wELCOME
THE FIRST STEP TO SOLVING A PROBLEM r. Daniel Ritz, President and CEO of PTCL and Jeff Daniels, the acclaimed American actor, seem to have more than their name in common. You will know what I mean if you watched a particular scene from the HBO television series, ‘The Newsroom’. Starring Jeff Daniels, this clip was viewed more than 8 million times on YouTube and has been termed by some as "the most powerful scene ever on television". In the scene, a woman from a packed auditorium steps forward to ask a question to a group of three panelists one of them being our Daniels, seated on the stage: “Can you say why America is the greatest country in the world?” The other two panelists give pat answers about diversity and freedom, but Daniels’ character thinks for a second and says: “It’s not the greatest country in the world.” The crowd sits in shocked silence. The moderator, tries to change the subject, but Daniels continues with a harsh and honest assessment about why America isn’t the greatest country in the world. At the end of his five minute speech he concludes: “The first step to solving any problem is recognizing there is one.” Dr. Daniel Ritz the recently appointed President and CEO of PTCL, like most other successful business
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leaders knows that this last sentence is as much true in politics as it is in business. And yet, this is many a times the only difference between long term business success and failure. His recent address at a conference where he conceded to the many issues and shortcomings of PTCL is a very welcome change in corporate Pakistan in general, and PTCL in particular. A company which was in the past a tad bit over sensitive about its media coverage deserves applause for such a frank and open presentation. For me, this alone is a huge shift in attitude brought about by the new management. The CEO was also forthcoming in explaining that fixing everything will take time as simplistic solutions are not going to do the trick here. Read the full story from page 18. Operating on a different scale, we profile the founders of 'Mango Baaz' (page 26) who are trying to take advantage of their early entry into the digital content industry of Pakistan and convert their passion into a money making business. Hope you enjoy this and much more in Profit’s launch issue.
Babar Nizami
Publishing Editor: Arif Nizami l Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Asst. Business Editor: Aroosa Shaukat Editor Reporting: Farooq Baloch l Reporters Karachi: Aisha Arshad l Nida Jaffery l Arshad Hussain and Usman Hanif Reporters Lahore: Masooma Raza l Abbas Naqvi and Hassaan Ahmed l Reporters Islamabad: Amir Sial l Ahmed Ahmedani Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Photographers: Murtaza Ali & Imran Gillani Contact: profit@pakistantoday.com.pk
FROM THE MANAGING EDITOR
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8 Weekly Roundup 11 The dividend of trust Khalid Mir 14 Is it the beginning of the end for S. Abdul Khaliq’s 400-year-old legacy? 18 PTCL Calls The Doc
25 25 Where are our cities? Nadeem ul Haque 26 Mangobaaz - Telling It Differently! 28 The grey economy of our black tea 32 “Pakistan’s stock market likely to get $1bn worth of IPOs till 2018”
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34 Issues in investing in listed stocks Humayon Dar 35 Children and retirement strategies Sadyia Babar 36 Employment opportunities broaden as Uber, Careem expand operations
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40 40 Here's what really happened at that company that set a $70,000 minimum wage 44 Talking Heads 47 Book Review 49 Market Review CONTENTS
“Political volatility and cessation of policies in the previous governments played havoc with national progress. ” Federal Minister for Planning, Development and Reform Ahsan Iqbal
QUOTE
BRIEFING
"Germany is the second largest partner in trade with Pakistan in Europe and it would do whatever possible to improve these ties" German Ambassador to Pakistan Ina Lepel last week
6.31%
decline in Pakistan’s exports in July-Oct of the current fiscal year was reported by the Pakistan Bureau of Statistics last week. According to the date, the total exports of the country stood at $6.432 billion in July-Oct 2016-17 which was a 6.31% plunge from the $6.865 billion recorded during the same period in 2015-2016. Meanwhile, Pakistan’s trade deficit of $9.3 billion was recorded in July-October 2016-2017, a 22% increase from the $7.639 billion reported during the four-month period last year.
Consumer Confidence Index drops Consumer confidence index in Pakistan has dropped by three points in the third quarter of 2016, according to the latest data by the Global Survey of Consumer Confidence and Spending Intention. The survey conducted by Nielsen, indicates that Pakistan’s consumer confidence index after showing a strong upward trend for about eight years, has slipped to 101 from 104 in the third quarter. It maintained its highest levels in the first two quarters of 2016.
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PPP Senator calls for withdrawing Rs5, 000 and Rs1, 000 currency notes A resolution in the upper house of parliament calls for demonetisation of Rs5, 000 and Rs1, 000 currency notes in a bid to reduce illicit money flows. Submitted by PPP’s Senator Osman Saifullah Khan the resolution calls for the step to encourage people to use banking services and reduce the size of undocumented economy. Speaking at a meeting of the Senate Standing Committee on Finance last Thursday, advocating his resolution, the Senator stated that the move was the only way to launch a crackdown on black money circulating in the economy. The resolution comes in the wake of a similar move made in neighbouring India earlier last week when Prime Minister Narendra Modi announced the demonetisation of Rs1, 000 and Rs500 banknotes.
$6.258 billion was remitted by overseas Pakistani workers during the period of July to October in 2016-2017, a plunge by 3.9% compared to the $6.507 billion received during the previous year in the same period.
BRIEFING
Rs 149 crores
is the amount the Pakistan Railways has collected in the last three years through the auction of scrap to as many as ten companies. According to the Ministry of Railways, scrap worth Rs. 97.9 crores, Rs. 45 crores, and Rs. 5.7 crores was sold respectively in 2013-14, 2014-15 and 2015-16.
“Banks do not allow us to examine foreign currency accounts” Rehmatullah Wazir, FBR Member Inland Revenue Policy. Commercial banks are not giving access to tax authorities for the scrutiny of foreign currency accounts despite a law that provides access to these accounts, said a senior official of the Federal Board of Revenue (FBR) on Thursday.
“We deeply appreciate the development cooperation that our two countries have had over the years. Most importantly, U.S. is Pakistan’s second largest trading partner and the biggest market for Pakistani exports Minister for Finance Senator Muhammad Ishaq Dar last week while speaking at the National Day and Presidential Election Day of the United States of America at the US Embassy.
Rs 2,900 crores was approved last week by the Central Development Working Party (CDWP) for 15 projects. This sum includes Rs 1,670 crores for three projects that have been referred for approval to the Executive Committee of the National Economic Council.
11.26%
growth was observed in the cement industry in local despatches during the first four months of the current fiscal year compared with those during the same period last year. The growth was according to data released by All Pakistan Cement Manufacturers Association (APCMA).
1.97%
QUOTE
growth in the country's large scale manufacturing (LSM) sector was witnessed during JulyAugust this year as compared to the figures from the same period last year. According to data of Pakistan Bureau of Statistics (PBS) released on Friday, during July-August 20162017, the Quantum Index Numbers (QIM) of large scale manufacturing industries was recorded at 122.18 points with 119.82 being recorded for the July-August last year.
is the highest rate the country’s economic growth reached in the past 8 years, according to a new report by the World Bank. Recorded in 2016-2017 the rate was a significant increase from the growth rate during the last year that stood at four per cent. “Pakistan continues to make good progress in restoring macroeconomic stability. Building on this Pakistan needs to push forward with deeper structural reforms that spread benefits more widely” said Illango Patchamuthu, World Bank Country Director in Pakistan.
BRIEFING
have been recovered from nine Rental Power Projects (RPPs) by the National Accountability Bureau. According to a report submitted by the National Accountability Bureau (NAB) to a sub-committee of the Public Accounts Committee (PAC) last week, it failed to recover outstanding mobilisation advance from three companies, including Karkey, Piranghaib and Sharaqpur Rental Power Projects.
Rs 359 crores
Rs 500 crores
was highest ever monthly revenue achieved by China Pakistan Mobile (CMPak), Zong for October 2016. The announcement was made last week. The company registered a 23.2% increase in revenues for the month of October 2016, a 26.5% increase in recharge as compared to October 15.
Rs 3,62,100 crores
BRIEFING
set as target for revenue collection has been termed unrealistic by Chairman Federal Board of Revenue (FBR) Nisar Muhammad Khan. The Chairman also informed the Senate Standing Committee on Finance that the FBR has so far no plan to enhance customs duty on the import of items during the current fiscal year.
Tractor Industry in crisis “Currently, the tractor industry’s outstanding and genuine refunds are hovering around Rs3 billion leading to huge operational challenges as the cost of doing business is increasing with the rise in refund claims,” said Pakistan Automotive Manufacturers Association (PAMA) Director General Abdul Waheed. According to the Director General PAMA the tractor industry is facing serious financial challenges as the Federal Board of Revenue (FBR) has not been settling pending sales tax refunds amounting to Rs 3 billion. In an apparent plea before the government, Waheed stated last week that the piling up of sales tax refunds has become a major concern for tractor manufacturers that annuls the impact of supportive measures taken by the government
Gas theﬞ The Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) have detected around 133,106 gas theft cases in their respective operational areas during the last three years. From July 2013 to August 2016, the SNGPL identified 130,516 theft cases, involving 18,031 mmcf (million cubic feet) gas and Rs 10,496 million in stolen money.
