Profit E-Magazine issue 77

welcome

A disease Pakistan can do without In this week’s cover story, we explore the advent of share buybacks in Pakistan’s capital markets, with major companies listed on the Pakistan Stock Exchange (PSX) engaging in such buybacks over the past few months. While we are certainly sympathetic to the argument in favour of allowing companies to return capital to shareholders, we find ourselves inclined against the practice, and implore the Securities and Exchanges Commission of Pakistan (SECP) to consider tightening the rules that govern such buybacks, or at least not relax them any further than the new regulations issued earlier this year.

The argument against buybacks is simple, in our view: it is not the job of the company itself to determine its own stock price. That is the sole prerogative of investors. By intervening in the market for its own stock, and using shareholder money to do so, companies are effectively manipulating the market for their own shares.

In our view, the logic behind restricting this practice is the same as the logic behind the prohibition on insider trading: entities with access to material nonpublic information must not be allowed to take advantage of those informational asymmetries. For the markets to deepen as a source of capital, investors must perceive the markets to be fair, and not the rigged playground of a few privileged insiders.

Beyond that argument, however, there is the broader concern: allowing share buybacks is a way of allowing CEOs and top management to shirk their responsibility to create value for their shareholders and the wider economy.

Put simply: by allowing CEOs to use company money to

bid up the value of the shares of their own companies, regulators are effectively delinking growth in the stock price from the financial performance of those companies.

For example, if a company failed to grow its net income, by buying back shares, it can still grow its earnings per share (EPS). EPS is defined as net income divided by total number of shares outstanding. A company’s management should be paid to increase net income, which is representative of increasing the value of the company to the economy as a whole. However, by allowing companies to short-circuit that, and grow EPS by simply reducing the number of shares outstanding – and using company money to do that to boot! – CEOs will naturally have the incentive to take the easy way out.

This, in turn, means that shareholders will continue to get richer at the expense of all other stakeholders of the company, an outcome already widely prevalent in the United States, the birthplace of the share buyback.

This is a sclerosis Corporate Pakistan can do without. We urge the SECP to prevent it from taking hold while it can still be nipped in the bud.

Farooq Tirmizi Managing Editor

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

FROM THE MANAGING EDITOR

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We Pakistanis love our imported cars. As this chart demonstrates, Pakistan’s car imports exceeded $1 billion for the first time in 2016 and have continued to grow beyond that level ever since. For the past 15 years for which data is readily available from the Pakistan Bureau of Statistics, the country’s car imports have grown by an average of 11.5% per year in US dollar terms, reaching a peak of $1.4 billion in 2017, before dropping by about 5.7% in 2018, largely due to the massive devaluation of the rupee that year that made it more difficult to afford imported cars, for which the price has to be paid in foreign currencies, typically the Japanese yen. Well over half of all imported cars in Pakistan come from Japan, with the remainder coming largely from Japanese car brands’ assembly plants in Thailand and Indonesia. When the government talks of limiting ‘luxury imports’, talk of luxury car certainly comes up, but never the regular sedans and hatchbacks that most upper middle-class Pakistanis import from East and Southeast Asia.

News IN NUMBERS

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In our continued effort to look for hidden gems in the Pakistani economy, Profit has looked at export sectors that are doing well despite the odds, yet often ignored by the government and the popular press when it comes to the conversation around policies to encourage export industries. This week, we highlight the case of copper, of which Pakistan exports a considerable amount every year. Over the past 15 years for which data is readily available from the Pakistan Bureau of Statistics, copper exports from Pakistan have increased by a whopping average of 22.5% per year. While some of this is certainly a low-base effect – exports were negligible in 2003 – it is nonetheless encouraging to see a sector that requires raw material that needs to be mined and then refined in an energy-intensive process doing well despite the odds, and without the kind of complaining that is the hallmark of the textile sector.

News IN NUMBERS

Ahsan Zafar Syed thinks the Thar Coal project will solve Pakistan’s energy woes and usher in a new era for the country. Just don’t ask about coal

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By Meiryum Ali

T

he year is 2019. Greta Thunberg is sailing the Atlantic to campaign for climate change. Young people around the world are marching for climate inaction, including in Pakistan. After all, this week, Karachi is scheduled to be swamped by incoming tsunamis, and, in any given week, Lahore suffers from hazardous levels of smog.

The world as a whole is struggling to find new renewable energy resources, and moving away from non-renewable resources like coal.

And standing on the complete opposite end of this wave of change are the very serious men of Pakistan’s energy sector. Men like Ahsan Zafar Syed, who is the chief executive officer of Engro Energy Ltd, a position he has held since March 2019, though his association with Engro stretches back to 1991. Engro Energy comprises three separate subsidiaries, but really the main star is Sindh Engro Coal Mining Company (SECMC), and Engro Powergen Thar Ltd (EPTL). Collectively, they are often known as just the ‘Thar coal project’, mainly because it is the very first one of its kind.

Ahsan has one guiding principle: that “this country deserves a cheap source of energy.“ He has absolutely no patience for critique of the coal project. And to that we say: fair. The Thar Power Project, purely by sheer size, is one of the most remarkable feats that any Pakistani company has achieved. This reporter visited Thar in late 2017, and was struck by the colossal scale of construction taking place in a district only 380 kilometres from Karachi, yet economically depressed and removed from the national economy.

If you ask Ahsan Syed, this is not a story about new energy or the climate: this is a story about how one corporation managed to pull of the feat, with no western financial backing, to start one of the only indigineous coal power plants that will add power to the national grid. In this narrative, Engro is an example of a responsible corporation, practically a national asset, and helping pave the way to solving Pakistan’s energy crisis - and if anyone is saying otherwise, well, they’re ill informed. Is it true?

The history of Thar Power Project

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he Thar Power project was always a little up in the air. Speaking to Profit, Ahsan Syed says, “People had heard that there is coal in Thar, and there was a myth whether this coal can be used for power generation. Engro took a leap of faith and we invested so much time… it took us 9 years of hard work, effort, sweat and blood, to take this

project to this stage.”

Engro Energy Ltd was formed in 2007, and initially focused on the Engro Powergen Qadirpur, a gas power plant. In 2009, it formed the Sindh Engro Coal Mining Company (SECMC).

This mining company is a public private partnership, with seven partners: the major shareholder is the Government of Sindh, at 54% and Engro has around a 12% share. The other partners include Thal Ltd, Habib Bank Ltd, HUBCO and the China Machinery Engineering Corporation (CMEC).

Its linked company, which manages the power plants, is Engro Powergen Thar Ltd (EPTL), formed in 2014. Engro has 50.1% ownership, with the remaining ownership belonging CMEC, Habib Bank, and Liberty Mills Ltd. While the ownership structure of both companies differs, both companies are managed by and employ Engro employees.

Both of these companies operate in Thar Block II. To help explain what that means, Ahsan picked up a regular A4-sized magazine lying on his coffee table.

“So suppose this is Thar. This entire magazine, this is the Thar potential of 175 billion tonnes of coal. And this is about 55,000 square kilometres area. This potential is equivalent to Irani and Saudi Arabian oil put together. This potential is about 68 times more than the current available quantity of gas.”

He then places an iPhone on top of the magazine. “Only this area is currently being explored, and by explored I mean drilling. And the government of Sindh has taken this section [the iPhone] and has divided it into 12 blocks.

And now a small piece of that, let’s say the Apple sign on the back of this phone, that one block, called Block II, has been given to Engro. This block is equivalent to only 1%, only 1% of Thar’s potential. It’s about 100 square kilometres.”

From there Ahsan elaborates: “When you start digging in that allocated area, you basically hit a pit that has 3.8 million tonnes of coal. And that is our first project, Thar Phase 1. And we have constructed a coal [fired power] plant next to it which is giving us about 660 megawatts (MW) of electricity. They are corresponding numbers”. Or more accurately, under Thar Phase 1, two power units of 330 MW were constructed.

For Ahsan, it is simple mathematics. While still speaking to Profit, he got up and pointed to his office’s fish pond. “Imagine this pond is that very coal pit. And imagine you keep expanding this pit. So basically, in multiple of 3.8 tonnes, as you keep expanding, you’ll keep putting up power plants of 660 MW.” Coal can be roughly divided into four categories: anthracite, bituminous, sub-bituminous, and lignite. Most of the coal found in the Thar district is lignite, which is the lowest quality of coal and moisture -heavy. However, according to

Ahsan, lignite coal can still be utilized - the only trick is to make sure that the power plants are close to the mine, as the coal cannot be transported across long distances well.

The reason why coal cannot be transported across long distances? If one uses trucks, it can often take more energy to transport the coal upcountry than one can get out of it by burning it. Using rail would be more efficient, but that requires hoping that Pakistan Railways has the capacity to build anything after 1952, which is howling for the moon at this point.

The cheapest way to transport energy from coal, therefore, is through electric wires: burn it at the mine mouth to convert it to electricity, and then transport that electricity via the national grid to the rest of the country.

The project reached its financial close in April 2016. Engro then selected China Machinery Engineering Corporation as the EPC for both the mine and power plant. As timing would have it, both companies were then included in the Early Harvest Project of the China Pakistan Economic Corridor. Phase 1 was then completed three months ahead of schedule in July 2019, and within budget, a point of pride for Ahsan.

As he says: “The power plant that we’ve installed is the first indigenous coal-fired power plant in Pakistan. These two projects will provide energy security to the country. Right now, we are injecting 602 MW into the grid, which is equivalent to supplying electricity to 2 million households. And on a yearly basis we will be saving $150 million in foreign exchange.”

The trouble with financing

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t’s a given that Ahsan, and by extension Engro, is extremely proud of the work they have accomplished. But Ahsan also views the project in terms of a nationlistic project: “We were carrying the burden of hope, of 220 million people of this country. A big burden of hope was on our shoulders, the shoulders of Engro, to move forward. Everyone was praying that, God, I hope they actually find coal.”

“When we talk about this country, whenever we take a nationalistic approach, it is a long-term approach. Indigenous coal is a longterm approach.”

One of the major roadblocks to the completion of Thar was financing. The nearly $2 billion project would not have been possible without the help of China. “You have to imagine the risk we took, no one was giving us money, no one was supporting us. And our country is a poor country. We did not have the money available with the government to do this project.” As he puts it a little more bluntly: “Hum say yeh project itnay paapar bailnay kay baad 10 saal mein huwa.”

ENGRO ENERGY

“You have to imagine the risk we took, no one was giving us money, no one was supporting us. And our country is a poor country. We did not have the money available with the government to do this project… Hum say yeh project itnay paapar bailnay kay baad 10 saal mein huwa” Ahsan Zafar Syed, chairman of Engro Energy Ltd

It’s understandable that the government of Pakistan did not have the resources; but why did Engro only receive a loan from China, and nowhere else?

