed to express themselves. In the Mahboobul Haq period, the role of the government was of a socialist which prompted the government to undertake excessive planning and control the markets strictly. But that model had failed even in the Ayub period.

The role of the government is not to decide how to control the market: what should be bought and what should be sold, but to define the limits of the economy very clearly, formulating rules and policies that maintain a

28

clean marketplace for the buyer and seller to interact.

Moreover, if the government knows where to invest it can make money doing so. We have seen the government unable to run a business.

Why then do we think that government knows where to invest?

The government should not provide direction and incentives without having the relevant knowledge.

Without such knowledge the government cannot decide which businesses should be run and which supported.

If an industry is unable to stand on its feet, it is okay to let it die. Around the world, industries die! Bankruptcy is not such a bad thing. Why are we stuck with the 70-year-old industries that we keep alive through subsidies?

What then should the government do? The government should monitor the economy through research and analysis. Let the local businessmen devise a strategy according to the economic conditions prevailing.

If allowed to operate freely, the forces of supply and demand will eventually bring everything to equilibrium, whether it is import demand or export supply. Businesses must manage exports and imports to maximize their profits. It is not the government’s job to export for them or to give them subsidies to do their work.

The government must stand ready to resolve disputes in a timely manner as they arise in business. A competent legal framework to facilitate economic transactions and coupled with an effective and efficient judicial system, will foster innovation and entrepreneurship to let the economy thrive and people to prosper.

We estimated in the Planning Commission Framework for Economic Growth that Pakistan’s youth bulge requires a growth rate of over 8% if the growing labor force is to be absorbed.

In recent years because of a lack of reform our long run growth rate and

productivity are both declining. Our growth rate now oscillates between 3 and 5% which is far below potential. I am surprised that finance ministers are claiming victory with growth rates at about 5%. Let us be clear that for Pakistan a growth rate of less than 4% is a recession. While anything less than 7% should be regarded as failure of policy.

We should not accept any growth rate of less than 7% as satisfactory performance. Hold your finance ministers to a higher standard! They must give us a growth rate of 7% or accept their failure.

An important hub of growth which we overlook, is cities. Our cities have been overregulated to choke out investment. And so is the construction industry, which stimulates growth and revitalizes many other industries.

Expensive land in the cities is being underutilized. Prime land is occupied by big houses instead of high-rise buildings, which have more economic value. When cities are dense and properly developed, entrepreneurship comes there inevitably.

If developed properly, like in the western economies, cities can add almost 4% of growth to the economy.

Unfortunately, government bureaucracy is vested in keeping the unproductive and slow-growth urban sprawl alive. Cities are spreading at the cost of the environment and economic growth. Yet there is no debate or thinking on this subject.

I have been asking for the last 20 years why there are no tower cranes in Pakistan. Every country that is growing at a rapid rate has thousands of tower cranes in their cities. Is it not odd that in our cities which are some of the largest in the world, there are no tower cranes? This means that unlike the rest of the world we are not allowing tall building to be made. Why is it that we are so different from the world? Or is it that we are more stupid?

Analysts who are looking for rapid

export expansion and point to the export performance of East Asia must also note that East Asian development happened not only with rapid increase in exports but also with rapid urbanization and high-rise development.

Maybe the two – exports and high-rise development — are related in ways that we have not studied yet.

Whichever way you look at it, we need to deregulate our cities to allow more construction and high-rise development. To my mind this is a must for accelerating growth.

All this needs to be reinforced with civil service reform. As Max Weber pointed out, the civil service is the keeper of the rules, the maker and implementer of policy and regulation, and the monitor and evaluator of policy and programmes in all countries.

It is the name given to many bodies of diverse skills many organizations, numerous work and reporting processes as well as a multiple checks and balances.

In Pakistan it has become concen-

trated and monopolized by a group of generalists. It lacks skills and checks and balances and has no work processes or policymaking skills.