World Bank has given a nod to Pakistan for the provision of technical assistance for the development of a new tariff policy structure. A high-level World Bank delegation led by its Country Director in a meeting with the Minister for Commerce Khurram Dastgir Khan decided that the new tariff policy proposal would be developed by the Ministry of Commerce. Meanwhile, all technical assistance would be provided by the World Bank.
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12.66%
increase in the production of motorcycles during the first two months of the fiscal year 2016-17 was observed as compared to the production in the corresponding period last year. According to the Pakistan Bureau of Statistics, the production of motorcycles stood at 376,379 units during July-August this year compared to 134,078 units during July-August last year.
Iran-Pakistan gas pipeline China has expressed interest to finance the unbuilt portion of Iran- Pakistan gas pipeline project, according to Managing Director of Pakistan's Inter State Gas Systems (ISGS) Mobin Saulat. "The Chinese company has expressed the interest in building the remaining portion of the IP” he said adding that it was part of the overall execution plan of the project.
Rice Exports
Rice export orders in bulk this year will bring a lot of relief to farmers, said Chairman Traders Association Kahna Haji Bashart Ali. In an addressing to farmers, he said that the agriculture package of the government had provided stability to the sector.
BRIEfInG
OPINION
Khalid Mir
dren. There’s an implicit vulnerability in doing so and we all know that things can go horribly wrong if we place too much trust in other people when it’s not justified. But there’s no denying that the quality of our social fabric is enhanced by trust, or what economists call ‘social capital’. A smooth-running society needs a certain level of trust amongst its people and in its institutions. Trust can be an important factor in the working of the economy as well. Think about the petrol station example again. What’s to stop the person fixing the meter for his own benefit? What’s to stop me from driving the car off without paying him? t the petrol station I’m always asked by someone who Would a society without trust lead to anarchy? Also, think about works there: “check the meter is at zero.” This is a lot of transactions that occur over time, like borrowing and remildly irritating, but of no consequence. But it is interpaying a loan. If you can’t trust someone to pay back the loan esting that he assumes I wouldn’t trust him to do his you might be less inclined to lend to that person or anyone else, job properly. However, if you’re going to get your car and that might lead to less overall productive investments and repaired, matters become a bit more serious. Unless lower growth in the economy. Or you might think: why should I you know something about cars, you generally have to pay my taxes if the government cannot be trusted to use the retrust the mechanics are doing a professional job and sources wisely? Trust matters to the economy. not trying to cheat you. When you think about it, trustAt this point you might wonder if we can get along without or the lack of trust-is crucial for all sorts of transactions and interactions betrust. After all, there are other ways in which societies can ensure tween people. exchanges between people take place. If the police and the At the most fundamental level, children trust that parents will make decisions courts of law are functioning then people who betray the trust that take into consideration their well-being. Couples trust each other and citiput in them can be caught and punished (of course, assuming we zens trust that politicians will not embezzle funds or think only in terms of can trust those officials to act honestly). Or you might think their own interests. When you send your child to school you trust the teachers things like reputation or competition prevent people from cheatwill be fair, open-minded, and true to the internal norms of their profession. ing since if they go back on their word eventually no-one will When you go a hospital or a court of law you trust those making choices and trust them and they’ll lose out as people take their ‘business’ decisions on your behalf will do so in the best possible way, and that they’re elsewhere. Also, if the government provides information and esnot motivated by their own selfish interests. Similarly, you trust bankers will tablishes standards of quality then it’s less likely that people will invest your money wisely (something we’re not so sure about now, after the erroneously (blindly) trust someone else. financial crisis) and that soldiers will do their job and not be bought off by the However, that can never be the whole of the solution to the highest bidder. So, we trust lots of people with things that are valuable to us, problem because there are lots of decisions that we make very like our savings, the quality of our healthcare and the education of our chilinfrequently and about which we can only have imperfect knowledge: which school to send your child to, which doctor to see, which politician to vote for and so on. Reputation and better information might help, but we’d still end up having to trust strangers. Societies without these good Khalid Mir formal institutions and without a developed sense of ‘generalised trust’ either, end up trusting only peois a professor of ple they know-which is why personal networks are so important in our country. In short, it would be economics at LUMS too costly for any society to monitor and enforce each and every transaction, or to design complete contracts. Even if it wasn’t that costly, would we want to live in a police state where every action of ours was monitored and could we trust those officials anyway to be good enforcers? Since we can’t do everything ourselves, we have to sometimes take the short-cut and trust people. Societies with high levels of general trust, it turns out, do much better economically and socially than those with low levels.
The dividend of trust
Societies with high levels of general trust, do much better economically and socially than those with low levels
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ECONOMY
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ANALYSIS
Farooq Tirmizi
pose, bought out by a skilled private equity firm at its nadir, turned around through a combination of strategic capital investments and modern management techniques, and then sold off in a healthy, relatively unleveraged state to a strategic buyer. And a Harvard Business Review case study to document it all. That is the kind of success most buy-side firms in New York would be willing to part with a limb for. But before delving into what comes next in the K-Electric story, it may be worth digging a little deeper into its past. Thirty-two years after Thomas Edison created the world’s first utility company in Lower Manhattan, the Karachi Electric Supply Company (KESC) was founded in 1913 (rebranded in 2013 as K-Electric). It is the country’s only vertically integrated utility, with its own power generation, transmission, and distribution assets. While it is not the oldest he problem with buying a monopoly is that you never reutility in the country (the Lahore Electric Supply Company ally think about the competition until it is too late. was founded a year earlier in 1912), it is the oldest company to Shanghai Electric’s $1.77 billion acquisition of $66.4% still be listed on the Pakistan Stock Exchange, having first of K-Electric is the second largest acquisition in Pakbeen listed in 1948 on what was then the Karachi Stock Existani history and the largest in a decade, after Etisalat’s change, though the company was nationalized in 1952. $2.6 billion acquisition in 2006 of management control Until the late 1960s, KESC was largely a financially selfin Pakistan Telecommunications Company Ltd. And sustaining entity. This is not, as many Pakistanis of an earlier while no doubt the investment bankers, lawyers, acgeneration would have us believe, because the management countants, and management consultants all pitched in was of a superior quality, but because it simply did not serve with their advice about why they think the transaction makes sense for the large parts of the city, particularly its poorer neighbourhoods. Shanghai Electric, the Chinese state-owned utility company is nonetheless With the democratization of Pakistani society in the 1970s stepping into the Pakistani electricity market at an inflection point. If it is came an expansion in its service area, an expansion of its gennot careful, it may find itself buying an asset that has its best days already eration capacity, but also a simultaneous neglect by the federal behind it. government of Karachi’s infrastructure, shortly after the fedAt first glance, K-Electric’s sale by Abraaj Capital is the epitome of a eral capital moved to Islamabad. successful private equity-led turnaround story. Indeed. It is the very reason In the 1980s, the company briefly became a subsidiary of private equity firms came into existence in the first place. A storied comthe Water and Power Development Authority (WAPDA) and pany, sullied by bad management but still serving a unique economic purwas at one point placed under the management of the Pakistan Army. The government apparently felt that soldiers would somehow know how to run a utility company. Farooq Tirmizi It is easy to forget that the 2008 acquisition by Abraaj was not the first time the company was privatised. In 2005, the Musharraf Administration sold off a 71% stake of the company to a consoris an investment analyst based in New York tium of the Al-Jomaih Holding Company, a diversified Saudi Conglomerate, and the National Industries Group, a publicly listed Kuwaiti financial conglomerate (which also owns a large stake in Meezan Bank). For three years, the Saudi-Kuwaiti conglomerate failed to make any headway in turning around the company, finally turning in 2008 to Arif Naqvi, the former Karachiite who had gone on to create Abraaj Capital in Dubai. Abraaj was already the largest private equity firm in the Middle East by
What Shanghai Electric is inheriting from Abraaj
The private equity firm led an impressive turnaround, but the real challenge at K-Electric is just beginning