The problem? Coal. And this goes back to the earlier point about dirty energy: not one western financial institution was willing to finance a coal project in Pakistan.

Ahsan himself rightly points out: “Right now there is talk about sustainability, about the environment. So everyone said, why are you putting this coal project up? You should be putting wind energy, solar energy. Why are you ruining the environment? We won’t give you a loan.”

Why indeed is Pakistan investing so heavily in a nonrenewable resource? For one there’s the expected energy potential of Thar, which makes both companies and the Pakistani government look the other way. For another, Ahsan himself sees no problem with the construction of coal power plants.

First, he uses other developing and developed countries as an example Pakistan can follow: “This is a misnomer. Right now as we speak, around 20+ countries, are putting up coal power plants. Huge power plants are being put

in Japan, in China, in India, and in South Africa.”

Second, coal power plants around the world are being shut, Ahsan insists it is because of inefficiency: “We need to ask ourselves, the right question. Those plants are closing that have outlived their useful life. If someone asks me coal plants are closing, I’ll say yes, they’re shutting.

Which plants? Those that have outlived their useful life, those that are inefficient, and those that are base load plants.”

In his defense of the EPTL, he says: “I have a third-generation coal power plant. My emissions from my power plant are well within World Bank guidelines.”

Pakistan) emits 33.5% more carbon dioxide than oil-fired power plants, and 84% more than natural gas, according to data from the United States Energy Information Administration (EIA).

602 MW

2 MILLION

84%

ENERGY PRODUCED

SERVICE CAPACITY

DIRTY FUEL

The amount of energy currently being produced by Engro Energy through its mine-mouth coal-fired power plants in Thar block 2

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In a clarification statement published in 2018, SECMC maintains that the lignite reserves found in Pakistan are of a much higher quality than coal reserves in India, Germany and Bulgaria. The statement points to Thar coal’s low sulfur content and low ash generated post combustion as evidence, among other metrics.

That may well be so, but here is another statistic that is important to remember: Coal (the lignite variety most commonly used in

Comparison of Thar Block II with Other International Mines Deposit

Heating Value Sulfur (%) Ash (%) Moisture (%) Stripping Ratio (Net) KCal/kg) (m3/t)

Thar Block II Gujarat, India

2770

1.07 7.8 47.46

2600-3000 3.4-5.9 9-12 38-40

Hambach, Germany 1911-2747 Maritz East - Bulgaria 1550

The number of households for whom the electricity produced by Engro’s Thar power plants would be sufficient, or about the population of Faisalabad

6.12 9-14

0.2-0.4

2-5

48-52

6.3

4.5

19-35

54

1.7

The amount by which coal-fired power plants increase carbon dioxide production into the atmosphere, compared to a similarly sized natural-gas fired power plant

There is no denying the fact that, no matter how efficient a coal-fired power plant, a natural gas plant will always be the cleaner option.

Shamsuddin’s squabble with Sindh

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hroughout the conversation, Ahsan is quick to emphasize the support provided by the government of Sindh.

As he says “There were no roads when we went to Thar. There was no source of water.

There was no airport. There was no tariff regime, or how a tariff is to be built for this overall project. So the government of Sindh helped us, infrastructure was built, roads were constructed, the water line was laid.”

There is very acute reason for this. Ahsan’s predecessor was a man called Shamsuddin Shaikh, who had worked at Engro from 1987, and had been the CEO of SECMC since 2010.

His retirement was due in 2023, but he dramatically resigned in November 2018.

The reason? He claimed that the Sindh government had failed to provide basic amenities promised to Tharis, and had also failed to provide electricity to Tharis, calling the government utterly “indifferent”, and accusing them of “hollow promises and fake slogans”.

Obviously, as Engro’s new CEO, Ahsan could only add: “Shams’s opinions are his own, those are his personal views, and I cannot comment on them. You need to understand that Engro is an institution. Shamsuddin Shaikh worked very hard on this project and he contributed a lot on this project, and he took this project ahead. But Engro is an institution, and a company like Engro, people change.”

Still, it’s clear that whether under Shamsuddin, or under Ahsan, Engro has heavily promoted its corporate social responsibility (CSR) campaign. Whether the Sindh government is actually incompetent is anyone’s guess.

[Editor’s Note: The author’s snark is much appreciated, but we would like our readers to know that, unlike Engro management, we at Profit have absolutely no qualms about calling the Sindh government incompetent.] But that very CSR campaign has come under scrutiny, as we explain below.

Enough about coal: what about Tharis?

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or someone who talked at length about coal, Ahsan is very clear about his definition of success for the Thar power project.

“For us the definition of success is not that the people living in Karachi who are using two air conditioners, and we provide them a third air conditioner”, he says. “For us the definition of

success is to make the people of Thar self-reliant.

The coal has come out of the land where they are living. They deserve to get the maximum benefit.”

This is a bold statement from a company that has been responsible for the displacement of hundreds of Tharis for the construction of the mine. But Ahsan frames it as: “We have converted the affectees of Thar, to the beneficiaries of Thar. If we are mining coal from under their land, and we have relocated them, then they are no longer affected, they are the beneficiaries.” He informs that Engro has built free houses for at least 171 families that will be displaced.

Engro’s main relationship with the Tharis is in term of employment. According to Ahsan, the mine itself had at one point up to 70% of local Tharis employed. Meanwhile, the power plant has up to 50% of local Tharis employed.

Engro spent months on training programs for Tharis to work in the mine and the plant. The company also started a Female Dump Truck Driver Program, which has trained at least 60 candidates from Thar to drive.

Engro also manages the Thar Foundation, which is in charge of ‘social impact’ in Thar. In health, Engro has helped build: a 125-bed hospital in Islamkot, Marvi Mother and Child Health Clinic, and Cataract Eye Camps. In education, Engro has spearheaded, 24 schools with 2,500 children studying there, and helped update the Government Polytechnic Institute Mithi, which caters to 180 students.

And yet: since the very start of the SECMC project, there have been cries from Thari and Sindhi activists that Engro is responsible for taking away the agency of Tharis, and is modelling a top-down approach towards development.

There is also the charge that Engro uses performative and palatable ‘women-empowerment’ activities, like the 60 dump truck drivers, to mask its real agenda: i.e. destroying Thar land.

Then there is the charge that Engro’s mining activities have altered the water table in the surrounding villages, forever changing the ecology of the area. Between 2016 and 2018, Thari families held a strike for 635 days outside the Islamkot Press Club, precisely about issues like these.

On the issue of water, Ahsan has a clear stance: “We have 36 wells that monitor the water level on a monthly basis… they also measure toxicity. When they said that the water level is decreasing, that there are toxins, we put 36 wells and retrieved the data, and provided a record to them.”

But as for other criticism lobbed by Tharis?

Ahsan says its difficult to keep everyone happy: “If you hire people from one village, the other village complains. If you hire from that village, the first village complains. If you hire a villager who’s affiliated with a certain political party,

then the other political party worker complains.

We try and hire everyone on a merit basis.”

As per Ahsan, Engro’s ‘inclusive’ CSR model has been so successful that Tharis employed in Block I (managed by Shanghai Electric), are badgering their employers to provide them with the same level of amenities that Engro provided in Block II. It is interesting to note that the CSR that Ahsan mentions are the kind of systems that should really fall under the Sindh government’s responsibility. Sure, it is Engro’s job to hire people, but it is the SIndh government’s job to provide basic amenities, that at this point Engro is providing. And that is concerning – if Engro, or in the future Shanghai Electric, are basically quasi-states operating in a place that has had historically zero investment, what does that say about the future of Thar?

The future of Thar Coal

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oving forward, Engro Energy has many plans. First, the financial close of Phase 2 of Thar project is expected to happen in December.

This phase includes the construction of two more power plants of 330 MW each. Phase 3 will then include the expansion of Block II. Another potential project is the construction of a railway line from Thar to the national railway. This is intended to help distribute Thar coal to the rest of the country, and helps eliminate the need to have a power plant at the mouth of the mine. The phases are expected to continue until 2024.

It is unclear how much of a market Thar coal will have in the rest of the country, however. Many power projects have already been set up to use liquefied natural gas (LNG), for instance, imported mainly from Qatar. LNG is both cheap and relatively easy to transport across the country, and has the benefit of an existing nationwide network of natural gas pipelines through which it can be pumped.

Not that Engro is likely to complain: Engro Elengy, another subsidiary of the parent Engro Corporation, is already supplying much of the natural gas being used by gas-fired power plants throughout much of the country.

Still, the folks at Engro Energy believe that ‘indigenous’ coal is better than imported natural gas, and view the Thar coal project as a national asset.

Ahsan Zafar Syed is expected to be at the helm of this project. He is genuinely banking on Thar coal power project to help propel Pakistan into a new energy phase. As he says: “I really want my country to leapfrog in all the energy areas.” Never mind that we’re leapfrogging using coal. n

ENGRO ENERGY

YUSUF H SHIRAZI:

A titan rests at last For decades, Yusuf Shirazi was the grandfather figure in Pakistan’s business community. But where did the recently late titan come from, and how did he make his fortune?

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By Abdullah Niazi

n 1963, Yusuf H Shirazi was striking out, and everyone was telling him it was a bad idea. Here was a man that, until a year ago, had followed the trajectory of every South Asian parent’s dream. He had studied hard, graduated with distinction, landed a private sector job in the duration that he was preparing for the prestigious civil service examinations, and was finally inducted into the federal service as an income tax officer.

And at his very prime, at the relatively young age of 34, he decided to quit, leaving a languid life of public service and

all its accompanying trappings, in exchange for a small but successful brokerage firm he ran with his older brother out of a room at the Karachi Stock Exchange. After a year of making his brokerage a successful endeavour, he was ready for more.

As he began the process of launching his own group, one of the questions that had him cornered was what the new group would be called. Symbolism was not lost on Yusuf Shirazi.

He was a keen reader and laboured over what the perfect name would be to best encapsulate just what he wanted to do with this group, and the ethic he wanted to bring to the world of Pakistani business.

Despite all the thought he put into it, inspiration for the group’s name came from unexpected quarters. When he was still in the process of launching, a South African friend, seeing the amount of work he was undertaking, likened Yusuf Shirazi to Atlas, the ancient Greek titan condemned to hold the celestial heavens on his shoulders for eternity. The name struck, and thus the Atlas group was christened.

One can quite see why Yusuf Shirazi was likened to Atlas. For starters, he was a very large man, physically imposing with an impressive height and breadth, and a crudely handsome face for good measure. But his gait and gusto were only as vast as his largess and love for learning.

Yusuf Shirazi was a man that carried many burdens in life, forming the Atlas Group and laying the foundations for multiple industries in the country. A mainstay in the world of Pakistani business since the early 1960s, Shirazi died on October 20 this year in his adopted city, Karachi.