In most of government, we have even lost the understanding of what a policy is. Policy is now the whims of politicians. Frequent policy changes are bad for business. Policies such as tax policy should be very clear and defined for a long term, with no room for arbitrary changes. Moreover, no policy or legislation should be passed which the government is incapable of financing. Policies should be based on research and there should be monitoring reports on how the policy is working. That is essentially the work of the bureaucracy.

We are facing a crisis repeatedly for the last 40 years. The crisis in Pakistan’s economy is essentially because of excessive dependence on unnecessary loans for wasteful expenditures. Without reform for productivity we can keep on this treadmill of a crisis. If we make a more thoughtful

government, deregulate our cities and markets, stop trying to prop up tired old industries, develop new laws and justice system, we will clear the room for entrepreneurship and innovation.

If we let our cities have the imagination to create all kinds of activities.

The cities will create these activities themselves, without the government’s support, if they have the space to do it. If we develop a modern civil service capable of midwifing a 21st century market and city, we will generate large investment flows to generate the required 8% growth.

If we deregulate the market place so that for the ‘survival of the fittest’ and not coddling the aged vested interest, we will grow exports and industry needed to absorb our youth bulge.

Dr Nadeemul Haque is former Deputy Chairman of the Planning Commission and served for several decades as an economist at the International Monetary Fund.

ECONOMIC REFORM

WITHOUT POLITICAL CONSENSUS IS IMPOSSIBLE

Technocratic solutions are not enough; Pakistan needs to have major political parties agree on the broad contours of economic policy

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Dr S Akbar Zaidi

eform of Pakistan’s economy should be undertaken after considering both economic and political factors. In deciding policy directions and reforms, you have to get the political parties together to form an agenda which all broadly agree upon,

that certain things vital for the economy and for the well-being of the people, like taxation reforms, should not be messed with regardless of the party in power.

There should be a minimal consensus between all the political parties of letting a policy continue if a change is to be expected. This predominantly requires one to know what a certain political party wants to achieve and

what it wants to do that is going to set the direction of the economy for the long and medium term. Basically, what Pakistan requires today is a robust taxation system, completely revamped and expanded.

Today, less than 1% of Pakistan’s population pays income tax, and most do so involuntarily since their tax is deducted at source. The government

MACROECONOMIC POLICY

should go after tax defaulters and extract money from them. In revamping all this, technocratic solutions are useless. All the parties know that revenue needs to be enhanced. If all the major parties form a consensus, a lot can be achieved.

There is a dire need to rationalize taxes across all the verticals. Many sectors of the economy, like agriculture and industries, decry multiple layers of taxation by the state which need to be rationalized in such a way that they are uniform as well as progressive.

There are certain categories which can be taxed, like income, wealth and consumption. Tax should be based on income and wealth, not through an indiscriminate indirect tax mechanism.

A major part of the expenditure goes to defense which needs to be waned and directed towards expenditure on social sectors such as healthcare and education. Pakistan should invest more on schools, hospitals, social development infrastructure, and the knowledge economy.

Things have changed now. Our exports are particularly poor and I do not yet see hope in achieving anything through our existing exports. Our exports are hopeless, we have hardly diversified and been dependent on the same export mix for 50 years. There is nothing we can do with our current exports. All we have is kinoos, dates and some textiles. There is little of value that we have that can be exported to increase foreign exchange. No matter how much we devalue our currency, our exports cannot be increased in their present form. We need to be brave enough to accept this.

The export structure needs a complete overhaul and we need to explore new areas, products and services, where we can gain something in the medium to long-term. The challenge lies in investing in the knowledge economy, information technology (IT) and software. That is where we should be heading now. Our industries are outdated. In the current circumstances, we should forget that we can capture any market through exports. Any efforts to improve the old export model will be counter-productive.

In trying something new, we should focus on developing the IT sector in the country and improve health infrastructure so that people can come to Pakistan to get healthcare, just like India. India is an exporter of health ser-

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vices now, which Pakistan can achieve as well if we prioritize our health sector.

Pakistan can also venture into the pharmaceutical industry and encourage exports in that sector.