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then, and had previously made forays into the Pakistani market before. In October 2008, Abraaj bought out half of the Jomaih-NIG stake in KESC, injecting $361 million into the company. It then began a turnaround effort the likes of which have never been seen in Pakistan before. Abraaj spared no expense in trying to turn around KESC, investing upwards of $1 billion in the company’s power generation and transmission infrastructure, which brought the utility’s power generation efficiency rate from 30% in 2008 to 37% in 2016, and its transmission losses from 4% to 1.4% in the same period. The bloated headcount was reduced by 7,000. The company also introduced for the first time in Pakistani history a system of disincentives against power theft, increasing power outages in areas of high theft and reducing them in areas of low theft, a strategy that brought down the transmission and distribution losses by more than a third, from 35.9% in 2009 to 22.9% in 2016. So did the effort pay off? Sort of. Shanghai Electric will pay just over Rs10 per share, or $1.77 billion for its 66.4% stake in K-Electric, but Abraaj only gets about $929 million. Compare that to its initial $361 million investment and that looks like a reasonable return. But then, when we factor in the fact that the firm held its investment for eight years, the returns suddenly do not look quite so impressive. My estimate of Abraaj’s internal rate of return for K-Electric is in the 11-12% range. You could have made about twice as much by investing in Hub Power Company’s stock. So Abraaj did not make a whole lot of money on K-Electric. That does not mean that Shanghai Power will suffer the same fate, right? After all, one could argue that Abraaj has already done the heavy lifting on K-Elec-
AS MORE OF THE WEALTHIER CONSUMERS – BOTH DOMESTIC AND INDUSTRIAL – SHIFT TO ALTERNATIVE ENERGY, K-ELECTRIC WILL BE LEFT WITH THE SMALLER, LESS PROFITABLE CUSTOMERS, TYPICALLY IN AREAS WITH THEFT RATES THAT CAN OFTEN BE UP TO FOUR TIMES HIGHER THAN IN THE MORE AFFLUENT NEIGHBOURHOOODS. tric and now Shanghai Power only needs to keep up the good work to reap the rewards. Not quite. Drive out to Defence Housing Authority Phase 8 in Karachi and you will see something you may not have seen much of five years ago: rooftop solar panels. If Abraaj had to struggle with intransigent labour unions, hostile populist politicians, violent criminal gangs, and a breakdown in law and order, Shanghai Electric will face a threat bigger than all of those combined: distributed generation. Here is how this works. While K-Electric has 2.5 million customers spread throughout the city, about 40% of its revenues come from just 2,500 of its top industrial customers. Most utilities have relatively high concentrations of their customers, so one might think
that this is not a big problem. But here is where things begin to get really interesting (or really worrying from Shanghai Electric’s perspective). Solar power is becoming increasingly cheaper and with advances in battery technology, is becoming competitive with the prices charged by the grid. It has the added advantage of being uninterrupted during bright sunny days, of which Karachi gets more than 300 of every year. The largest, most profitable of K-Electric’s customers are also ones who are most likely to start generating their own electricity for a substantial portion of the day and even selling electricity back to the utility, a phenomenon known as distributed generation. It may be tempting to think of solar power as a niche product, but that would be a tremendous mistake. The numbers suggest that the market is growing incredibly rapidly. Solar panels are not manufactured in Pakistan and are imported mostly from China. According to data from the Pakistan Bureau of Statistics, the value of solar panels imported into Pakistan in 2005 was just $1.6 million. The number for 2015? $445 million. That is an compound annual growth rate of 75.4%, astounding by any measure. Solar power in Pakistan is rapidly gaining traction. As more of the wealthier consumers – both domestic and industrial – shift to alternative energy, K-Electric will be left with the smaller, less profitable customers, typically in areas with theft rates that can often be up to four times higher than in the more affluent neighbourhooods. Not only would its addressable market shrink, but the utility would be left with the most bothersome portions of its customer base. Of course, it does not all have to be doom and gloom. For one thing, distributed generation is growing slower than it could be in large part due to a lack of consumer financing. Any management team with its salt would recognize the opportunity to provide that financing in exchange for favourable power purchase agreements with industrial and upper middle class consumers looking to install solar panels on their rooftop. This would require a utility company to start acting more like a consumer finance company, but the reorientation of business model is at this point completely unavoidable. The sooner buyers like Shanghai Electric recognize this, the better for themselves and for the residents of the cities they serve.
MERGERS AND ACQUISITIONS
JOURNEY
Is it the beginning of the end for S. Abdul Khaliq’s 400-year-old legacy? by Aisha Arshad
Amid a retail boom, the Mughal era sweet maker is losing market share magine it is the 1550s; Mughal Emperor Humayun is sitting in his courtyard with all his nobles and elite present. The King orders his ShahiHalwai (royal sweet maker) to serve SohanHalwa, prepared exclusively for His Highness and the royal guests. Humayun takes a bite of the saffron-and-cardamom-flavored delight and praises – as he always does – the hands that made it.
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Humayun’s immense love for the SohanHalwa prepared by the sweet maker originally from Persia can be judged from the fact that he had limited its consumption to the royal court and even restricted the halwai from selling it commercially. Fast forward to 2016: the public is not restricted anymore from consuming the gooey goodies prepared with clarified butter (ghee) by the third generation of the Mughal era sweet maker, operating under the brand name, S. Abdul Khaliq Sweets. That, however, is hardly helping one of the sub-continent's’ oldest SohanHalwa mer-
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chants to attract customers in Karachi – the only Pakistani city where the business has its presence. The royal sweet maker opened its first commercial outlet in 1835 in ChandniChowk, New Dehli, making a fortune from its customers who were addicted to the distinguished taste of its famous range of sweets The business fared well even after it moved to Pakistan. Starting with its flagship store, opened in downtown Saddar, Karachi in 1947, it expanded into a chain of four outlets in the same city. However,
with the rising competition from other sweet makers taking a lot of its business over the past decade, the sweet maker has been struggling to survive. In fact, word on the street stipulates that it might eventually become history just like the Mughal emperors – this is happening when the sweets and confectionery businesses have been witnessing a boom in the country’s largest city. “Karachi’s environment has gotten better over the years and people are more confident in starting their ventures, thus the restaurant industry is rapidly growing,” said Nauman Mirza, Chief Executive Offi-
cer of EatOye – Pakistan’s largest food-ordering portal, which had been doing business with S. Abdul Khaliq until 2013. While the retail sector was witnessing a boom, it got a further boost after security forces in 2013 launched a targeted operation against criminals and terrorists who had held the port city hostage for years. The business environment thereafter improved drastically. The country’s retail market has grown more than three folds during the last decade. Planet Retail, a global retail-forecasting firm, estimates the size of Pakistan’s retail market at $152 billion, up from $43 billion, a 2006 estimate by Small and Medium Enterprises Development Authority. The growth and expansion of once small-time confectionaries, such as United King, Hobnob, Khalid Sweets, and La Farine, into re-
tail chains indicate the industry has been going through a boom over the past few years. In contrast, S Abdul Khaliq Sweets has shut down its outlets including the flagship store. The business has reduced to only one store, located at Boat Basin, a food street in the upscale neighborhood of Clifton.
“THEY NEEDED TO EXPAND OVER TIME, BUT THEY DIDN’T, COMPETITION TOOK OVER THEIR MARKET SHARE AT THE SAME TIME”
As one walks into the Boat Basin outlet, time seems to have stopped for the famous sweet maker. A closer look at the showcase hardly reveals any sign of innovation – sweets are displayed in a manner indicative of style of sweet makers 50 years ago. Barring a thin staff presence, a manager and two salespersons, customer activity was rare; a stark contrast to the now-defunct Saddar and Bahadurabad outlets that used to be filled to their capacity with loyal customers until recently. “Our old customers from Bahadurabad, Saddar and all over Karachi still like our HabshiHalwa and other sweets,” Tariq, the manager said expressing his satisfaction regarding their loyal customer base. “We also try to get their [old customers] orders delivered because it is inconvenient for
STRATEGY
them to reach Clifton branch.’’ Though optimistic about the magic of their centuries-old recipes that he kept promoting during the conversation, Tariq hardly had any idea about why the owners closed their outlet in Bahadurabad – a lucrative market for retail businesses that have been thriving on the back of high purchasing power of the area’s inhabitants. The Bahadurabad outlet was their most profitable branch, according to market sources, which was located at a stone’s throw from both United King and Khalid Sweets, other sweet makers that have made it big from the very location. Tariq refused to comment on the closure of their outlets saying he was not authorized to speak on the subject. While our interview requests still await a response from Farrukh Bari, the current owner and maternal grandson of Sheikh Abdul Khaliq, market sources tell us S. Abdul Khaliq’s unique selling point was the quality of its mithai (sweet) and the location of its outlets, which targeted upper socioeconomic class of people. They needed to expand over time, but they didn’t, sources say, adding that the competition took over their market share at the same time. “They’re now trying to focus on their specialty [sweets], but it’s difficult for them to expand,” an industry expert said forecast-
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“KARACHI’S ENVIRONMENT HAS GOTTEN BETTER OVER THE YEARS AND PEOPLE ARE MORE CONFIDENT IN STARTING THEIR VENTURES, THUS THE RESTAURANT INDUSTRY IS RAPIDLY GROWING,” Nauman Mirza CEO EatOye
ing “they may just be able to survive’’. Explaining, the expert said the revenue wasn’t utilized as an investment for expansion and the business was left to operate the way it had been operating since ages. “Technically they should have been as big as United King and the likes, but no one in the family was daring with the money,’’ he said. The ‘ShahiSohanHalwa merchants seem to be gradually losing their brand loyalty which formed the foundation that helped their ancestors build the legacy.