He was 91. As this titan of industry finally rests his weary shoulders, Profit takes a look back at the life, the times, and the man that was Yusuf H Shirazi.

A scrapper from Sahiwal finds his first love

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t is as Punjabi a trope as it can get – the bildungsroman of a small-town boy making his own way in the world against all odds, armed with little more than a desire to make something of himself. Born the eighth son to a landowning family in 1929, Yusuf H Shirazi knew from his earliest days that he would not inherit much. Primogeniture was perhaps not the law of the land, but certainly practiced by many large landowning families of the time.

Perhaps it was this that cultivated in him a stringent, almost Calvinist work ethic that drove him to the heights he reached all his life.

Yusuf Shirazi was sociable and outgoing from his childhood. But the schoolboy charm was only a veneer to the deeply studious, and constantly curious young boy he was in his school

Yusuf Shirazi and Zulfikar Ali Bhutto days. He did excellently in school, and even back then enjoyed a healthy appetite for reading and writing. At Government College Sahiwal, he passed his intermediate examinations with flying colours, topping the board.

The next stop in this coming of age story was Lahore, as Shirazi moved from his native Sahiwal to attend Forman Christian College for his Bachelors. His association with the capital of the Punjab would continue as he explored the different fields he wanted to study, going on to pursue post graduate degrees in Persian and Math from Punjab University after his Bachelors.

It was after securing his education that he found his first calling, what he would call his first love. A first love he would eventually have to abandon, but one he remained faithful to until the very end in his own way - journalism. Fresh out of university, he joined the then vibrant Pakistan Times. He would eventually move on to work for Nawai Waqt, and study law at Punjab University at the same time.

Here he first rubbed shoulders with the giants, the bulwarks, the Atlases of print media.

Those he counted among his friends included the likes of Hameed Nizami, the legendary newsman to whose legacy this magazine and its parent publication are dedicated. Eventually, public service would come calling, and Yusuf Shirazi would make the practical decision to switch from journalism to income tax, but his passion for the field would remain the same.

All his life, he would make it a point to personally know the many editors of Dawn, and would continue his friendships with the Nizamis, M A Zuberi (publisher of Business Recorder) and others. And while he may have withdrawn from the affairs of the Atlas Group near the end of his life, leaving different parts of his empire for his sons to manage, he continued to write as a regular columnist for multiple English dailies.

One wonders what he would have thought of the state of the media today, especially the

print media that he so loved and cherished. The twin death blows of censorship and pulling of ad revenues by the government has left the industry near crippled, and an agonizing, damning rot has well and truly set in. For a man like Yusuf Shirazi, who appreciated and loved the sanctity of the written word in addition to being a business titan, the state of the media must have been disheartening. It is disheartening enough for those of us already disenchanted, and Yusuf Shirazi remained enchanted until the very end.

But the thrill and magic that the life of a newspaperman can offer had to be put on the backburner, because in 1953, Yusuf Shirazi was inducted into the federal service as an income tax officer. His first posting was in Shikarpur, a historic city in its own right, but no match to the luster and allure of Lahore. But his stay in Shikarpur would not be a long one, and he would soon be posted to the second city he would make his own – Karachi. And this one, he would finally call home.

The business story begins

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n 1962, after nearly a decade in the income tax department in Karachi, Yusuf Shirazi with his usual diligence and work ethic had become a point man. So when he was assigned that year to compile a report of the top 20 groups in Pakistan, something clicked in him, and he approached the assignment with the zeal of a newshound on the hunt for a story.

He interviewed the top businessmen in Pakistan extensively and in excruciating detail, asking the difficult questions and going above and beyond the call of duty. This was not a mere assignment for him, this was one last opportunity to play reporter.

As all reporters know, however, an unfortunate part of the job description is being a pest.

You question and you nag and you e-mail and

OBITUARY

WhatsApp until the person you need to talk to is frustrated into submission. It is a testament to Yusuf Shirazai’s interpersonal skills that he came out of the assignment not just with his report, but also the admiration of some of the biggest businesses in Pakistan instead of their chagrin.

He was now on good terms with the Adamjees, the Dawoods and the Habibs. But the friendship that stood the test of time the most was the one he formed with Mian Muhammad Yahya, the father of Mian Muhammad Mansha, chairman of the Nishat Group.

By the time he was done with this extensive assignment, Yusuf Shirazi was beginning to get the feeling that he had a flair for business. So, against all advice and common sense, he abandoned the civil service in 1962 to start his first group: Shirazi Brokerage Ltd, which he operated with his brother from a small room at the Karachi Stock Exchange.

While he was still getting his firm off the ground, he was engaged by his friend Mian Muhammad Yahya, who asked him to join his company as an executive director, another role he excelled at. During this same time, he was also asked by Lt General Habibullah Khan to join Ghandhara Industries as a Director, another post he served at well into the 1980s. By the time Mian Muhammad Yusuf and Lt General Habibullah died, he became like an uncle to their heirs, and to the other business heirs of Pakistan.

But after this first year-and-a-half in which he ran the brokerage and served as an executive director and director for Nishat and Ghandhara, Yusuf Shirazi went all in, forming what would come to be the Atlas Group.

As he focused on Atlas, he became the first Pakistani to gain licensing for the manufacture of motorcycles in partnership with Honda Motors of Japan, along with Syed Wajid Ali, the brother of Syed Babar Ali. Together, the two families set up the motorcycle industry in Pakistan, and the Atlas Group saw a meteoric rise.

Honda itself was formed in 1948, but by 1955 had become the leading Japanese manu-

facturer of motorcycles. So, in 1962, when Atlas Autos signed an agreement with Honda, the Japanese company was only 15 years old. Pakistan at the time was the fifth largest country in the world behind China, India, the Soviet Union and the United States. Honda came to India in 1995, and brought motorcycles there in 1999. In Pakistan, Honda brought motorcycles in 1962, and cars in 1992, entirely due to the efforts of Shirazi.

The first two factories that Yusuf Shirazi set up were in Lahore and Dhaka, and he soon rose in the eyes of the business community. In 1968, he was unanimously elected the President of the Karachi Chamber of Commerce, and is to this day the only President elected consecutively for two terms in the office.

Then, in 1971, disaster struck on a national level. The independence of Bangladesh meant that half the country was now another nation, but it also meant that all the private industry set up in erstwhile East Pakistan was now no longer available to them.

For West Pakistani businessmen, a lot of the loans for their assets in the East were serviced in the West, which resulted in a mass defaulting.

In this time, whether out of consideration for the state of the nation or personal principle, Yusuf Shirazi and the Atlas Group were among the very few to continue making their loan payments, even though they had lost the Dhaka factory.

From this point, it was a case of building from scratch again, but by this time he was widely admired and respected by the business community. Perhaps it was his good karma from before or his close relationship with the Prime Minister, but the Atlas group managed to survive Zulfikar Ali Bhutto’s nationalisation spree relatively unscathed.

The rebuilding effort he was now embroiled in encompassed more than just motorcycles, and he soon became a founding father of four of Pakistan’s industries, racking up an impressive portfolio. In the auto industry, he made at least 20 partnerships in Japan, turning Atlas Honda Motors into the unmissable giant it

Atlas Honda Factory

16

is today.

He also had success in financial services, with Atlas Assets Management and Atlas Insurance (originally founded by Allama Muhammad Iqbal and bought by Atlas in 1980), even if Atlas Bank was not the most successful venture in the world. He also delved into the trading sector, forging links with General Electric before moving on to power generation with Atlas Power.

The business ethic

I

n his death, Yusuf Shirazi has left behind an enviable empire. But from financial services to automobiles and power generation, one of Yusuf Shirazi’s most admirable qualities was his commitment to fostering good business environments.

Most corporate heads develop a pretense to philosophy or letters at some point. It usually has to do with free time or swollen heads, but Yusuf Shirazi had a knack for the artistic and the profound from an early age. In his years at the helm of Atlas, he wrote for the benefit of all his employees the doctrine of ‘The Atlas Way’ - the core principle of which was his belief that “what comes from society must be shared with society.” Coming from anyone else, one might scoff at the statement, but coming from Yusuf Shirazi, there might be an inclination to believe in its raw earnestness.

After all, he was always a man committed to the things he loved the most. Much like he continued to write columns for English newspapers, his passion for learning and belief in the power of education endured all of his 91 years.

Twenty-five people have already been sent to Harvard as part of his initiative to send two persons to the American varsity to be trained each year. He also formed the Harvard Club of Pakistan, and remained a founding member of both LUMS and GIK, in addition to his many philanthropic efforts through the Atlas foundation.

The passing of Yusuf Shirazi leaves a hole in the world of Pakistani business. He was no longer particularly active in the circles he once dominated, but he remained a kind, grandfatherly, imperious figure watching over everything. He was still sharp as a tack, writing columns until the very end.

Ayn Rand’s most famous book was titled ‘Atlas Shrugged’ and discusses the fall through of Atlas shirking his responsibilities. Yusuf Shirazi did not shrug his entire life, carrying his celestial spheres with dignity. In death, his labours completed, he has gently passed the burden on to the shoulders of his sons, Aamir Shirazi, Saquib Shirazi, Iftikhar Shirazi, and Ali Shirazi who are running different sides of the business. Whether they will live up to the legacy of their father is yet to be seen. For now, the legend is cemented, and Atlas finally rests. n

OBITUARY

The Profit Digital Banking Roundtable:

“LESSONS FROM THE FRONTLINE ”

The digital heads of HBL, Bank Alfalah, and JS Bank sat down with Profit to discuss the many problems with digital banking in Pakistan, and what can be done about it

By Habibullah Khan

W

e’ve been to all the conferences, heard the keynotes, and have been fed the vision of digital banking for years now. But to really understand the reality of digital banking in Pakistan, Profit decided to sit with three digital bankers at the forefront of this industry: Atyab Tahir, Head of Digital at HBL, Khurram Jamshed, Head of Digital Products at Bank Alfalah, and Omer Salimullah, Head of Open Banking at JS Bank.

Profit: Thank you for joining us. In your opinion, how mature is the digital banking sector in Pakistan? What positive role

18

have regulators, banks and customers played, and what are the challenges in each of these areas?

Khurram Jamshed: I have no qualms in saying we are at a nascent stage. We have done nothing as a banking fraternity. We have done branchless banking, and we call that digital. We have not digitized basic intrinsic needs ie. I need to send and deposit cash, I need to get and receive pay orders, I need to deposit cheques. Can we do this?

No. These are basic transactions, and currently we can’t do these seamlessly. We haven’t even done cheque truncation, a process that is becoming obsolete in the world. Scandinavia is cashless and so are entire African countries! Yet we are still doing physical cheques. We have trillions of rupees stuck in the system as we take days fulfilling cheques.