With textile and cotton, our exports have been static for a long time.

We have devalued our currency by almost 35% in just one year and yet our exports have fallen. This will give an idea of our export competitiveness and also about how little devaluation helps our exports. So, it is a completely different restructuring of the economy that we need to direct it towards growth.

The import substitution strategy that the current government is trying to embark upon cannot work in the present circumstances, especially in the presence of a free trade agreement (FTA) with China. The FTA has destroyed the local market. Import substitution is a good slogan but cannot be given importance in the current circumstances. If import substitution is to work, Pakistan should venture towards the knowledge economy and build the capacity to substitute.

The government should provide incentives to certain industries where it sees a high potential for investment, exports, and foreign exchange. Such industries should be protected but not for an indefinite period of time. There should be a timeline and scale defining how the government is going to intervene in a particular sector or industry, and how it is going to be incentivized for a certain period before it becomes uniform for everyone. Incentives should not be for life but they should be there in a rational way if the government wants to increase income and reduce unemployment.

Things can improve considerably if Pakistan’s agriculture sector is reformed, which requires improvement in the irrigation and water distribution system.

Pakistan should actually stop cultivating sugarcane because it consumes a lot of water. We are a water scarce country. There are other healthier alternatives to sugarcane that consume less water. Importing sugar would be a more sensible decision than producing it locally because the international price for sugar has fallen but our prices are higher. But the local price is protected here.

There is a considerable political rent that the sugar barons extract out of this sector. There is a potential to reform the whole sector but there is a huge mafia

behind the sugar industry so this would be particularly hard to achieve. The sugar sector is patronized by powerful political interests who will not allow any changes. We can grow wheat, barley, and cotton instead. But the government needs to ban underproductive crops.

Import tariffs are a revenue measure but Pakistan cannot rationalize import tariffs as long as it is a part of the World Trade Organization (WTO). And tariffs are a global phenomenon. There is an ongoing tariff war between America and China. If one country increases the tariff for the other, it is responded in a similar manner. The suffering and loss are eventually mutual. Pakistan cannot increase import duties as such.

But if we are able to restructure the system of taxation, which has a component of value-added tax and consumption tax, and income tax is structured in a way that taxes are paid by those who have money, then there is no real need to impose import duty tariffs. Governments levy import duties as a measure to increase revenue so if there is a proper taxing system in place, there is no such need.

But the present trajectory of the government is unknown. It has been five months now that the Pakistan Tehreek-e-Insaaf (PTI) government has been in office. That is almost 10% of the total tenure of the government and yet there is no clear policy direction, vision or even a decision of what the government wants to do next. The growth rate has been predicted to be around 3% for the year and inflation has started rising again. Complacency and indecision by the government have marred the economy with uncertainty, which can wreak havoc of monumental proportion.

These persisting problems have not been created by the PTI and they are not responsible for them. However, they now have to take responsibility for what happens over the next five or so years. They cannot keep blaming the past governments or corruption and have to start by taking decisions to put things in order. Procrastination and indecision, which have both created uncertainty regarding the economy, must come to an end. It is time for the government to act and take decisions rather than dilly-dally.

S. Akbar Zaidi is a Political Economist based in Karachi. He teaches at Columbia University in New York, and at the IBA in Karachi.

MACROECONOMIC POLICY

OPINION

Ahsan Jamil

How Pakistan can avoid the “Dutch Disease” Should the country soon find itself awash in hydrocarbon wealth, how it chooses to manage that surplus will be critical n the early 1960s the Netherlands stumbled upon large discoveries of hydrocarbons. The whole nation was overjoyed thinking it would bring prosperity to the country. The country’s exports increased significantly, bringing in sudden large inflows of cash into the economy. However, somewhat paradoxically, all other macroeconomic indicators started to deteriorate. The increases in exports caused the currency to appreciate rendering the rest of the economy (non-oil) uncompetitive.

The Dutch central bank tried to rein in the currency’s strength by keeping interest rates low, but only managed to hurt the non-oil economy even more as lower interest rates caused those sectors to attract less investments. As result, unemployment increased from 1.1% to 5% from 1970 to 1977.