“Forty years ago, my [late] father used to take me to S. Abdul Khaliq’s shop at Regal Chowk in Saddar. We used to have scrumptious RasMalai and RasGulla,’’ an old customer of the legendary sweet maker and a resident of Bahadurabad, HaroonRasheed said recollecting his childhood memories. However, Rasheed doesn’t seem to be a fan of the traditional sweet maker anymore. “Last time when I went there six years ago, they had maintained their quality, but I
was left disappointed by the service and unfriendly staff. I was given sweet in a heavy box which was unjustified for the price I was paying for the sweet and not for the 250 grams of box,’’ he said explaining why he stopped visiting S. Abdul Khaliq Sweets. Our research shows the company has made several attempts to grow the business, but none helped. A few years ago, S. Abdul Khaliq tried to franchise the brand in order to expand. However, the effort went in vain when no response was received on their official website, which doesn’t seem to have
been updated for years – it still shows outlets that were closed two years ago. They also opened a branch in Gulistan e Johar a couple of years ago only to close it within a short span of time. Another attempt to market the brand was opted by the halwa makers, on social media, but today the Facebook page – showing last post from November 2015 – demonstrates the failure of the venture to establish relationship with its customers. The mithai makers also ventured into customized cakes and bakery items to keep abreast with changing market dynamics and consumer habits, but that didn’t work either and they came back to basics. Industry specialists say that sticking to the original product range is a good move, but the closing of flagship outlets in Saddar and Bahadurabad was an error which should have been avoided. The halwa merchants should not try to ‘reinvent the
“AS ONE WALKS INTO THE BOAT BASIN OUTLET, TIME SEEMS TO HAVE STOPPED FOR THE FAMOUS SWEET MAKER. A CLOSER LOOK AT THE SHOWCASE HARDLY REVEALS ANY SIGN OF INNOVATION” wheel’, they say. Whether it is strategic mistakes, rising competition, poor customer service, or the declining interest in traditional sweets, old customers and fans of S. Abdul Khaliq’s rich history seem dismayed over the downfall of the SohanHalwa merchant’s legacy. Some still hope that the ‘royal sweet makers’ will be able to regain their lost name while others like HaroonRasheed are content with the memories of good ‘halwa’ days.
STRATEGY
“OUR TARGET IS TO GIVE 20 MEGABITS PER SECOND OF INTERNET SPEED TO OUR CUSTOMERS. THIS IS THE DIRECTION WE WANT.”
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COVER STORY
PTCL Calls The Doc Despite disruptive technologies and fierce competition from newer players, Dr. Daniel Ritz seems to know exactly how to bring growth back and help PTCL consolidate its leadership position
By Farooq Baloch hen he took to the podium at the Management Association of Pakistan’s 18th Convention held in Karachi’s Mövenpick Hotel recently, Dr. Daniel Ritz, President and Chief Executive Officer of Pakistan Telecommunication Company Limited was clear about the mistakes PTCL made and the direction his company had to take. Drawing parallels between PTCL and Pakistan Cricket Team, the CEO said, “Both are number one, but not meeting the country’s expectations.” There have been ‘good days and bad days’ as both the country’s cricket team and PTCL were ‘inconsistent’ in their performance, Dr. Ritz said as he swiped through slides, visuals of fans reacting to Pakistan’s wins and losses in international cricket contests.
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COVER STORY
Since his presentation, Pakistan’s cricket team has come back in the game, showing a great deal of consistency in its performance. However, PTCL may take longer to do the same. “Let me be very clear, it [restructuring PTCL] is a long journey. There are no easy fixes, no shortcuts to revamping such a large organization,” Dr. Ritz told a packed audience in what was his first public talk on the topic since taking office in March, 2016 – he was referring to the company’s gigantic but decaying infrastructure, its large employee base, mostly untrained, and its ‘inconsistency’ in providing quality services resulting in a plethora of customer complaints. Faulty equipment and poor customer service have been some of the main problems PTCL's customers faced over the years. During three-year period ending June 30, 2016, Pakistan Telecommunication Authority – the telecom sector’s regulatory body – received a total of 1,15,278 complaints of which 44,115, or 38%, were against PTCL alone. Until a few years ago, calling a PTCL lineman to fix faulty telephone equipment or poor Internet connection required quite an effort, little wonder unsatisfied clients remain one of the priorities for the company's new chief: “Customer service is an attitude, not a department. Everyone in the organization needs to learn that." With a renewed focus on customer experience, things have started to change at PTCL. The customer relations officers are more courteous and address complaints rather swiftly -- and that's one of the many changes the company is likely to witness under Dr. Ritz, the man tasked with restructuring this mammoth organization by its UAE-based parent, Etisalat.
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“We have been replacing old infrastructure with state-of-the-art equipment,” the 50year-old Swiss national said pointing to a slide displaying images of PTCL’s distribution equipment (cabinets) and the old government structures, which are being replaced by smartshops. Acknowledging their customers were not happy, he said changing an organization this big takes a lot of time and energy. PTCL has more than 23,000 employees, over 400 telephone exchanges, 700,000 distribution points, and an optical fiber network of 38,000 kilometers, spread over the length and breadth of the country. “Checking and revamping them [distribution points] will take a lot of time, but we want to be clear about what we aim to provide our customers,” the CEO said in an obvious reference to the quality of service and customer experience. Dr. Ritz’s presentation was one of the most relevant speeches in the event’s context: an annual gathering of business leaders, MAP Convention, in its latest episode, focused on critical business and economic forces, trends, disruptive technologies and organizational and personal level changes that could reshape Pakistan’s commercial environment over the next two decades. If one looks at the country’s telecom sector, the disruptive forces, which business leaders warned of in the MAP conference, have not only emerged but also brought about a major change in the broadband market. Existing fixed-line and other wireless technologies were no match for mobile broadband, which went through explosive growth since the April-2014 auction of 3G and 4G licenses, PTA said in a report. The Internet subscriptions jumped from
3.8 million as of June 30, 2014 to a staggering 37 million at the end of September, the latest for which data is publicly available. Almost all of this growth can be attributed to the five cellular mobile operators (CMOs) that have added more than a million new subscriptions per month to the country’s broadband base since the launch of first 3G service. On the other hand, PTCL suffered a great deal. Once a near monopoly in the country’s broadband market, the fixed-line Internet giant now accounts for less than a tenth of this rapidly growing segment – the company’s customer base reduced to a mere 7.6% of the Pakistan's total Internet users at end of August, 2016 compared to a whopping 80% it had two years ago. With the growing adoption of mobile broadband technology, PTCL lost over half a million subscribers to the competition. As of August 2016, PTCL's Evolution Data Optimized (EvDO) subscribers fell by 5% year-over-year while those of Digital Subscriber Line (DSL) remained almost flat, Topline Securities said in a report. "Fixed Line and Wireless Local Loop (WLL) segments have also been kept in check and we believe this is due to the proliferation of Mobile Broadband," it said. The stagnancy in PTCL's legacy business was even reflected in the latest (JulySept.) quarter. Though it turned back to profit, the company's core business segments remained flat, say analysts. PTCL could partially blame the latest technology for the loss of its subscribers, but experts say the company always had presence in that segment through its cellular arm, Ufone, which faced stiff competition from the other mobile operators.
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Ufone was in the market even before Telenor and Zong, but these companies left it behind in the race of 3G, says Parvez Iftikhar of Islamabad-based information and communications technology think tank, ICT Forum Pakistan. They bought only 5 Megahertz of 3G spectrum and didn't even bid for 10 MHz, which was not a smart bet, he said. Despite a good start in the 3G market, Ufone was soon lagging behind other operators -- the company's 3G user base remained almost flat in the six-month period ending Sept. 30, 2016. It reported losses in most of 2015 and early 2016, analysts say. “PTCL lacked a long-term strategy and rather focused on short-term profits,” the ICT expert Parvez Iftikhar said. Explaining, he said their leadership mainly focused on the last mile customers while ignoring back-
services, Long Distance International (LDI) operators, and cellular operators and connects most, if not all, of them with Internet globally through its four international gateways (submarine cables). In other words, it is the carrier of carriers. "They [PTCL] should have laid much more fiber optic in both metros and villages, which they didn’t," said Iftikhar who provides consultancy services to telecom operators in different countries of Asia and Africa. Had the company expanded its network, even CMOs would have used its infrastructure as opposed to setting up their own towers, he said. “PTCL could not become the carrier of carriers it was meant to be,” Iftikhar said adding the company failed to capitalize on its strong market position.