Atyab Tahir: We are in a race to the beginning.

We have 33 banks. Smaller banks often look to the bigger banks for leadership, but all of the big banks are still trying to figure out [what to do].

Usually this stage lasts seven years. If you look at it that way, we are in year two. Our regulator is not averse to change - it is averse to not knowing what change could look like, and we [the banks] have not been able to articulate that well. If you show regulators anti-money laundering implications and customer protection and satisfy them in this area, they will help you. Most banks hide behind regulations as an excuse because they do not want change. To protect banks from their inertia, the regulator needs to give a compliance framework that applies to banking sandboxes.

KJ: Sandboxes will have their own sandboxes with their own flavors, and we need that compli-

ance framework around it.

AT: Yes, a central bank sandbox. Regulatory startups may not have the solutions we need, even though they are approved for anti-money laundering customer protection.

Omer Salimullah: Top banking decision makers do not really believe in digital. They keep digital bankers around to fulfil board pressures to go digital. At their core, they do not believe in digital because it does not bring in the numbers.

The branches bring in the numbers, so they believe in that model. Digital is low on their priority. And this is one of the reasons we do not see digital gaining any traction.

KJ: The myth that customers will not do digital because they are not comfortable is just that - it is a myth.

OS: We had $2 billion in operating expenses for banks in the year 2018. Of that, only 7% was spent on IT. Most expenses are salaries and rent.

This shows you where the belief is. The silver lining is that 40 million Pakistanis are now on Facebook and their expectations are changing.

We are also a young nation. The young want digitization.

KJ: The issue is the return on investment. Right now we open a branch knowing the numbers that will come in. We do “fire and forget”. It is risk free and it works. So we are risk averse. We do not hire people who are aware of the technology needed to take risks.

AT: We have 207 million people in Pakistan, of which 112 million are adults. There are 110 million SIM cards. Almost 60 million SIMS are for smartphones. And 45 million mobile users are daily users. They all use social media. Every board room needs to answer this question - can we exploit this familiarity with technology?

What if someone else does?

“We have not digitized basic intrinsic needs ie. I need to send and deposit cash, I need to get and receive pay orders, I need to deposit cheques. Can we do this? No.” Khurram Jamshed, Head Digital Products, Bank Alfalah

part here?

AT: Digital is not about technology. It’s a tool.

Digital is about changing that mindset in a bank.

Products traditionally are made by us in conference rooms to satisfy some senior banker. Digital flips that. It asks- what does the customer need?

How do they live their life? How can I facilitate that life? That is what digital is. So if you do digital you should delight customers, like N26 and Monzo in Europe. We should be able to customize payment needs for customers on their terms. Digital allows that.

OS: Monzo got investment from its own customers. That is how much customers believed in their digital bank! When you start looking at life through customer’s eyes, the answer is digital.

AT: Why do customers hate banking? Here’s just one use case where we don’t help. A big chunk of our customers are small to medium enterprises (SME), or related to SME. This is a huge unserved category, but banks do not have enough data points to give them loans. We need to modify our approach to serve them. We need to change our lens from lending to facilitation.

KJ: Female inclusion in banking is pathetic.

Women in our society do not want to go the branch for societal reasons. They do not feel as safe, for example. They need money to pay for goods and services in cash. We do not facilitate them. We do not even have drive-through ATMs! How do we even serve middle class women? We have not digitized end points.

Women organize millions of committees. They often participate in them for social reasons. If you make it easier, they will do [committees] digitally. We have not been able to convert them.

We look at digital as “make an entire digital bank”. Instead, we should be taking individual use cases and catering to them. We are also bad at communicating to our customers when we do digital use cases well.

Profit: What are the top two things you want done to accelerate the adoption of digital banking in the country?

OS: Allow fintechs to get a foothold in the market. They will drive digital and force banks to wake up. The thing that is required badly in this country is a Unified Payment Interface rail. In India they have UPI. Banks have opened up link-

OS: Experienced bankers often say “if it is not broken, why fix it?” However, banking middle managers like us who are digital-cognizant are scared that banking is so far behind, it will become irrelevant by the time we become decision makers. Change comes very quickly and we are leaving ourselves open for disruption.

KJ: Retail will be the first to get massively digitized. Trade and other use cases like business-to-business will be slower.

Profit: Why do customers hate banking?

There is a feeling in certain quarters that banks do retail grudgingly. What’s is your honest take on this, and can digital play a

(L to R) Atyab Tahir, Head of Digital, HBL, Omer Salimullah, Head of Open Banking and Ecosystem, JS Bank, Habibullah Khan, Moderator and Guest Editor Profit, Khurram Jamshed, Head Digital Products, Bank Alfalah.

DIGITAL BANKING

ing to their devices for free. Google Pay did 24 crore transactions in just the month of May 2019.

All transactions are secure. Now India also has WhatsApp Pay. We need to copy this UPI rail.

Banks need to open their deposits securely for free to fintechs to accelerate ecosystem. Banks in Pakistan will not allow this. They know they will become just a transaction platform and dumb pipes. We need to remove that distrust and fear together. Banks, fintechs and regulators together are a banking fraternity.

AT: The game is all about customers. We only have 20% of the population as customers. We need to onboard customers. To do that, we need to go to customers. For that, we need data.

Banks need to accept the fundamental nature of data. The reality is we have a lot of data. We need to be confident in the trust and credibility banks have, and focus on financial inclusion for the rest of the country. If we want to stay relevant, we need to know our customers better.

We have enough data to know them. We can then identify needs, address them. So be less instinctive and more data curious. My smartphone gives me 16,000 data points. I need just 8 to 10 to do credit-worthiness. I can do basic banking business by just being data curious.

KJ: I would do the most basic things first, and then talk about digitization. Do the basics first, then partner with fintechs. Open up your infrastructure. Invest in fintechs. Let them innovate on your behalf. Right now banks take four months to two years to launch a digital product.

We need fintechs!

OS: You cannot have the old school vet the new school and set the rules. They will take the agility out of it.

Profit: According to some estimates, banks are spending over a quarter of a billion dollars a year on technology. A lot of this goes on operational expenses related to legacy technology. Can we

“We spend money on very expensive consultants, that we should be spending on training our people” Atyab Tahir, Head of Digital, HBL

“Experienced bankers often say “if it is not broken, why fix it?”

However, banking middle managers like us who are digitalcognizant are scared that banking is so far behind, it will become irrelevant by the time we become decision makers” Omer Salimullah,Head of Open Banking and Ecosystem, JS Bank

spend this money better? What would you like it spent on?

Profit: How can digital banking help with financial inclusion in Pakistan?

OS: Every board needs to ask “what is your IT cost and relation to efficiencies?” IT budgets are increasing, but efficiencies are not. Why are we not having this conversation?

KJ: Digital is not the answer for everything, but it can help. The government needs to enforce a digital economy. That will is needed. The government needs to lead here. Banks can’t do it if the government doesn’t want to do it.

AT: You will be surprised, but often the biggest technology cost is people, not even technology itself. We need to move to cloud somehow, which will address this.

KJ: We do not have electricity grids to make high end data centers. I would invest some of that money on the right people who get disruptive technologies. We try to get MBAs to do tech and critical digital enablement work.

AT: I second that. We spend money on very expensive consultants, that we should be spending on training our people.

AT: Microfinance banks, institutions and small-to-medium enterprises banks are all involved in the ecosystem. Mobile operators are also focused on the demographic right above the bottom of the pyramid. The role for digital is in education. You need to educate people so that they go to microfinance institution and then to microfinance banks, etc. That way, you can get data about them and then continue to help them.

The key is to educate, and take that first deposit. We have to look at the entire financial value chain for the bottom of the pyramid and see where digital can add value and where various players can add value. It can be done.

OS: The bottom of the pyramid is currently too much of a hassle for banks. The answer is to make it easier for fintechs to do it. Fix a rail, like UPI in India, and you will get people who will take the risk. The sheer volume and data will help justify their business models to investors.

KJ: I passionately believe if we simply do banking digitally well, it will solve a lot of the financial inclusion problem, because it will make onboarding and fulfillment easy, cost-effective and seamless. n This roundtable was conducted and moderated for Profit

by Habibullah Khan, Director of Content at Penumbra

20

DIGITAL BANKING

22

The corporate practice of publicly listed companies buying their own shares may yield positive returns in the short run, but may skew incentives over the long run

CAPITAL MARKETS

P

By Farooq Tirmizi

erhaps we should have seen this coming, but count us surprised. Share buybacks – the practice of publicly listed companies buying back their own shares from the stock market – have come to Pakistan. Long a mainstay of the capital markets in the United States, they now appear to have a place in Pakistan’s nascent markets as well.

Over the past few months, at least two major Pakistani companies – backed by two major Pakistani financial and industrial conglomerates – have announced share buybacks. On July 25, 2019, JS Investments, the asset management company that is part of the broader JS Group, announced that it would be buying back Rs503 million worth of shares, equal to 34.8% of the company’s total outstanding shares.

Then, just two weeks later, on August 9, 2019, Nishat Chunian Ltd, the textile company that is part of the broader Nishat Group, announced that it would be buying back Rs1 billion worth of its own shares, equal to 13.3% of its total outstanding shares.

These two transactions are not the first of share buybacks in Pakistani history. Indeed, they are not even the first share buybacks for the conglomerates in question: JS Global Capital, the investment banking and securities brokerage subsidiary of the JS Group, conducted a similar share buyback in 2016.

During that year, JS Global Capital spent Rs552 million buying back 12 million shares, which at the time represented 24% of the total number of shares outstanding, and nearly half of the company’s free float.

And while three data points are not necessarily a trend, given how novel this phenomenon is in Pakistan – and how prevalent it is in mature capital markets like the United States – it is worth exploring what share buybacks mean for investors, and the broader Pakistani economy.

The financial economics of buybacks

L

et us start with a recap of some corporate finance basics, which will help explain why corporate buybacks are possible, and why companies even contemplate them.

When a company makes profits, there are essentially five possible choices it has as to what it can do with the money it has earned, and it can choose any combination of these five: 1. Spend it on capital expenditures 2. Spend it on buying other companies 3. Keep it for a rainy day 4. Pay it out as dividends 5. Buy back its own shares Each of those has a different outcome, both from the perspective of management and investors in the company, as well as the economy.

And the two perspectives are not always aligned. In theory, the job of a CEO is to allocate capital efficiently and continue to grow their business, and by extension create jobs and grow the economy. Doing that job well can result in CEOs being very highly compensated. In practice, however, it is possible for the CEO to earn a high income by rewarding shareholders without necessarily contributing to the growth of the broader economic pie.

And the most popular way of doing that – at least among CEOs of American companies – is share buybacks.