This apparent paradox of high exports but deteriorating macroeconomic indicators came to be known as the “Dutch disease” and is a very well documented economic phenomenon.

The term was coined by The Economist in 1977 explaining the paradox the Dutch economy found itself in the 1970s.

This disease has manifested itself in other numerous examples in resource rich countries like Australia, Chile, Nigeria, Venezuela and even Russia.

Some economists have also labeled the current economic

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Ahsan Jamil The writer is an equity portfolio manager at the Pak Brunei Investment Company

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woes in Pakistan as result a slight variant of this same phenomena, in effect, the “Dutch Disease” on steroids. Pakistan has not been large resource exporter, but has seen large inflows to Pakistan under the last IMF program (the most recent of which was under the PML-N Ishaq Dar era), and the overvalued exchange rate resulted in similar effects. Pakistani exports became uncompetitive.

The inflow resulted in increased aggregate demand with rampant increase in imports and as a result Pakistan found itself in the familiar position of unsustainable twin deficits.

Another recent development is the ENI and Exxon’s offshore oil and gas exploration currently under way in Pakistan. There is a lot of hype and expectation for the search underway.

The economic managers of the country need to be reminded of the phenomena. On the off chance of a large hydrocarbon discovery, would we find ourselves in a similar “Dutch Disease”?

Fortunately, Pakistan needs only to look at Norway’s sovereign wealth fund for a way out, should the need arise. The Government Pension Fund Global (GPFG) is the world’s largest sovereign wealth fund (with a current market value of almost US$1 trillion). Norway discovered large hydrocarbons in the early 1970s. They were aware of the impacts it would have on the domestic economy. To manage the effect of the limited resource, this sovereign wealth fund was set up to sustainably manage oil revenues and create resources for the future generations.

The surplus oil revenues that went into this fund were invested globally. The fund restricted the overflow of oil money coming back into the economy. Not only did this fund help with negative after effects of the oil and gas exports, it allowed sustainable wealth creation. Another well documented issue with discovering large natural resources is the aftermath when the resources

finish or large swings in commodity prices.

Funds like these allow the economic managers to create other sustainable reorientation of the economy and allow for buffers from price shocks. Other resource exporting countries that have also followed this model successfully include Kingdom of Brunei, Malaysia and some of the Arab oil exporting countries. Pakistan has not made any large hydrocarbon discoveries in the recent past, so let’s keep our fingers crossed. But we do need to find a balance between being careful about what we wish for and still be ready for all the possibilities.

COMMENT

Amir Wain is building i2c into a SaaS powerhouse that is rapidly turning into one of the country’s largest software exporters

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By Taimoor Hassan

hen you enter Amir Wain’s office located in i2c Pakistan’s facility on Lahore’s Ferozpur Road, what’s most observable is what is not there: no adornments or extravagance, unlike other offices this scribe has visited.

Vainglory is not Amir’s strong suit. He stands in line with the employees of the company, waiting for his turn to

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fill his plate with the free meal that his company offers to its workforce – a refreshing quality in a corporate executive at the helm of affairs of a successful business. When it comes to his person or his business, it’s substance over vanity.

A graduate from the University of Texas with a computer science and an engineering degree, Amir’s entrepreneurial run started in 1987 with a company he founded called Innovative Pvt Ltd, followed by Avanceon a few years later. His third company was i2c, one of the leading software firms from

Pakistan, which he founded in 2001 and currently serves as its CEO. Since its inception, the company is on an unending pursuit of dominating the global payments processing industry and being the best in the world, and that too out of Pakistan.

SaaS as a stable business model

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n 1996, Amir came to a realization that the outsourced software development model is a failed business especially in Pakistan as

built software that runs in our own data centers that provides a level of service that is unparalleled because we control the variables that cause issues. Revenues become far more stable due to the ongoing contracts, and growth is aligned with the organic growth of our clients as well as the new clients that we bring on board,” Amir explicated.