“IT [RESTRUCTURING PTCL] IS A LONG JOURNEY, THERE ARE NO EASY FIXES, NO SHORTCUTS,” haul (infrastructure) where they had a huge advantage. PTCL is the largest operator based on its revenues as of fiscal year 2016 and provides core infrastructure services to the Wireless Local Loop operators, Internet service providers, call centers, payphone
The Pakistani subsidiary of Etisalat was in a very strong position until a few years ago. Just like its telephony service, it had an early mover’s advantage in the broadband segment, especially because of the delay in 3G auction. It fully capitalized on the opportunity through aggressive mar-
COVER STORY
“PTCL could not become the carrier of carries it was meant to be,” Parvez Iﬞikhar ICT Forum
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keting and promotional campaigns for its DSL and EvDo customers, which more than doubled to 3.2 million between FY2012 and FY2014. On the other hand, favorable policies of Government of Pakistan, which owns more than 60% of PTCL’s shares, helped the company increase its revenues and profit margins significantly. A WLL license holder, PTCL continued to use its Evo service with full mobility that is its Karachi-based subscribers were using their devices in other parts of the country. This, according to Internet Service Providers Association of Pakistan, was a violation of PTA’s determination, dated July 13, 2005, which directed all WLL operators to implement ‘Single Cell Limited Mobility’ for both voice and data services. All this came at the expense of small internet service providers while the regulator looked the other way. PTCL maintained that the PTA determination was related only to ‘voice’ service of WLL operators, and not data. However, a former PTA chief had confirmed that the limited mobility condition on WLL license applied to both voice and data. Another boost to the PTCL’s revenue came from a PTA directive in October 2012, which led to the formation of International Clearing House (ICH) – a centralized telecom gateway meant for terminating all international calls landing in Pakistan. The controversial cartel killed competition and allowed a consortium of 14 LDI operators – led by PTCL – to share revenues based on each operator's market share. Since PTCL had the largest share in the market at that time, it was able to increase its top line by a significant margin. On average, the company booked a net profit of more than Rs 100 crores every month during eighteen-month period ending June 30, 2014, becoming one of investors’ favorite stocks in 2013, the year its share price appreciated by 68%. However, the impact of the aforesaid policies did not
last long. In June 2014, PTA announced to discontinue ICH. On the other hand, CMOs also started rolling out their 3G and 4G services, breaking PTCL’s dominance in the broadband segment. As a result, investors offloaded their shares, reversing all the gains the stock had witnessed previously. PTCL’s share price plunged by 45% and earnings shrank by 88% since 2014, Sherman Securities said in a report, dated June 16, 2016. “The company which holds $2.8 billion worth of assets is now trading at a market capitalization of only $722 million,” it said. Explaining, the report said consistent decline in earnings of Ufone and discontinuation of ICH are the major reasons behind its dismal performance. “ICH easily wiped off approximately Rs 500 crores from PTCL's net profits,” says Zeeshan Afzal, who is Director Research at Insight Securities. Moreover, competition from Zong – Ufone's chief rival -- and high costs of 3G license as well as a voluntary separation scheme (VSS) ate up some of their gains, he said. However, the analyst says PTCL is still in the game. "It has the largest infrastructure in the market and still gets good cash flows,” he said. In a turnaround result, the company reported a net profit of Rs 87.6 crores for the quarter ending Sept. 30, 2016, compared to a loss of Rs 37.1 crores of the corresponding period last year. The fixed-line internet giant still accounts for more than a quarter of the telecom sector's total revenue based on PTA's data for FY2016. It has a much higher data revenue
per user compared to CMOs, which still generate a bulk of their revenue from voice services. If the company is to sustain its leadership position and regain its dominance in the broadband market, Dr. Ritz will have to come up with a long-term strategy, say experts -Mobilink is set to surpass PTCL's revenue as a result of its merger with Warid Telecom while Telenor Pakistan is closely following behind. The CEO didn’t share exact details regarding how he plans to restructure the com-
sulting Group where he was Director and Business Partner – spends much of his time in the field to understand challenges on ground, ensures customer service representatives are trained to provide a better service, and frequently uses Facebook at Work, a feature he introduced for instant and better collaboration among all employees. "Spending four months in office helped me understand the challenges," PTCL’s new chief said adding, “Our target is to give 20 Megabits per second of Internet speed to our customers. This is the direction we want.”
company. According to our sources, Etisalat has sent Dr. Ritz to consolidate its Pakistani businesses into a bigger telecom company, whereby Ufone and PTCL will be merged to form one company and provide broadband, telephony, LDI and fiber to the home services. "I plan to position PTCL as an integrated telecom provider of Pakistan," Dr. Ritz had said at the time of his appointment. Barely six months into his appointment, PTCL signed a Fiber Optic Leasing Agreement with Zong for deploying 789 Kilometer
“PTCL is still in the game, for it has the largest infrastructure in the market.” Zeeshan Afzal Director Research at Insight Securities
pany, but assured the attendees of MAP conference that he is busy fixing this mammoth organization. Dr. Ritz – who formerly worked with renowned organizations, such as Boston Con-
There was no question-answer session to follow Dr. Ritz's presentation nor did he entertain Profit's request for an interview at the venue, but market talk certainly provides a hint towards his long-term plan for the
of fiber for the latter. "This agreement will serve as a major milestone towards achieving PTCL’s vision of being the carrier of carriers," the company said in a press release in August. PTCL's chief didn't talk about whether the company will lay off any employees as part of its restructuring. Market experts, however, expect a lot of cost cutting measures including some layoffs through VSS -- once a 60,000-strong company, PTCL has already reduced to its workforce to about 23,000 as a result of its privatization. Though optimistic about his plans to put the company back on growth and consolidate its leadership position, the Swiss national seems to be adamant on one thing: it will take a while to achieve the target. “We are changing, we’ll change but there are no easy fixes or short cuts to this. And we have just begun," Dr. Ritz said wrapping up his presentation on the iconic picture of Pakistan Cricket team posing with the 2009 ICC World Twenty20 trophy, the country's only world title in the shorter form of cricket.
COVER STORY
OPINION
Nadeem ul Haque
development are now being spelt out. But Ali’s research does show that Pakistan is largely an urban country, and urbanizing at a rapid rate – although it is happening badly because of bureaucratic failure. But that is another story. hy do Pakistani official circles still like to maintain Agriculture production as a share of GDP is about 21%. It is Pakistan is a rural country? Every pronouncement often stated that agricultural employment is 40%. Yet various of government, at the cabinet table and even in surveys show that half or more could be non-farm employment. donor dialog, this myth is maintained – yet data If that is correct than agricultural production employs about 20% shows otherwise. Reza Ali, an indigenous urban reof the labor force. What is more important is that agriculture is a searcher, has been studying this use for some time. declining industry. Why does this pressure in official circles exist For decades he has argued that censuses are underto keep Pakistan an agricultural country? USAID continues to estimating the extent of urbanization. His most recent work using satellite imagcharacterize Pakistan as an agricultural country and the ecoing argues that about 70% of Pakistan is non-rural. He hesitated to say that 70% nomic growth component of its aid is based mainly on agriculwas urban because despite showing concentration of population several areas ture. When I was in charge of the Planning Commission I told lacked city functionality. He found large areas where density was at levels that them many times that Pakistan was now largely urban and that were by international definitions accepted as urban. Yet he hedged and called we wanted an urban based growth policy. The Pakistan Framethem ‘urbanizing’ because he found that despite density they really were satellites work of Economic Growth accepted by the NEC and Cabinet of some urban core. The new category of “urbanizing’ that Ali used is newly was an urban based growth strategy. The bureaucracy, EAD and emerging suburbia. As we all know there is a push for housing colonies and strip USAID however remain rural focused. Perhaps John Perkins urbanization along roads because of the repressed demand for housing in cities. (Confessions of an Economic Hitman) is right) USAID does not And demand for housing and urban space is growing and leading to a rapid develwant Pakistan to develop. Maybe USAID wants to keep us as a opment of housing colonies spreading cities far and wide. farming hinterland! We can’t even have a debate on this subject, Moreover, Ali is right: the world has been confused about suburbia for a long despite Ali’s work which is now about 5 years old and still not time. Only recently has it started waking up to how suburbia is a netherworld berecognized by donors. tween rural and city and perhaps neither. The negative consequences of suburban DFID commissioned a study on urban areas by a young assistant professor at one of our prestigious universities which cited no work of Ali’s or of any other urban researcher. The researcher told me donors did not know any Pakistan work (such as at Nadeem-ul-Haque PIDE or Planning Commission) on urban areas and more importantly they did not even want to recognize such work. Yet Nadeem-ul-Haque is DIFD published the report. Why then, should the young researcher know more than what the donor contracted? And so, the former deputy it appears, we have the myth of rural Pakistan. chairman of the Planning Commission. I remember at an ECC meeting one minister made this very eloquent speech to counter the pro-market, urban voices by saying in a nice modulated voice “Finance Minister, we can continue our conversation on markets and policy, but one issue is settled we are a rural country and the poor farmers deserve subsidy” Of course if we are a rural country, Agriculture incomes must not be taxed; subsidies must be given on inputs such as water, electricity and fertilizer; farm to market roads (mainly to havelis) of influential must be made; and upport prices can be kept well above the market. I was also surprised at the number of bureaucrats and politicians in meetings who professed to be farmers and speak on behalf of agriculture, of course to increase some form of subsidy to agriculture. Recall the government has on occasion given agricultural land as a gift to senior officials, judges, generals. These people and their children now in official positions maintain the myth of rural Pakistan. I asked some bureaucrats why so many of them are farmers. The answer was that having a DMG job is considerable advantage to farming. State resources can easily be used to help manage and even increase some productivity. Timely and abundant supplies of water, seed, fertilizers and electricity are available to those with political or bureaucratic muscle.So our policy continues to remain distorted because of the nexus of landlords and donors. Interestingly, local intellectuals like Ali – even when they do great work – remain invisible.
Where are our cities?