Owing to reasons relating to both finance theory as well as taxation laws, instead of net income, it is easier to examine what a company does with its free cash flow. A quick proxy for free cash flow, and one used for the purposes of this analysis, is earnings before interest, taxation, depreciation, and amortisation (EBITDA).

From a company’s perspective, the first two options – spending on capital expenditures or mergers and acquisitions – are both ones that involve the most risk and

Returning capital to shareholders means that management has decided not to use that cash to grow the company. That does not mean that returned capital – whether in the form of dividends or share buybacks – cannot still help grow the economy. After all, shareholders who receive the dividends or buybacks can reinvest that capital in other, more productive companies 24

the most reward, with capital expenditures often involving more perceived risk than even mergers and acquisitions. And that makes sense intuitively: it feels a lot riskier to set up a completely new factory from scratch rather than buying a running factory from another company, where at least the revenue and profits are known variables.

From an economy’s perspective, though, the riskiest option – capital expenditures – if successful, is clearly the best option: a new factory or business unit would require the company to hire new staff (creating new jobs), create relationships with suppliers (creating new sales for other businesses), and ultimately pay taxes (new revenue for the government).

Mergers and acquisitions may result in higher profits, and therefore higher tax revenue for the government, but not necessarily new supplier relationships, and often result in job losses as redundant employees are let go.

Among the largest global companies, Amazon is famous for always choosing option one: the company will invest as much of its free cash flow as possible in new projects, resulting in Amazon becoming one of the most valuable companies in the world.

The third option – saving the money for a rainy day – is somewhat neutral. From both the economy and the company’s perspective, doing so achieves one major goal: risk mitigation. Saving cash during a boom means a company will have more cash when there is a recession, which in turn will likely mean that it can keep its business open despite hardship.

From the broader economy’s perspective, that may also mean being able to avoid layoffs during an economic downturn, and perhaps even keeping salaries steady.

Some companies – such as JPMorgan, the largest financial institution in the world – use option three as a countercyclical growth strategy: save money while everyone else is investing, and then, when the rest of the market runs out of money during a recession, go out and buy all the good assets that are now cheap because nobody has the money to buy them.

Jamie Dimon, CEO of JPMorgan, refers to this strategy as the “fortress balance sheet”.

Others, such as Apple, simply hoard the cash and opportunistically deploy it in acquisitions as and when needed, but otherwise sit on a mountain of money.

As of June 30, 2019, Apple was sitting on $94.6 billion in cash and cash equivalents (short term investments that can quickly be converted into cash, such as term deposits, money market funds, etc.).

What the first three options have in common is that they are some form of investment: each of the three options involves some element of strategy whose ultimate purpose is

“The reason for our buy back from the stock market was that we had a PE [price-to-earnings] ratio of 2, which is ridiculously low. So, the best investment for us was to buy back shares. Our value subsequently rose 33%. We bought back at low prices, and eventually our shareholders made money” Shahzad Saleem, CEO of Nishat Chunian

to grow the company’s revenue or profits, and usually both.

That is not true of the last two options, which are both just two different ways of returning capital to shareholders.

Of course, there is nothing inherently wrong with returning capital to shareholders.

After all, that is the stated purpose of existence of all for-profit businesses. Indeed, the value of a company is calculated by estimating how much cash it can generate for its shareholders.

But returning capital to shareholders means that management has decided not to use that cash to grow the company. That does not mean that returned capital – whether in the form of dividends or share buybacks – cannot still help grow the economy. After all, shareholders who receive the dividends or buybacks can reinvest that capital in other, more productive companies.

Of these two options, dividends are the one that result in all shareholders receiving the cash back from the company, and are generally taxable at a higher rate than capital gains, which means that the government tends to receive more in revenue from dividends.

By comparison, share buybacks result in cash capital gains only for the few investors who

sell their shares as part of the buyback, though the unrealised capital gains are available to all investors. The cash capital gains are generally taxable at lower rates than dividends, resulting in lower revenue for the government.

The Pakistani context of buybacks

W

hile each of these choices have different consequences for both companies and the economy, these are not exclusionary choices: most companies can and do select multiple options each year, and can switch between them over the course of several years.

Paying dividends does not preclude the possibility of capital expenditures, and vice versa.

Hence, to understand the consequences of a company’s choices, it is helpful to examine the relative weight of each option in the company’s decisions on how to deploy its capital.

The biggest criticism of share buybacks is not that they are an inefficient use of capital.

It is that if they become the dominant use of capital, they could perhaps represent an abdication of responsibility on the part of management.

In other words, a company’s CEO may

decide to do share buybacks because they have simply run out of ideas for what to do.

“If a company is buying back equity, then one reason could be that it has run out of new ideas, or they don’t have enough new ideas,” acknowledged Shahzad Saleem, CEO of Nishat Chunian Ltd, in an interview with Profit.

For the purposes of this analysis Profit focuses on Nishat Group. While both JS Group and Nishat Group initiated share buybacks, the JS Group companies are both financial institutions which have different dynamics that are not directly comparable to non-financial companies. Balance sheets and income statements are organised differently for financial institutions and capital expenditures, though not wholly absent, are a less relevant feature of a financial services company’s business strategy.

By contrast, an industrial company offers the kind of characteristics that most other companies – including some services companies – might face, and thus has more applicable lessons to offer.

Our analysis of Nishat Chunian indicates that it is far from being the kind of company that is out of ideas on growth strategy. Then why did it go for a buyback?

CAPITAL MARKETS

A bit about Nishat Chunian

N

ishat Chunian Ltd was established in 1990 as part of the Lahore expansion of the then-Faisalabad-based Nishat Group, which owned Nishat Mills Ltd, what is now – and has been for decades – the largest textile mill in Pakistan.

At first, Nishat Chunian was the most basic form of industry: a spinning mill that spun ginned cotton into cotton yarn. In 1998, however, the company invested nearly Rs700 million to diversify its product offerings into weaving: manufacturing cotton cloth out of the yarn it was producing. Over the next few years, it continued to expand its spinning and weaving capacity until, in 2006, the company finally entered the home textiles business (bed sheets, linens, etc.)

By 2010, the company had set up its own independent power generation unit that not only supplied its power plant with electricity, but in fact sold electricity to the national grid.

That subsidiary was eventually listed on the Karachi Stock Exchange as Nishat Chunian Power Ltd. In 2014, the company invested in expanding the power generation capacity of NCPL by adding a 46-megawatt (MW) coalfired power plant.

In 2015, Nishat Chunian tried diversifying by investing in a cinema operating business, though that business was eventually sold off as management decided it was too far removed from the company’s core business. They did, however, decide in 2016 to invest in creating their own retail outlets called The Linen Company (TLC), which was a vertical integration for the domestic market.

Needless to say, that short history illustrates the fact that this is a management that has been more than willing to take risks and think creatively. This is particularly impressive,

26

considering the fact CEO Shahzad Saleem has been at the helm of the company since 1997, and has been involved with the company for even longer. Typically, CEOs with long tenures tend to get complacent and stop innovating, though that is evidently not the case with Nishat Chunian.

Shahzad Saleem is the son of founding CEO Sheikh Mohammad Saleem, and the nephew of Nishat Group chairman Mian Muhammad Mansha. A graduate of the University of Karachi, Shahzad then went on to do his MBA at the Lahore University of Management Sciences (LUMS) in 1989, one of the earliest batches to attend what is now inarguably Pakistan’s finest institution of higher learning.

“The interview for admission into LUMS was held at Packages Ltd. office in Karachi

by Syed Babar Ali, Abdul Razak Dawood, Javed Hamid, Yusuf Shirazi, Ehsanul Haq and Waseem Azhar,” he said, during a 2012 interview with his alma mater, highlighting just how seriously the university’s industrialist founders took their commitment to the institution in its early years.

Buyback activity

Rs1 billion

The amount of money Nishat Chunian will spend in buying back its shares, the largest non-delisting buyback in Pakistani history, representing 13.3% of the company’s outstanding shares

Following his graduation from LUMS, Shahzad Saleem joined the Nishat Group, and has been working with Nishat Chunian Ltd since its inception.

One would assume that such a company would be ripe for complacency and stagnation, but over the past decade – Shahzad’s second decade as CEO of the company – Nishat Chunian used the bulk of its cash flow for investments and capital expenditures rather than returning capital to shareholders, according to Profit’s analysis of the company’s financial statements.

Since 2008, measured as a percentage of EBITDA, Nishat Chunian’s investments in its subsidiaries, as well as direct capital expenditures, accounted for a far greater proportion of the use of its cash flows than dividends, even though the company has paid a dividend in all but one of those years.

However, over the past two years, dividend payments have outpaced investments, suggesting the company may be encountering some difficulty in finding profitable investments. That may at least partially be due to the economic slowdown experienced by the Pakistani economy, which has hit large scale industrial companies like Nishat Chunian especially hard.

Why the buyback?

T

he scale of the buyback – Rs1 billion worth of buybacks – is worth noting: it is larger than any dividend Nishat Chunian has paid throughout its history. And it would take 13.8% of the company’s shares off the market, effectively one-third of the free float of shares.

So, what is going on? Why has the company decided to pursue buybacks?

“The reason for our buy back from the stock market was that we had a PE [price-

to-earnings] ratio of 2, which is ridiculously low. So, the best investment for us was to buy back shares. Our value subsequently rose 33%.

We bought back at low prices, and eventually our shareholders made money,” said Shahzad Saleem.

He is certainly correct: the market has been pricing Nishat Chunian stock unusually low, even when taking into account the fact that the earnings per share that Saleem cited as part of his price-to-earnings calculation was artificially inflated this year due to favourable currency gains that Nishat was able to take advantage of as a result of the massive devaluation of the rupee this past year.

Analysts and investors correctly conclude that such gains are likely one-off and do not represent ongoing profitability for the company. Still, even if one excludes that Rs1.4 billion in currency gains, the price-to-earnings ratio for the stock, a measure of its valuation, would come out to just 3.36 times financial year 2019 earnings. Nishat Chunian’s financial year ends June 30.

For context, the broader Pakistani market currently trades at 7.4 time trailing 12 months’ earnings, according to calculations

by Topline Securities. Hence it is rational for Nishat Chunian management to feel that their stock price was being unnecessarily undervalued by the market, and that a stock buyback would be an efficient way to return capital to shareholders while also correcting what they felt was an anomaly in the stock price.

“There are two other things here: sometimes the valuation of these stocks is so low, and your market has fallen so much, that it is in the shareholders’ best interests to buy back stocks. That’s often the smartest thing for a company to do. And this happens all over the world,” said Shahzad Saleem. “The other thing is our tax structure. In Pakistan, there are low taxes on capital gains in Pakistan. So financial-

ly, it’s a good idea.”

Should buybacks be allowed?