From an industry perspective, Amir and his cohort stayed in financial services. Whereas they used to do things like ATM driving and card processing, they focused i2c on the infrastructure that issuers need to launch, manage, and grow their payments portfolios, all on a platform based on modern technology and development principals.

Today, with almost two decades in business, i2c – originally set up as a US corporation in Silicon Valley and a Pakistani entity – has since added two Canadian entities and boasts a formidable global presence, serving clients with customers in all time zones. Its clientele includes First Abu Dhabi Bank in the UAE, CIBC in Canada, Comerica Bank in the US, Australia Post and others, besides working with card associations like Visa, Master, Discover, American Express, and Union Pay.

A solid business

i every new client assignment starts from scratch, relationships become transactional, and one never really gets a chance to develop and leverage his own Intellectual Property (IP). Additionally, growth for this business model requires a constant stream of new talent, requiring thousands of skilled developers to get to scale. And while Pakistan has many talented people, it does not have a large talent pool to pull from for continued growth, according to him.

“So we decided to develop a packaged software product, looking to develop our own IP and sell single product to multiple customers. While this was a step in the right direction, it has its own drawbacks. First, the software needs to be supported in as many different environments, and hardware etc., as we have customers, making it difficult to provide high-quality service. Secondly, each year essentially starts from scratch in terms of

sales. While there is maintenance fees post-sale, it’s a small fraction of the revenue. And this challenge is magnified by any downturn in the market or a negative event in Pakistan. You can see this happen with other IT companies in Pakistan as they hire up during the good times and fire in the bad,” Amir told Profit. i2c was the logical outcome of the challenges faced with the first two business models by Amir and his associates, and in an attempt to create a business model that was stable and sustainable, they ventured into SaaS (software as a service) – an upcoming business model at that time which was essentially subscription to a set of features and functionality on an ongoing contractual basis.

“Under the model, we don’t build software for a customer and nor do we sell packaged software that has variability in the environments it’s run on. Instead, we have

2c’s business is specifically consolidated in the payments processing industry where if a financial institution – for instance a bank or a credit union – wants to offer credit cards, debit cards, or prepaid cards to their customers, it needs a platform to manage that from.

“That is what we provide. This platform needs to support things like balance tracking, fraud monitoring, transaction processing as well as automatically sending out alerts to cardholders via SMS. Mobile applications have additionally become core to a customer’s relationship with their bank. Most banks outsource this to companies like i2c, customizing the look and feel to match their brand experience. In the US, with the exception of the few extremely large banks, almost everyone outsources this function,” Amir said, as he elucidated the company’s core business.

The payments processing is a highly consolidated industry with only a dozen or so companies operating globally. This is in part because it is a difficult industry to enter due to a high degree of regulation, complex requirements, high-availability, and security. According to Amir, once you have entered the industry and been successful, it is a very large-scale opportunity.

“In Pakistan, cash is still used quite a bit.

Elsewhere though, credit cards and other forms of non-cash payments make up a large majority of all transactions. So, every time

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“I2C IS THE MOST PROFITABLE IT COMPANY OUT OF PAKISTAN. WE HAVE LOOKED AT THE NUMBERS OF NETSOL, SYSTEMS LTD AND TRG. NETSOL MADE AROUND $8-9 MILLION IN PROFITS LAST YEAR. OUR PER-YEAR PROFIT IS MUCH HIGHER THAN THAT. IF SOMEONE WANTS TO VALIDATE, I CAN SHOW THEM THAT WE MAKE MORE MONEY THAN ANY IT COMPANY IN PAKISTAN. WE ARE A SOLID BUSINESS AND WE HAVE FREE CASH” Amir Wain, CEO i2c someone makes a payment, the processor gets a little bit of revenue. It’s a sizeable revenue per client and we have multi-year contracts. And as more payments move from cash and check to electronic form, our industry continues to grow at an accelerated pace,” he added.