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ECONOMY
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TECH-START-UP
Mangobaaz Telling It Differently! by Abbas Naqvi
In November 2014, two youngsters based in San Francisco decided to quit their startup jobs and return to their homeland to start a company of their own. Ali Ahsan and Ali Gul teamed up to turn their experimental website which they started in April 2015, into a full fledged digital media company with the vision “to tell a different story about Pakistan”. MangoBaaz is an online digital media company that generates information and entertainment based content for Pakistani millennials. What started as an experimental website in April 2015 with a few thousand readers, turned into a business in August 2015 and now serves over a million users on a monthly basis. “I worked for the sales department of a tech company but it was meaningless to me. There was no growth and I wanted to start my own business,” said Ali Gul. Young Pakistanis crave meaningful entertainment Gul and Ahsan said that they weren’t satisfied with the type of entertainment content being produced by the media in Pakistan since it failed to cater to the majority of the population: the youth. Teens and millennials make up over seventy percent of Pakistan’s population. The market, they believe, was ripe for disruption. Gul opined that a dynamic shift is taking place in the audience today since they are
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more empowered to choose what they wish to see unlike the audience of the past who only had television or radio for en-
“We don't expect to break-even for another three to five years. And that's because it's not our priority to breakeven at the moment.” tertainment. TeeThing problems: Like most startups, Ahsan and Gul had to overcome obstacles in setting up their
company and garnering support for it. Even family members were reluctant to allow them to risk their future in a business venture. From the outset, they knew their team would be critical to the success of MangoBaaz. But scouting like-minded enthusiasts who were ready to commit to showing Pakistan in a different light came as a huge challenge. The co-founders had issues finding volunteers for work or people who could work without being paid. Another major task was to explain the business model to people who thought it was merely a blog. Not far behind in the list of challenges was finding a conducive environment to work in. The business model: MangoBaaz essentially generates its revenue through native advertising which is a type of advertisement that is thoroughly connected to and interwoven with the platform that it appears on. It is a type of advertisement that matches the form and function of
Ali Gul (L) and Ali Ahsan (R). Photo: Murtaza Ali
“Mango is the best fruit of Pakistan which is sold all over the world and is therefore supposed to symbolize the best of our country. 'Baaz', on the other hand is meant to convey the message 'kay hum baaz nahi aatay'.”
the platform upon which it appears. They use a few banner ads by Google as well but those are meant primarily for data collecting to validate why native advertising is more effective than display; one metric they talk about is how native advertising has had a 100-200 per cent higher click-through rate (CTR) than traditional display ads. Key performance indicators (KPIs) for MangoBaaz are traffic growth, video consumption, and revenue growth. Without giving too much detail, they mentioned that they’re currently having talks with like-minded investors who share their vision and expect digital marketing to grow exponentially. It is a private limited company with only two shareholders at the moment; Ali Ahsan and Ali Gul. New investors will help the expansion strategy of the company while taking a share of the equity. “We don’t expect to break-even for another year or so and that’s because our
biggest focus is audience growth and retention. We’re focusing on building a brand image for MangoBaaz as having engaging content,” said the co-founders. “We’re looking to aggressively grow our video operations as we expect 80% of online content to be video based by 2020, if not sooner,” they added. “Video also has a wider reach for us as we’re able to engage English and non-English speaking users, something which we’re unable to do with our written content,” Ali Ahsan remarked. Three major expense heads for MangoBaaz are its human resource, video production, and marketing. MangoBaaz has their own production house and creates videos in which it embeds brands. They also use articles to advertise. A recent example is one of their episodes in which they advertised Sprite by linking it with fasting and doodh soda. Native advertising is being used all over the world by leading brands and companies and is expected to be increasingly used in Pakistan as well. Notable partners of MangoBaaz in native advertisement are companies like Uber, Telenor, Coca-Cola, Nestle and Unilever among others. Other key partners also include Pakistan Today and other magazines for content sharing and distribution. Strong Support SyStem: Currently, they have nearly 350,000 likes on their Facebook page and have graduated to PlanX, the accelerator. PlanX, an initiative of the Punjab Information Technology Board, empowers commercially viable earlystage tech start-ups by providing access to multiple funding channels, a specialized network of mentors and global exposure to establish high impact businesses. “It has been a great experience for us to work with these people. They have helped us and encouraged us as much as they could. More initiatives to facilitate start-ups should be taken to cater the young generation of entrepreneurs in order to boost the economy,” the co-founders said while praising the initiative of the government. Why ‘mangoBaaz’?: When asked why they chose such an uncanny name for their company, Ahsan said, “Mango is the best fruit of Pakistan which is sold all over the world and is therefore supposed to symbolize the best of our country. ‘Baaz’, on the other hand, is meant to convey the message ‘kay hum baaz nahi aatay’.”
MEDIA & MARKETING
Muhammad is pouring tea at New Quetta Anabi Hotel at Khawaja Ajmair Nagri, North Karachi. Photo: Imran Gillani
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Those humble chai dhaabas are worth Rs 1,450 crores in import duty and sales taxes alone By Usman Hanif rawing attention of his friends, Naveed Pasha expresses his frustration over the poor state of education in the city at his favorite place to discuss the country’s social issues: a local teashop around the corner of a busy street in Mehmoodabad, a populated neighborhood in Karachi. Another group sits next to them discussing business in Pashto, as two other men on the adjacent table indulge in family talks in Seraiki over a cup of tea. This local teashop or dhaaba, a common name for such businesses, also buzzes with cheerful voices of youth every evening. Coming from diverse backgrounds and age groups, all these people have one thing in common: they are the main customers of the booming business of dhaabas, the largest buyer of unpackaged or loose tea. “People don’t have enough space to entertain their guests at home so they host them at
INSIGHT
tea shops,” Hidayat Sahir, a regular visitor at the aforesaid dhaaba said, adding that such shops are like guest houses. Tea is a popular low-cost drink in Pakistan, the second largest importer of the commodity after Russia, and the largest consumer in South Asia on a per capita basis, which stands at roughly 1.005 kilogram. People consume this hot beverage thinking it relieves fatigue mainly because of the caffeine it contains – whether it actually does or not remains debatable. What is certain is the fact that this beverage is in high demand in our society: the mushrooming of dhaabas, mostly filled to their capacity, in every street and corner of the city is an evidence of that. These dhaabas and other commercial teashops have been growing in numbers across the city, yet they remain almost entirely undocumented: they are the major buyers of the unpackaged tea, which accounts for more than a third of the total tea market but doesn’t come under the tax net. In other words, the tea consumed by Pasha and his friends does not exist in the country’s GDP – the importers of this tea did not pay any duties nor did consumers pay any sales tax on the same. According to industry estimates the per capita tea consumption of Pakistan stands at 1.005 kg, translating to a market of 201 million kg based on population of 200 million. By contrast, the country’s legal imports are much lower. According to Pakistan Tea Association (PTA), the country imported 151 million kg of black tea worth Rs 4,400 crores or $420 million at the rate of Rs290 per unit in 2015. This means approximately 50 million kg made it to Pakistan through illegal channels – in other words the smuggled or illegal tea imports is 33% of the size of the country’s legal imports. If one applies 11 percent import duty and 17 percent sales tax to the tax-evaded tea, the government lost about Rs 1,450 crores or $140 million in potential revenues during 2015. This translates to 76% of the budget deficit (Rs 1,900 crores) of Pakistan International Airlines, the loss-making state-owned entity, reported for nine-month ending Sept, 2016 – the amount doesn’t include impact of 30 percent corporate income tax paid by the packaged industry on its earnings and tax deduction from employees salaries. “Our tea is exceptional in taste chiefly
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Grand Tea Company located at Saddar, Karachi, one of the busiest shops of unbranded tea. Photo: Imran Gillani because it is imported from Afghanistan,” Abdurahim Kakar, owner of a Dhaaba in Mehran Town, told this correspondent while serving a customer with a smile. Kakar is oblivious to the fact that Afghanistan itself is not a producer or exporter of tea nor does it exist in the list of 23 countries which export tea to Pakistan. “Almost all of the tax-evaded tea is currently coming through Afghan Transit Trade,” Unilever Foods Pakistan said referring to misuse of the bilateral trade agreement between Pakistan and Afghanistan. Once the prices in international market go up, more and more smuggled tea starts entering the Pakistani market, the maker of Lipton said. Owing to the misuse of the Afghan Transit Trade, the importers benefit from cost saving from the various taxes that are levied by the government along the way making it significantly cheaper for them to bring the tea to Pakistan, it said. “By avoiding import duty, sales tax and income tax, traders of unbranded tea enjoy an unfair advantage of approximately Rs70 to 80 per kg”, PTA’s Chairman Shakeel Jan says. In other words if a consumer buys one kg of packaged tea from legitimate brands, such as Tapal or Lipton, he will have to pay Rs520 as opposed to Rs450 per kg for the same quality of unbranded tea. While major buyers of loose tea are local teashops, also known as Quetta hotels or dhaabas, unpackaged tea is also becoming popular at domestic level as a signifi-
cant number of households continue to buy and consume the unbranded tea. “People like loose tea mainly because it is cheaper than branded tea, and in many cases has a good taste,” says Zain Asif, a vendor of unpackaged tea in Babar Market, one of Pakistan’s largest markets located in Landhi, a populated low-income neighborhood in the eastern outskirts of Karachi. Asif said people like mixture of different categories but he keeps asking them about the tea they prefer. “A customer yesterday informed me that he buys from a big tea store in Saddar, today I brought that tea. We can extend our business only through this way as we don’t have resources like big companies to reach large number of people,” he said. “Half a kilo tea with color,” a customer asks Asif interrupting the conversation. “This color is health hazardous but we have to meet the demand as customer is the boss here,” the retailer explains voluntarily anticipating a question about tea adulteration. “If we do it ourselves, it will be called milawat (adulteration),” he added explaining why they have to add the color. Perhaps catering to the very taste of his customers is what helps Asif’s business
flourish. However, this is not enough to cater to a bulk of customers from his area who still travel 24 kilometers west to the downtown (Saddar) for buying their specific taste. “I tried different kinds of teas and then settled on taste of a tea retailer in Saddar,” said Salman Khan, a resident of Landhi No. 4 and a consumer of unpackaged tea. “We use unbranded tea primarily because of its taste.” Taste may be one of the attractions for the subscribers of loose tea, but industry sources say unpackaged tea loses some of its taste because of inefficient supply chain. Tea smuggled from Afghanistan goes through Chaman and Spin Buldak, to come back to Pakistan. This whole traveling process takes 15 to 20 days, which reduces the quality and taste of tea. Even if it loses some taste and aroma during transportation, the price factor seems to more than make up for the loss in the quality of the unpackaged tea. “Loose tea is cheaper than branded tea. We are family of four, our usage of tea is approximately one kilogram; sometimes a quarter increases,’’ Khan said implying the unpacked tea saves him on costs. Khan’s loyalty for that particular tea can be judged from the fact that he doesn’t mind traveling to a large retailer in Saddar where he often has to wait for his turn. Unbranded tea business works on word
“BY AVOIDING IMPORT DUTY, SALES TAX AND INCOME TAX, TRADERS OF UNBRANDED TEA ENJOY AN UNFAIR ADVANTAGE OF APPROXIMATELY RS70 TO 80 PER KG” Shakeel Jan Chairman Pakistan Tea Association
of mouth, Khan says recalling his father-inlaw had informed him about the shop. Now his sister, younger brother and his in-laws use the same tea. While they continue to sell unpackaged tea, nearly half a dozen traders of unbranded tea polled by Pakistan Today have a typical view about tax evasion by the grey market. “We pay taxes everywhere; via taxes on petrol while transporting tea and government has also put indirect taxes on everything from mobile phone card to utility bills,” Asif, the tea vendor at Babar market said responding to whether he pays any taxes.