S

till the broader question remains: should buybacks even be allowed? After all, so what if the management feels that the stock price is too low? It is the job of management to operate the company efficiently and deliver revenue and profit growth and the communicate the prospects for that growth to the market. What the market chooses to do with that information is not necessarily something that the company should have any control over.

That used to be the position of regulators around the world. It was not until the early 1980s that the United States Securities and Exchanges Commission began allowing buybacks, and it was never quite intended to become the massively popular phenomenon that it has become in that economy.

Over time, however, regulators have come around the position that the Shahzad

Low valuation

3.36x

The price-to-earnings ratio of Nishat Chunian at the time it announced the purchase offer, adjusted for the one-time effects of currency depreciation

Saleem articulated: that buybacks are simply a tax-efficient way of returning capital to shareholders. While the Securities and Exchanges Commission of Pakistan (SECP) has allowed buybacks in the past, it articulated a fuller set of rules governing such transactions in March of this year, as a result of which it is easier for publicly listed companies to navigate the regulatory process.

Nonetheless, companies that have thus far engaged in buybacks believe that the regulatory process is still too cumbersome. “The mechanism for buying back shares in Pakistan is so illogical. The system is so full of rules and regulations, and is so bureaucratic. The process takes 45 days. But the stock market doesn’t wait 45 days,” said the Nishat Chunian CEO. Indeed, is those regulations that have persuaded many that the negative side-effects of share buybacks – where CEOs use company money to pump up the value of stocks that then inflates the value of their own shares – are unlikely to become visible in Pakistan anytime soon.

When asked if he thought that buybacks will become a worrying trend in Pakistan, Shahzad Saleem responded; “No, [because it is difficult to do] with all these rules and regulations. The government should actually encourage this, for shareholders and minority shareholders. They need to amend the rules, and the timeline [of the process].”

As for whether there could be long term damage to the economy and the depth of the capital markets, Shahzad was equally sanguine: “Absolutely not. This is a matter of opportunity [opportunity ki baat hai].

Companies can always issue rights, or raise equity.” n With additional reporting by Meiryum Ali

CAPITAL MARKETS

Pakistan is pouring Rs 44 billion into importing urea and LNG to make up for the gap in demand, and a further Rs 21 billion in subsidising the imported urea. A smart, equitable subsidy to local producers might be the answer.

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By Abdullah Niazi

P

akistan is an agrarian economy.

This little factoid is drilled into our heads from our earliest school days. It is plastered front and center in social studies books, and is most likely the first thing you learn about Pakistan’s economy and topography. This agrarian bent, along with an inexplicable pride in being rich in natural resources (as if that sets Pakistan apart from the rest of the world), goes to the core of how we try to portray ourselves as a country.

Behind all the bluster, behind the terrors and blacklists and nuclear arsenals, there stands the folksy farmer. He wakes up with the sunrise, ploughs his field, feeds his cattle, wistfully roams his fields and takes in the fresh air. Disconnected and unconcerned with all of the chaos of the city, it is a good, simple life.

The largest concern that this noble farmer may have to face at some point is a low crop yield, and that too is easily fixable. Get a bag of urea fertilizer, sprinkle a little here, a dash there and another handful there, and watch as

it works its magic.

At least that is how the television and radio ads make it look like. One farmer tells another of how his crops have done magically well thanks to this new fertilizer. The other is shocked but intrigued, prompting the former to explain the details of the how the magic of urea has changed his life and fortunes, and the latter scurries off to buy said fertilizer. For good measure, we sometimes even get a shot of farmers dancing off into golden hour as they spread the fertilizer in their fields to the beat of flute music.

As ad nauseam as the fertilizer industry’s advertising has become, the fact of the matter remains that access to fertilizers can often be a life changing factor in the lives of farmers, especially those working on a small scale. As such, there is no surprise that fertilizer is one of the most subsidised products in the country,

and for good reason.

A staggering 39% of our labour workforce is employed in the agriculture sector, 66% of the population depends on the agriculture sector for its livelihood, it makes up 19% of our GDP, and makes up 20% of our exports, not including the input it provides for the textile industry, which makes up for 60% of the country’s exports.

But while two-thirds of our population may be dependent on the agricultural sector for their livelihood, the sector is also one in which Pakistan’s wealth gap is most palpable.

According to the Pakistan Bureau of Statistics (PBS), a mere 10% of zamindars hold 52% of the agricultural land in Pakistan.

Currently, we employ an across-theboard subsidy on Urea import that is costing tens of billions of rupees, and hurting both the country’s balance of payments and fiscal

AGRICULTURE

deficit. It also means that the richest farmers with the largest land holdings reap most of the rewards from these billions that the government is pouring in.

But short of land reform, how can the government ensure a more equitable dispersal of the fertilizer subsidy? Would incentives to the local industry work, and are the fertilizer companies to be trusted? Most importantly, could changing the subsidy framework do anything to actually add some credence to the image of the happy-go-lucky farmer cultivated by textbooks and peddled by years of advertisements?

The state of the sector

F

rom whichever angle you approach the problems of a sector, the macroeconomic determinants will remain the same. With the agriculture sector, one could look at more specific issues such as low crop yield, shrinking agri acerage, low margin crops and poor farm economics. But these are issues that have existed, will continue to exist and can be dealt with at a more opportune time.

What is plaguing the agriculture sector is the same thing haunting every other sector: interest rates have almost doubled from 8% to 15%, the Pakistani rupee has depreciated by 30% in the last year alone, inflation has more than doubled from 5% to 12%, and the prices of utilities such as gas are also on the rise.

As a result of devaluation, farmers face the brunt of the rising inflation and input costs as well as increased prices of utilities and energy costs. Naturally, this results in higher food prices, which heightens the country’s food security issues, and so on and so forth goes the deadly cycle.

To its credit, the government seems to have picked up on the fact that the sector is important. Currently, the federal government has 13 projects in the pipeline on which they are spending Rs 290 billion under the five year National Agriculture Emergency Programme.

The federal government’s five year plan taking place with the coordination of all provinces is aimed at boosting crop yield, fishery and livestock development as well as water conservation of a little less than combined live water capacities of Tarbela and Mangla dams.

The provincial allocation to agriculture has naturally also seen a similar rise, with a

total Rs 114 billion allocated for agriculture projects in the provinces. The Punjab provincial budget saw a 24% increase given to the agriculture sector, while the KP development budget saw a 63% increase. A Rs 8.4 billion allocation has also been made in the Sindh budget.

Part of the current government’s agriculture vision was the provision of a ‘smart subsidy’ that would provide agricultural inputs to 3 million small scale farmers that have farms up to a maximum of 5 acres, as explained in the PTI’s 100 day agenda. The plan was as ambitious as any of the other agenda’s on the PTI’s plate for the first 100 days. By July 2019, they were supposed to have already set up mechanisms to monitor the schemes, and made the first round of payments to farmers and vendors using digital platforms. It is now November,

If Rs44 billion being spent on fertilizer import is used smartly, the government could even provide free urea to the smallest, poorest farmers 30

and the government has still not developed their basic scheme, which was a goal they had set out to achieve by March.

The state of the subsidy

T

he PTI’s desire to provide a smart subsidy to farmers with less than 5 acres of land is a proposition that makes sense.Given the wealth gap and disparity in land ownership, and across the board subsidy would mean an equal but inequitable distribution of government assistance.

In the current dire economic straits, those most adversely affected, as is always the case, have been the poorest farmers with the least land to their names. With 10% zamindars holding 52% of the land, the remaining 48% of the land is divided among the remaining 90% agriculturalists. These 90% farmers all have land holding sizes of less than 12.5 acres as per PBS data. Out of this, 65% of the farmers have even smaller land holdings of less than 5 acres

per farmer. The 10% zamindars that own the most land would thus get 52% of any across the board national subsidy, while medium scale farmers with farms between 5 acres to 12.5 acres would get 29% of the cut. The smallest farmers that own less than 5 acres of land would only get 19% of the government subsidy.

A major example of misdirected government intervention in the fertilizer industry is in the subsidy and import of urea. Domestic urea demand hovers somewhere around 5.8 million tons, while the domestic supply using indingenous gas peaks at 5.5 trillion. The remaining demand for 0.3 million tons of urea is met with expensive urea imports, or the production of urea using imported gas such as LNG. The foreign exchange outflow on the import of urea and LNG is a Rs 44 billion burden on the balance of payments. But the problem does not just end there. Once the government imports either the urea or LNG to produce the urea at home, the costs have racked up so high that they cannot compete with the prices of the urea being produced domestically using indigenous gas. This means the government then has to subsidise the imported bags of urea and the urea produced using LNG, which puts a Rs 21 billion burden on the fiscal deficit.

In addition to this, the LNG provision to fertilizer producers is resulting in overflowing inventory. The government currently supplies 70mmSCFD of LNG to fertilizer plants, which has resulted in the production of 0.9 MT to date this year. The closing inventory of LNG based production as of October 15 2019 was also 0.7 MT.

Enter Engro

E

arlier in October, Engro fertilizer held a closed door meeting with a select few journalists. Engro fertilizer’s Chief Financial Officer (CFO), Imran Ahmad, presented many of the same facts and data that have been discussed in this report.

The purpose of the meeting as per Imran Ahmad, was not to tell Engro’s side of the story, but to make a case for the farmers. These are our customers, he said, and it is our duty as a responsible organisation to look out for them when the government is not acting as efficiently as they could to give benefits to the most disadvantaged.

Every time a large corporation claims they are standing up for the little guy, one

should take it with a heavy dose of salt. All CSR programmes, and Robin Hood missions by corporations looking to make even more money are most probably just that, a way to make money.

But even as Imran Ahmad explained Engro’s proposal with the socialist zeal of college graduate fresh out of University with a sociology degree, it became apparent what Engro was suggesting. That the Rs 44 billion in foreign exchange being spent to import urea and LNG to produce urea be instead directed towards the local industry. That they be provided the low grade gas they were promised, especially since the domestic industry could more than fulfill demand using gas at home if they were provided it. Let us at least look at the claims that Engro is making.

For starters, the local industry is currently producing 5.5 million tons of urea, while the demand can go up to 5.8 million tons. Of the 5.5 million tons being produced, Fauji Fertilizer is producing 3.1 million tons at full capacity, Fatima Fertilizer is providing 0.5 million tons, and Engro is providing the remaining 1.9 million tons. Both Fatima and Engro are unable to produce at full capacity.

If they were allowed to do so with the provision of gas, Fatima could produce an additional 0.1 million tons and Engro could produce an additional 0.4 million tons, meaning total domestic production using indigenous gas could go up to 6 million tons - 0.2 million more than the maximum demand.