But as the volume of transactions through electronic means grows, it increases the pressures on the payment infrastructure, increasing the likelihood of transactions not processing when a cardholder is, for instance, buying petrol or groceries. “It’s a bad experience for the cardholder and it reflects poorly on the clients of the company. So, the system has to be available 100%. We have had over 10 years without any downtime and that has led to happy clients and continued growth,” Amir said.

Security in this industry is also incredibly important as instances of data breaches are not uncommon, making it a difficult industry to operate in. But according to Amir, i2c has been fortunate enough to grow into a worldwide company in an industry with few players. i2c’s competitors are predominantly large, multi-billion-dollar conglomerates in the industry such as First Data Corporation, Fidelity Information System (FIS), TSYS and Fiserv. But while its competitors are fairly large for the size and scale of i2c, Amir has skilfully carved out a niche for his business and giving his competitors a run for their money.

“Our competitors are all very big, and by being big, they are unable to move very quickly. Their technology is also antiquated, often running on mainframe-based systems. If you are one of the top banks, you can get their atten-

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tion and they may do some changes for you. In the US, there are over 10,000 banks which means that most of them have no options when it comes to differentiating their offerings. They simply can’t get anything customized. i2c, on the other hand, offers a lot of flexibility and control and puts most of it in the hands of our clients, allowing them to quickly and easily configure options to differentiate their offerings,” Amir said, adding that i2c was able to win Australia Post as its client against FIS because of its unique value proposition.

The billion-dollar target

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henever there is a mention of the Pakistani IT industry, three companies often get the limelight: NETSOL, Systems Ltd and The Resource Group (TRG). All three companies are publicly listed and understandably gain considerable traction than private companies. Pakistan’s tech landscape witnesses more buzz when any of these companies sign a business contract or when there is a bull or a bear run in the bourse. But are these companies more profitable is what Amir questions. While these companies have hit peaks and troughs, as can be seen from the financials of these companies available publicly, Amir claims that i2c’s growth curve has been upward and steady, and makes more profits than these companies. “If you look at i2c’s origin in 2001 until now, the curve of revenue, profitability and headcount has trended upward without the slightest negative blip,” Amir said. “i2c is the most profitable IT company out of Pakistan. We have looked at the numbers of NETSOL, Systems Ltd and TRG. NETSOL made around $8-9

million in profits last year. Our per-year profit is much higher than that. If someone wants to validate, I can show them that we make more money than any IT company in Pakistan. We are a solid business and we have free cash,” Amir told Profit.

He further disclosed that the company is eying $1 billion in revenues by 2025 and is “absolutely on track to do so”. “The plan is based on four different growth levers and we are actively working on those growth levers. If we continue the straight line growth that we are on, by 2025, we will hit $1 billion dollars in topline revenue. Our gross margins are around 60 per cent. We are at a scale where as we go from our current numbers to say half a billion to a billion, there will be improvement in the margin but it is not going to go to 90%.

It might move from 60 to 70% but that is the range of the margin we operate in.

Our CAGR [compound annual growth rate] was around 30% previously and we are looking at it to be even higher now.

One more thing: free cash flow. Our free cash flow is absolutely in line with our profitability,” Amir said.

“Our billion-dollar goal is truly organic. This is organic sales growth, year after year and profitable sales growth.

You have to make sure you have free cash flow and this business is extremely focused on that.”

To assess the sensibility of this target, it is paramount to look at i2c’s business from an industry perspective.

Globally, the payments industry is burgeoning at breakneck speed, allowing improved revenue and profit margins for those already in this business. A 2017 study by McKinsey & Company had estimated that the global payments indus-

try accounted for 34% of overall banking revenues in 2016 and that for the next five years, annual growth will average 7%, making payments a $2 trillion industry by 2020. Surprisingly, however, in 2017, payments generated an impressive 11% growth for a single year and revenues swelled to $1.9 trillion. Consequently, McKinsey estimated that payments will surpass the $2 trillion projection in 2018, instead of 2020, and approach $3 trillion within five years, making it a rosy industry for the incumbents to grow.