Even consumers share similar views when ask about this growing but undocumented market of loose tea. “It is the responsibility of the government [to educate people]. How would we know that a vendor evades taxes. If they do this, it’s a loophole in the system,” Khan said on the subject. The government can give level-playing field to the legitimate tea vendors by reducing tax and introducing favorable policy decisions, Shakeel Jan, PTA’s Chairman said. The government has imposed duties of up to 52 percent per kilogram of tea, he said, which makes the branded tea more expensive; as a result consumers switch to cheaper alternate: the unbranded tea. Giving an example, he said sales tax on tea was reduced from 16 percent to 5 percent in June 2012. However, this was reversed to 16 percent shortly after by the then government to meet revenue shortfall. “The government should have given some time to their policy decisions to demonstrate their impact on tea smuggling. Two months were not enough to check the result of reducing taxes on tea,” Jan said. Be it taxes on tea, mobile phone service or cigarette, the incumbent government’s inability to go after tax evaders and heavy reliance on indirect taxes remain a topic of much discussion among masses. However, Pasha and his friends find a temporary relief, if not a complete escape, from the burden of indirect taxes in a cup of tea. They leave the dhaaba with a lot of incomplete discussions about “poor state of basic needs (education, healthcare, and transport to name a few), tax evasion and Panama leaks only to resume the next day -- oblivious of how they themselves are contributing to this vicious cycle.
INSIGHT
interview
“Pakistan’s stock market likely to get $1bn worth of IPOs till 2018” By Arshad Hussain akistan Stock Exchange (PSX) may receive new Initial Public Offers (IPOs) of above $1 billion from different power generation and distribution companies by the end of 2018, PSX Managing Director Nadeem Naqvi said in an interview with Profit. “Since 60 per cent of the China Pakistan Economic Corridor (CPEC) projects are from energy sector, our market research suggests we are likely to receive $1 billion worth of new public offerings by 2018 from energy sector alone”, Naqvi said. He added that a lot of listed companies are going towards expansion and many of them will go for secondary issuing as well These new listings, which are likely to result from the government’s privatisation process, will give a new boost to the country’s equity market, the MD said.
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“it’s a good time for Privatization Commission (PC) to initiate sell-off process of government entities through PSX as the investors’ eyes and trust are on the market now”, naqvi said in an apparent suggestion to the government. Managing Director, Pakistan Stock exchange, nadeem naqvi speaks to Pakistan today - photo by imran Gilani Managing Director, Pakistan Stock exchange, nadeem naqvi – photo by imran Gilani One of the world’s best performing markets, the benchmark KSe-100 Share index has given over 20 per cent return to the investors during last 10 years while some stocks paid 500 per cent return in the same period, naqvi said. the benchmark index is already up 25 per cent this year and hitting new highs every other day. it has also regained the status of Asian tiger after becoming the best performing market in Asia and fifth-best performing market globally in 2016, Bloomberg reported earlier in July. now that the government has passed a bill, nobody including the law enforcement agency can interfere in the capital market business without the Securities and exchange Commission of Pakistan’s direction, the PSX chief said adding it would boost investors’ confidence in the market.
“we are expecting up to 10 new listings of national and multi-national companies between 2016 and 2018,” the MD said. “the government is going to privatise a number of power supplying companies of Punjab and Sindh and other entities like PArCO, State Life insurance Company (SLiC) through PSX”. the other energy projects would be set up under CPeC before the end of 2018 and shares of these power units would also be sold through PSX, he added. the PSX is divesting up to 40 per cent of its stake to strategic investors, it will definitely increase the market’s profile globally, explained naqvi. the PSX, he said, has received an overwhelming response from three continents including europe, Asia and South America as well as local and foreign investors for acquiring its equity stake. According to him, PSX has received a total of 17 eois from foreign and local investors applying under the categories of ‘Strategic investor’, ‘Anchor investor’ and ‘Financial institution’ as a result of the extensive campaign and persistent follow-up. Among the parties interested, Shanghai Stock exchange is reportedly the front-runner while a delegation of nasdaq has also expressed its interest. According to a report by insight Securi-
The PSX has also requested brokers – the current stakeholders of PSX – to offer the remaining 40 percent stake as well. If all brokers agree to offer the remaining shares, the cash inflow would increase to $227 million, it said. “The brokers will take the final decision regarding the selection of strategic partner of PSX as we have to see what new product they will bring for Pakistan’s equity market”, Naqvi said. “We are looking for derivatives products, internet modern techniques and finally we have to see what a new strategic partner can do to sell our product abroad.” Explaining further Naqvi said the current members while making selection will have to see what benefits the new strategic partners can offer. For example, they can bring new internet technology to connect us with the international markets through enhanced technology and internet connectivity. “We want to connect PSX with the international exchanges in future,” he said. The big Exchanges are connected with internet globally, while many exchanges have been sold only for the modernised equity trade. Recently Hongkong Exchange purchased London Stocks. Thailand Exchange interconnected with a platform to connect inNadeem Naqvi vestors from other Asian Markets so Managing Director, that investors can trade in their ExPakistan Stock Exchange changes. He further said that London and Nigeria are in talks to have a cross listing of companies. A new trend has been developed to contact each other’s exchanges With Naqvi adding that they do not want to isolate the Pakistani market. “We want partners who can build international Exchange connectivity with Pakistan.” “We were in negotiation with Turkey’s ties, this selloff could spur the next round of stock market for the Cross Listing, but we liquidity into the capital market, which rallied cannot reach any consensus”, he said. It’s a more than 10 percent after news of its reclasdifficult task for us as we do not have a law sification to the MSCI Emerging Market over the Cross Listing or any formula to pay a Index, which will come into effect next June. dividend to any investor outside the country. The aforementioned selloff of PSX We have to make law on both things, he said. stakes, along with 20 percent IPO, could inject “Actually, we are looking for the investors to a combined $136 million in the brokers’ cash increase country’s stocks base and it will be balances and another $60 million revaluation possible when foreign investors will come in gains on freely held 40 percent PSX shares by Pakistani stocks directly or through their broJune 2016, resulting in higher capital adekers or banks,” he added. quacy and proprietary trading, the report said. Market analysts say that the new foreign
“THE POLITICAL AND ECONOMIC DIRECTION IS ON THE RIGHT TRACK”
partner is likely to improve the functioning of PSX by streamlining operations and efficiency while expecting new products, such as futures, options, and other derivatives. Pakistani stocks have been included in the emerging market of Morgan Stanley Capital International (MSCI) and would finally be included in May 2017 as one of the best performing market across Asia as well as the world. The PSX chief said that the investors from Europe and America are looking for emerging market and after coming into MSCI, world investors will invest in Pakistani stocks. In the first month of the current fiscal year, Pakistan has received a portfolio investment of $50 million, he said adding: “We are expecting around $300 million through portfolio investment in the current fiscal year.” Because of the economic growth in Pakistan, the domestic companies such as DG Khan, and Lucky Cement are also expanding their businesses. The foreign investors may also invest in local companies to earn a good return. Pakistan’s overall economic and political situation has improved during last three years because of sound economic policies. “The political and economic direction is on the right track”, Naqvi believes. He said that regulatory framework of the country is transparent, while brokerage regime audit, client assets are good. Last year, we successfully initiated a trading platform KITS, internet trading system and all 414 brokers are following it. After merging all stock markets into an entity, the listed companies in PSX are getting benefits through saving in different taxes and fees etc.