Moreover, if the Rs 44 billion being spent in foreign exchange on the import of urea

Under the smart sticker based subsidy system, farmers could redeem 25 bags per CNIC and the remaining subsidy proceeds could be dispersed into the farmers’ easy paisa account

and LNG to produce urea were to be diverted towards subsidising bags of urea, an acrossthe-board subsidy of that amount would mean that the price of a single bag of urea would come down to a mere Rs 1690 per bag. Currently, a bag of urea costs Rs 2040 - a change of Rs 350 per bag.

Moreover, a more targeted subsidy could even mean that a lot of the poorest farmers could possibly get bags of urea for free.

According to Engro’s calculations, if Rs44 billion being spent on fertilizer import is used smartly, the government could even provide free urea to the smallest, poorest farmers in the agricultural diaspora. Farmers that own holdings up to 5 acres can get free urea in this money, and if the ceiling is increased to holdings of up to 12.5 acres, the government could provide urea at a discount of Rs860 at Rs1,180 per bag compared to the Rs2,040 per bag it is currently going for.

The smart subsidy system being encouraged by Engro would be a sticker-based subsidy mechanism, executed through a web portal which would enable fertiliser marketing companies to generate unique codes for their products. Under this system, farmers could redeem 25 bags per CNIC and the remaining subsidy proceeds could be dispersed into the farmers’ easy paisa account. The system has already been quite successfully implemented for phosphates in Punjab.

The numbers may sound too good to be true, but those are the numbers. Engro is also not a saint in this situation, and they have their own motives for these suggestions, but they do also have a reputation for being a responsible corporation. In his conversation with Profit after his presentation, their CFO Imran Ahmed continued to say that Engro was insistent on investing in Pakistan further, despite the bad hand the government has at times played them and proven again and again that they are not a good partner. n

AGRICULTURE

STEEL SECTOR

profitability plummets 67%, but the outlook may still be optimistic

The sector is suffering from the hangover of a massive expansion drive over the past five years, but is poised to take advantage of a pick-up in economic activity 32

P

rofits are down in Pakistan’s steel sector by a sharp 67%, though that decline in productivity – caused in large part due to the costs the sector built up as a result of a massive expansion drive over the past five years – may be the precursor to a rebound in the sector as economic activity picks up in the country over the coming year.

Revenue for the steel sector in Pakistan grew by a paltry 4.9% in the third quarter of calendar year 2019 compare to the same quarter last year, but net income for the sector fell by nearly two-thirds, according to an analysis conducted by Foundation Securities, an investment bank and securities brokerage firm.

“Steel universe profitability has declined by 67% year-on-year in the first quarter of fiscal year 2020.

We attribute decline in profitability to (1) steel companies’ inability to fully pass on the impact of higher input cost due to competition and slowdown, (2)

increased working capital requirement and recent expansions which led to higher finance cost, and (3) higher other operating cost due to inflation,” wrote Usman Arif, a research analyst at Foundation Securities, in a note issued to clients on October 31, 2019.

Like most manufacturing sectors in Pakistan, steel has declining business over the past year, particularly as higher energy costs are something that the company has been unable to pass on to its consumers, something evident by virtue of the fact that the company has lower than consumer rice index growth rates in revenue, but sharp declines in profitability.

Steel is also seen as a somewhat indicative sector in Pakistan, given the fact that it is often an input into other industrial output, such as automobiles, for instance. The decline in steel, and its potential for a subsequent

rise, therefore, are seen as indicative of broader trends for the country’s economy.

This is especially true, given what analysts believe are the reasons as to why net income has declined for the sector.

“We have a positive stance towards the sector given (1) companies larger financial muscles as compared to private manufacturers in rebar segment and (2) recovery in HRC-CRC margins for flat steel companies given reduction in tariff by U.S. Furthermore, imposition of 13.94% provincial ADD on CRC imports from Canada and Russia would help to increase pricing power,” wrote Arif.

Arif was referring to the fact that the steel market in the world is influenced in large [art by the trade wars between the United States and China, and that US attempts to retaliate against Chinese imports hurt the market for all globally traded steel products, including those produced in Pakistan. Should tensions between the two countries eases, however, Pakistani producers could also stand to benefit.

Part of the reason why the trade war between the US and China matters it drives down prices as well as forces local companies to compete more aggressively against each other, which has the impact of reducing gross margins in the business.

In addition, reduced demand from the government of Pakistan – as the new Pakistan Tehrik-e-Insaf (PTI) led administration scales back the infrastructure ambitions of the previous Nawaz Administration – has also contribution to slowing sales and declining margins.

It also does not help that the major steel companies in the country – Mughal Steel, International Steels, and Aisha Steel Mills – had also kicked off massive capacity expansion drives right before the recession hit, causing their operating costs to go up right when demand started to weaken.

Particularly badly hit was Mughal

Steels, which not only conducted one of the largest expansions, but also did so in large part through an increase in borrowing, which increased the company’s interest costs. At a time when the plants are not operating at full capacity, margins tend to get compressed even further.

Nonetheless, the good news is that the worst appears to be largely over. As manufacturing activity continues to pick up steam, the Pakistani steel sector will be able to continue serving their needs and ramp up production, which will serve the dual purposes of increasing both revenues and gross margins, since higher plant utilization typically reduces per unit costs.

In addition, there have been some favourable decisions by the government that are also likely to help the steel sector. In particular, the decision by the Economic Coordination Committee (ECC) of the cabinet to freeze electricity tariffs for four months will likely have a significant positive impact on all of the companies in the sector.

Foundation Securities estimates that the impact is likely to boost corporate earnings by as much as Rs0.92 per share at Mughal Steels.

“Mughal’s profitability has declined by 25 year-on-year due to (1) higher long term borrowings to finance the ongoing capital expenditures and (2) increased energy/depreciation cost.

Mughal’s revenue has increased by 11% year-on-year in the first quarter of fiscal year 202 due to higher retention prices. Moreover, Mughal’s current total debt stands at Rs13.6 billion due to addition of Rs2.5 billion in long term debt,” wrote Arif.

The sector remains a relatively leveraged one among Pakistani industrials, with high debt levels exacerbated in recent years by debt-fueled expansions. As interest rates eventually decline, that should also help profitability recover. n

“We have a positive stance towards the sector given (1) companies larger financial muscles as compared to private manufacturers in rebar segment and (2) recovery in HRC-CRC margins for flat steel companies given reduction in tariff by U.S. Furthermore, imposition of 13.94% provincial ADD on CRC imports from Canada and Russia would help to increase pricing power” Usman Arif, research analyst at Foundation Securities

INDUSTRIALS

The battle for 4G in the North

In Gilgit-Baltistan and Azad Jammu and Kashmir, 3G and 4G technology has been a contentious area, with the military run SCO and private telecom at each other’s necks with lawsuits and price hikes.

With the technology officially hitting the region in a few months, how are things on the ground?

TELECOMMUNICATIONS

By Syeda Masooma In 2014, the much hyped telecommunications spectrum auction introduced the country to 3G and 4G technology, propelling it into an ever evolving world of breakneck mobile broadband-like internet speeds where business, education, health, and communication are all at the powerful whim of high speed, top of the line internet connections. But while the rest of Pakistan underwent its transition, Gilgit-Baltistan and Azad Kashmir languished behind.

Why? Because in 1976, the Pakistan Army had been the ones to set up telecommunications in the two mountainous and relatively inaccessible regions under the auspices of the Special Communications Organization (SCO) – an army-run organization that runs, and is responsible for telecommunications services in Azad Kashmir and Gilgit-Baltistan. The auction was for private telecom providers, and the SCO is anything but.

39

The long wait for access to 3G and 4G internet in these regions has come to an end, however, because the services are set to be officially offered in the regions by early next year.

The key, however, is the word ‘officially.’

Perhaps they were tired of being left behind and forgotten in yet another way by Pakistan, especially because of something that happened back in 1976. Because despite there not having been any official licenses granted, private telecom providers have been offering 3G and 4G services in these regions for some time now, and the people of Azad Kashmir and Gilgit-Baltistan have been just as avid consumers of mobile broadband internet as the rest of Pakistan.

The development has been delayed beyond what is reasonable. It is 2019, after all, and your world moves at the speed of your internet.

One can sympathize with the residents of the northern areas wanting access to something that is quickly becoming a necessity, and the telecom companies were simply obliging, even if their provision was not, strictly speaking, legal.

A deeper dive into the issue of spectrum telecom in Azad Kashmir and Gilgit-Baltistan will show that while the official 3G and 4G licenses will only be granted by the government in 2020, it is fair to assume that telecom companies have in the meantime been cutting corners, and providing these services to the regions anyway. The ensuing history that will be revealed regarding telecom operators and their licenses in Gilgit-Baltistan and Azad Kashmir, will be as fraught and convoluted as the histories of these regions themselves.

The beginning

I

n 1976, during an official visit to Gilgit and Kashmir, Prime Minister Zulfikar Ali Bhutto found himself cut off from the rest of the world. Kashmir and Gilgit were still off the phone grid, causing great annoyance to the prime minister. As with all easy fix solutions, Bhutto decided to turn to the military (he still liked them at this point) to solve the communication woes of these northern regions of the country.

Ideally, the private sector should have

been able to provide telecommunication solutions to Gilgit and Kashmir, but when they did not come through, the Prime Minister turned to the military. At this point, government telecommunication services were T&T’s responsibility – Pakistan’s Telegraph and Telephone Department and the SCO, which worked under the Ministry of Defense and was providing services to both army and civilian consumers, but primarily to the state authorities and armed forces.

In 1976, the SCO was given the sole responsibility of managing telecommunication in Gilgit-Baltistan and Azad Kashmir. The very same year, the T&T department was transformed into the Pakistan Telecom Corporation (PTC). The new PTC now had four departments: Pakistan Telecommunication Authority (PTA), Frequency Allocation Board (FAB), National Telecom Corporation (NTC) (for government departments, the folks who run the “92” numbers) and PTCL – a public limited company for retail customers.

By the late eighties, the SCO continued to dominate the market in Azad Kashmir and Gilgit-Baltistan. By this time the government had decided to level the playing field and allowed private telecommunication companies to operate in the area, but the SCO still remained the biggest telecom operator in Gilgit-Baltistan and Azad Kashmir, and its authority was preserved through Section 40 of the 1996 Pakistan Telecommunication (Re-Organization) Act, initially promulgated through the 1994 Pakistan Telecommunication Ordinance.

But then the first revolution took place: mobile services. During the early 1990s, InstaPhone and Paktel pioneered mobile telecommunication services in Pakistan, and were later joined by Mobilink in 1998. All three companies began AMPS (Advanced Mobile Phone System) services before moving on to Global System for Mobile Communications (GSM) services in the early 2000s.

Ufone entered the mobile services market in 2001, which until now was heavily regulated and offered expensive rates to consumers.