And with the legacy payments framework fast becoming an anachronism in an age of millennials and growing e-commerce, financial institutions, in an attempt to stay ‘top of the wallet’, are striving to provide seamless payments experience to the cardholders with an element of differentiation. That is exactly what i2c helps the financial institutions achieve. Through it’s platform, i2c enables its clients to swiftly differentiate their product offerings to keep pace with the rapidly evolving payments industry.

The industry’s robust growth dynamics and direction are, therefore, ripe for maneuvering for higher revenues and, consequently, profits. Amir’s plan to achieve his ends include a $30 million investment in the city of Omaha in the state of Nebraska, US to set up an operation center that will house 350 people.

“The building has been bought and the work on it is ongoing as we speak. The governor of Nebraska flew to Silicon Valley just to thank the i2c team for the investment that would create hundreds of jobs. We made a similar investment about three years ago in Montreal, Canada to set up an operations center because of the availability of good talent there,” Amir said.

“Moreover, we have recently signed a project, and I cannot disclose the name of the client for confidentiality purposes, but that one project would be close to triple digit million dollars [minimum $100 million] per year in recurring revenue.

It is known as the largest project in the prepaid card space and we would be processing about $38 billion [in payments] a year just for that project,” Amir disclosed.

No IPO plans

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ut as the company sails towards ambitious targets, Amir ruled out going for an IPO. “For i2c, we have more cash than we need and we have zero debt on

“I2C IS ONE OF THE MOST PROMISING COMPANIES WITH OPERATIONS IN PAKISTAN AND THEIR CONTINUOUS GROWTH IN THE HIGHLY COMPETITIVE PAYMENTS INDUSTRY IS A CASE STUDY FOR OTHER COMPANIES TO FOLLOW” Shehryar Hydri, P@SHA Secretary General our balance sheet. If we want to go acquire a company, we can go acquire it through our own cash. So, for me, to open up to all the public scrutiny and all the overhead and reporting, just for ego purposes so that I can say that our valuation is a billion dollars makes no sense. When you have an empty box, you look for these external validations. I can understand going for an IPO if there is really a need for capital. If you have a poor business model where you are running out of cash and prefer another round of share issue, then that is not our business. We have a solid business and I have no reason to think about an IPO,” he said.

A major component of Amir’s strategy is investing in the human resource of the company. For him, the biggest challenge is how to change the mindset of his employees and help them see organization. When it comes to human resource, it is quid pro quo for Amir. He tries to make things easy for his employees to enable them to focus on their work.

“Everything doesn’t have to be chaotic. Things can be organized. In Pakistan, where majority of the company’s engineering and IT operations are based, at home they [employees] see power going off twice, thrice a day. They say things break down. It is normal. At work, I say breakdown is not acceptable. I want 100% availability. Then there is inefficiency. How do you help people realize things can be

done efficiently? So, that requires creating an environment and getting to a tipping point. We’ve had to do a lot on HR and policies, training and things of that nature. While they might not be directly connected to revenue, I see them making a huge contribution. One more thing is that our retention rate is very high. IT companies don’t have high retention rates. At i2c, over a 100 people have been with us for over 10 years.”

P@SHA Secretary General Shehryar Hydri attested to i2c’s achievements and said, “i2c is one of the most promising companies with operations in Pakistan and their continuous growth in the highly competitive payments industry is a case study for other companies to follow.”

Profit also inquired if Amir was open to trying something new, to which he responded, “i2c is all substance. It’s all logic and reason. We are in one of the largest industries in the world. If you look at the breakdown of the overall economy, financial services is a big market. The conversion of payments from cash to electronic forms of payments, mobile and cardbased payments is growing. And we as a player in that space are growing tremendously and are being acknowledged as the next generation star. So I would not want to dilute my focus.

I want to invest, double down on this and make sure that I accelerate my growth. What I would [rather] do is look at adjacent services. [If] I am giving my clients nine things and they are using one thing from someone else, adding that to our offerings will make it easier for my customer and also increase my revenue.” n

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