In January 2004, the Ministry of Information Technology announced a new ‘Mobile Cellular Policy’, deregulating the market and encour-

As things stood, the SCO seemed set and content in its role. What shook things up was the Next Generation Mobile Networks (NGMN) services, 3G and 4G. As of October 2019, Zong has announced the start of their operations in the area, while Telenor and SCOM are already offering these services in the Gilgit-Baltistan and Azad Kashmir areas, with other telco operators looking forward to joining them 40

aging private investment in the cellular mobile sector.

It was this year that the SCO finally launched GSM cellular services in Azad Kashmir and Gilgit-Baltistan regions, and formed the current brand SCOM. Within one year, international companies like Telenor and Warid set up their operations in Pakistan, but Gilgit-Baltistan and Azad Kashmir still had to wait a long time before they received service from any operator other than SCOM.

Ground realities

A

s things stood, the SCO seemed set and content in its role. What shook things up was the Next Generation Mobile Networks (NGMN) services, 3G and 4G. As of October 2019, Zong has announced the start of their operations in the area, while Telenor and SCOM are already offering these services in Gilgit-Baltistan and Azad Kashmir, with other telco operators looking forward to joining them. Interestingly, these services have as many opponents as they do contestants.

SCOM claims that no one other than the SCO has the authority to provide mobile services in the area, since their monopoly was never removed. The PTA argues that in the spirit of the Mobile Cellular Policy’s aims of improving fair competition, other ‘licensed’ operators also have the authority to offer these services.

Gilgit-Baltistan Chief Minister Hafeezur Rehman terms both SCO and private operators’ services illegal because there has not been a proper auction for any player to provide these services.

Meanwhile, the Islamabad High Court has ruled that all operators must continue their services until the legal issue of licenses vs monopoly vs auctions is resolved. And not to forget the consumers from the northern areas here, who are dissatisfied with the status quo because of poor service standards of SCOM and sparse coverage from any other operator, if at all.

And as with any problem of this magnitude, the core issue remains that of money.

SCOM argues that limited powers of operating in Gilgit-Baltistan and Azad Kashmir is causing it an “annual loss of Rs1 billion.” The Gilgit-Baltistan government is irate over loss of auction fees, which according to the chief minister, are in the “billions of rupees”.

Azad Kashmir’s problems began in 2005, when the PTA allowed private telecom operators to offer services and entered into an agreement with Azad Kashmir Council to share licensing fees 50-50. The PTA, of course, has already issued those licenses to operators for a hefty sum of money. And the consumers are lamenting the high prices they have to pay because of not having any alternate option but

Gilgit Baltistan Hunza Konodas nagar Astor Khunjerab Gilgit City to yield to the service provider available.

The good, the bad, and the auctions

O

ne of the recurring themes in this problem remains that of auctions for 3G and 4G licenses. In the rest of the country, all telecom operators have followed the path of the PTA in issuing expressions of interest (EoI) to choose consultant companies to conduct the auction for rolling out these services, then short listing companies to issue these licenses to, and finally the chosen telecom operators are granted the authority to operate in the market.

In Gilgit-Baltistan and Azad Kashmir, these auctions have not taken place, and while the solution to this problem may be seemingly obvious, the facts remain complicated. For starters, SCO says that it is neither required nor allowed to become part of any such auction even if it were to take place.

“In 2016, Azad Kashmir council and Azad Kashmir ministry said that they wanted 3G and 4G in that area. The then Nawaz Sharif [PMLN] government decided that since SCO is

government owned so if they are to operate the government will pay them itself. Therefore SCO was not to be seated in the licenses’ auction,” said SCO Director Regulatory Affairs (Headquarters) Col Ghulam Hussain Anjum.

As to why the PTA’s auction became controversial, that is another long story that dates back at least three years. The first time it was formally decided to equip Gilgit-Baltistan and Azad Kashmir with 3G/4G was in September 2015.

A high-level meeting was held, under the chairmanship of the then federal minister for Kashmir and Gilgit Baltistan affairs Chaudhry Barjees Tahir and attended by then PTA chairman Dr. Ismail Khan, member telecom of Federal Ministry for Information Technology Mudasir Hussain, Federal Secretary of the Kashmir and Gilgit-Baltistan affairs Abid Saeed, Additional Secretary Azad Kashmir Council Ameer Ashraf, Joint Secretary Gilgit-Baltistan Council Ajmal Gondal and other concern officials arrived upon this decision. The formal process, however, did not start until early 2016.

In 2016, the PTA announced ]that the auction for Next Generation Mobile Services will be held on May 16 the same year. It published a

memorandum that laid down all the rules, procedures and timetable for the auction with the base price set at $295 million. Gilgit-Baltistan was excluded from this auction.

The regions’ turn came next year, or was rather supposed to come the following year.

In August 2017, the PTA announced it was ready to auction 3G/4G spectrum services in Gilgit-Baltistan and Azad Kashmir. A policy directive was issued that offered different frequencies for licenses and earmarked one of those for SCO. At this point, the PTA decided to hire a consulting firm and called for Expression of Interest (EoI) by September 15, 2017, which ended up being delayed until the end of September, and was followed by another delay going till October 19.

The PTA finally decided on two companies to proceed with the auction, and claimed that these regions were expected to have legal 3G/4G services by February 2018.

Details on this auction and licenses are a little murky which, coupled with PTA’s refusal to respond to Profit’s queries, left us with little knowledge on the prices and details of the licenses that were issued and to which com-

TELECOMMUNICATIONS

panies. However, Zong announced soon after this auction its plans to launch next generation spectrum services in the area from May 5, 2018.

But before this could come to fruition, the SCO filed a petition in April 2018 under Article 71 of the 2009 Gilgit-Baltistan Empowerment and Self-Governance Order, challenging the Pakistan Telecommunication Authority’s (PTA) decision of issuing licenses to cellular networks for launching 3G and 4G spectrum in the mountainous region.

The Gilgit-Baltistan Council, PTA, Frequency Allocation Board and the Gilgit-Baltistan government were made as respondents, with the claim that SCO had the monopoly to provide the said services in the region.

This lawsuit came in the wake of another tussle that was going on between PTA and SCO regarding PTA’s refusal to grant the Long Distance International (LDI) license to SCO to operate across the country. Ministry of Information and Technology maintains that issuing such a license will go against PTCL’s agreement with Etisalat and can lead to huge penalties.

The PTA maintains that SCO did not fulfill the codal formalities in their application for the said license. SCO in return argues that while they have been entrusted with exclusive operating rights in Azad Kashmir and Gilgit-Baltistan, PTCL and other companies still operate in the region so they should be allowed to do the same in rest of the country.

It is difficult to estimate whether the NGSM battle is also a continuation of this previous row, but regardless it resulted in suspension and then resumption of 3G/4G services for the residents of Gilgit-Baltistan and Azad Kashmir areas.

Regarding this case, an SCO official told Profit that in 2017, the government had paid SCO money and they conducted trials in Azad Kashmir and Gilgit-Baltistan both, and provided free service to the consumers for six months.

When the PTA decided to do their auction, they tried to stop SCO. According to the SCO, source, the only reason the PTA asked them to stop was because the auction would not yield the desired result if SCO already providing these services.

According to the SCO, source, the only reason the PTA asked them to stop was because the auction would not yield the desired result if SCO already providing these services. To this effect, the Azad Kashmir Prime Minister apparently personally requested SCO not to suspend service To this effect, the Azad Kashmir Prime Minister apparently personally requested SCO not to suspend service, after which they approached the Azad Kashmir government, the secretary was Pir Bux Jamali and minister for Kashmir Affair was Birjees Tahir at that time, and they instructed the PTA to issue an NOC and not try to stop SCO from providing 3G and 4G services.

At the same time, however, our source admitted that private companies that only have 2G licenses and despite not having the required permissions, still end up providing 4G services because they already have the necessary infrastructure.

In fact, before the previous government terminated the Azad Kashmir council, there were four federal responsibilities that the Azad Kashmir government had to perform – communication, defense, currency, and foreign affairs.

“Communications was given to the council and with it gone; now it is back to the federal government. In Gilgit-Baltistan, now the communications responsibility is also with Prime Minister of Pakistan. So now, since 2018, neither Gilgit-Baltistan nor Azad Kashmir has the right to issue the license as of now,” said the SCO official.

“We are protected by the law, we have never taken money from anyone, and we have the right to operate in Northern Areas and Azad Kashmir to the exclusion of all other operators.

We don’t have entered into any private operator to work with them either. We are completely independent operators and bear no responsibility for what other operators may be doing”.

Much of the same was claimed in SCO’s petition, which termed the launching of 3G/4G services by other operators as “unlawful author-

In 1976, during an official visit to Gilgit and Kashmir, Prime Minister Zulfikar Ali Bhutto found himself cut off from the rest of the world. Kashmir and Gilgit were still off the phone grid, causing great annoyance to the prime minister. As with all easy fix solutions, Bhutto decided to turn to the military (he still liked them at this point) to solve the communication woes of these northern regions of the country.

42

ity”. The petitioner also claimed that the auction held by the PTA was an attempt to restrain the SCO’s trial-basis services already going on in the region.

The IT ministry’s response to this case and claims made by SCO was that the army owned company not only takes 80 percent of the IT ministry’s budget every year, but has also been seeking free licenses, income tax exemption, as well as exemption from customer duties and turnover. As of now, the court has allowed SCO to operate their trial basis services and has also directed other private operators to continue with the launch of their services.

A statement received from Telenor on this allegation by SCO and by Azad Kashmir chief minister, Telenor Pakistan’s Chief Corporate Affairs Officer Kamal Ahmed said, “We are already providing telecom services including data, in Azad Kashmir under the license which covers both Azad Kashmir & Gilgit-Baltistan and our provisioning of such services has been endorsed in terms of stay order granted by Azad Kashmir High Court in our favour, and therefore we are within our legal rights to launch data services and add the region of Gilgit-Baltistan falling under the same license.”

SCO’s official stance on IT ministry’s and Gilgit-Baltistan’s allegations is that since SCO is government owned, even if they have to pay a license fee, it will be coming from the government itself and going back to the government kitty, thereby them not sitting in an auction or paying the fee is not causing any loss to the national exchequer.

According to the latest reports, Telenor has started 4G services since September 2019 and as per a local newspaper report from Gilgit-Baltistan, Zong also has some coverage in the said areas. After all is said and done, it is anybody’s guess to define the legality of private telecom operators in Gilgit-Baltistan and Azad Kashmir or SCO’s monopoly.

From a solely market standpoint however, and perhaps taking into account the plight of the local communities, one might say that telecommunication is as much a need in modern times for consumers as it is a profitable business for providers. Thereby rendering a monopoly in telecom a much less favorable option than fair competition and variety of services, irrespective of what was decided in 1976. n

TELECOMMUNICATIONS