MARKETS
OPINION
Humayon Dar
Issues in investing in listed stocks any people, including some ulama, are of the view that buying and selling shares of the companies through a stock exchange is not acceptable in Islam. One such view equates trading in shares on a stock exchange to gambling and prohibited speculation. Another view states that shares of the companies are no more than papers whose price goes up and down depending on how much the market players bet on them. Given that now there is a thriving international market for shari’a compliant investing in stocks of listed companies, it is important to understand what makes it permissible to invest in such financial papers. There is no disagreement amongst jurists that it is permissible to co-invest in businesses that carry out shari’a compliant activities. This can be done through a partnership – also called shirka in Arabic or musharaka in the literature on Islamic banking and finance. Shirka allows partners to forego their management rights. Thus, it is permissible for partners in a business to appoint one of them or even a third party to manage the business on their behalf. In small partnerships, it is always problematic when some partners would like to quit or when new people would like to join. These so-called “exit” and “entry” related problems are taken care of by listing the business on a stock exchange. The investors in stocks of listed companies in fact buy equity in the listed business and can acquire controlling rights, if they buy certain percentage of the total equity, for example, one-third or majority shareholding. Most of the buyers of stocks, however, have no controlling rights, although they have voting rights through which they can raise their
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Humayon Dar is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com
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concerns at an Annual General Meetings (AGM) of the company they have invested in. This establishes the fact that investing in ordinary shares of listed companies is equivalent to buying equity in the business, which Islamic law permits. However, it is important to consider some restrictions in this respect. Following are the important shari’a guidelines for investing in stocks of the listed companies: n The business of the company whose stocks one wishes to buy must be shari’a compliant, ie, the companies that deal in the prohibited activities must be excluded from the universe of shari’a compliant stocks. The prohibited activities include (but are not limited to): n Interest-based financial services (conventional banks, insurance companies, brokerage firms etc); n Production, packaging, distribution and logistics, and sale of alcohol and other prohibited items like pork, pornographic materials, etc; n Gambling and gaming; and n Unethical activities and wasteful entertainment like music and movies. The above requirements are known as business screens. As there are very few businesses that strictly fulfil all shari’a requirements, especially those related with their financial matters, contemporary shari’a scholars have developed and agreed on the following four financial screens: n Total borrowings by the business should not be more than one-third of its market capitalisation (generally known as debt equity ratio screen); n Total cash held by the firm and its investments in interest-bearing instruments (like interest-bearing bank deposits) must not exceed one-third of its market capitalisation; n Funds receivables (invoices issued and other forms of debt owed to the firm by its clients and others) must not exceed one-third of its market capitalisation; and n The company must not earn more than five per cent of its income from the prohibited activities.
There are over 100 stocks on the Karachi Stock Exchange, which fulfil the above screening criteria, and hence are deemed shari’a compliant. It is important to understand that the actual process of selecting and investing in stocks of listed companies requires a lot of due diligence on such businesses. For example, Apple stock is deemed shari’a repugnant because it draws more than five per cent from the sale of iTunes (about nine per cent) and hence shari’a advisors would recommend not investing in the Apple stock. However, in the absence of such a detailed breakdown, if someone wishes to invest in such a stock, the shari’a guidelines require that the dividends from such a stock must be purified by donating five per cent (as an approximation of the prohibited income) to independent charities. This process is known as dividend purification.
PERSONAL FINANCE
OPINION
Sadyia Babar
It won’t have been possible for her to live amiably if her children were not considerate enough to understand her financial needs. Yes, surely, she was lucky! My husband and I both agree that that we don’t want to depend on our children to provide for our post retirement years because there are just too many factors plunk in the way of making this strategy work. What if they are not supportive and caring enough in the long run? What if their spouses are not willing? What if they are facing difficulties flew to Karachi a few days ago to attend my khala’s 90th in making their own ends meet? Therefore, it would birthday. The celebration was attended by all of her chilbe wise to leave the kids out of our retirement dren, who were delighted to see their mother thrilled to plans. bits. Numerous grandchildren and great-grandchildren I suggest the conformist one of saving for your own were also in audience, doing their bit to make it a truly retirement. You can do this in a number of ways. memorable occasion. My khala is not a well educated You can make ad hoc lump-sum investments into woman, has never had a professional career, has never various assets like gold bullion. These days rising made any financial provision for the future and has spent price may have drawn a lot of attention but I don’t all her life slaving after her children and, now, her chilthink the party is over yet. My sister has been buydren’s children. ing gold bars worth Rs5,000 for the last eight She lives in an annex attached to her son’s house. She is very conmonths. If she needs cash in a hurry, she can take tent with her life, but she defies the rules of financial planning. She them to a jeweler and redeem them for cash on the has put all her time, effort and money into her four children and has spot. made no financial provision for herself. Now, the question is: has Like any other high profile investment opportunity, she got it right? Did she choose the right retirement strategy? Or I feel the stock market is a very lucrative option was she just plain lucky? too. It’s true that the twirl in the stock market can I have to say that she was lucky. Her late husband used to work in a cause both large losses and large gains, but if your fairly nice company, and according to the Pakistani pension plan: investment time horizon is long enough, these It is two or 2.5 into number of years worked for = per cent of last short-term fluctuations will result in relatively high basic salary, which in my khala’s case amounted to Rs30,000, and returns. What’s important is to make a portfolio after her husband died, she used to get half of it, that is, 15,000 with a healthy mix of high risk, high return investmonthly. ments and some which provide a stable regular income. The next question is how much do you need to save? Well, this depends on the lifestyle that you want during retirement, the numSadyia Babar ber of years you have to prepare for it, the amount of money that you have already is a part time business accumulated or expect to receive from inheritances, for example, and the success executive and a full that you have with your investment strategy relative to inflation. time home maker. If a lifetime of saving depresses you, then you can always adopt my khala’s strategy with a lifetime of self-sacrifice and hope that your children will do the honors. I prefer to save.
Children and retirement strategies Don’t let one affect the other
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PERSONAL FINANCE
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Careers
Employment opportunities broaden as
expand operations By Nida Jaery
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f you want to bid farewell to the humdrum of nine-to-five jobs, you’re in for luck, for lo and behold, driving cabs is the new rage hitting across the metropolitan cities of Pakistan. and luckily it appears to compensate well. after the launch of cab-hailing services Careem and Uber in Pakistan, money-making opportunities for car vendors and drivers have increased tenfold. Not only did the two cab-hailing services remain successful in gaining popularity, especially among women, but they also managed to draw the car rental community under one umbrella. Most drivers, working as captains - alias used by Careem for drivers and partners - alias used by Uber for drivers, were previously providing rent-a-car services with the same vendors who have now deployed their vehicles with the two cab hailing giants. Moreover, people with personal cars are all geared up to steer the wheel towards the big pick up. according to a survey by Profit, drivers with own cars are earning up to rs70,000 a month, working 11 hours during a six-day week. enter Nasir, a thirty-year-old owner of two Toyota
Corollas. Nasir takes home more than rs50,000 a month per car providing pick and drop services to clients of Uber and Careem. This is 31.5 per cent higher than rs 38,000 - the average monthly salary in 2015 in the financial sector, which incidentally is the most sought-after industry in terms of compensation. In good months, their average earnings can shoot even higher. For example, Nasir made rs1,75,000 in the month of ramzan. after eliminating fuel and maintenance costs he was left with a take-home of almost rs 85,000. after an overwhelming response in Karachi, Lahore and Islamabad, Careem is all set to launch in five other cities: Hyderabad, Faisalabad, Gujranwala, Peshawar and Multan. Uber, on the other hand, is currently present in Karachi and Lahore and has not announced any further expansion plans. Yet, its acceptance in the market cannot be denied. To top it off both Uber and Careem claim that the demand is exceeding supply each passing day – an indication that more people will jump the bandwagon in the days to come. so what is broadening work opportunities for drivers around the country?
According to Uber, it currently employs more than 1,000 active drivers in Lahore alone. These drivers managed 65,000 rides in the last two weeks of July, just a couple of weeks before its launch in Karachi. Careem Pakistan, on the other hand, refrained from disclosing their number of drivers; however, a major car vendor who has engaged more than 50 of his cars with Careem said the UAE-based company has 3,000 active drivers working in Karachi. These vendors and drivers, who were already involved in rent-a-car business, aren’t the only ones benefiting from the growth of these ride-hailing services. A whole new breed of college graduates are becoming a part of the league. A classic case is that of Faisal, a fresh graduate who drives his father’s cars for Uber’s clients and earns more than what a corporate organization would pay him in starting salary. While Faisal drives one car, he has employed drivers on daily compensation for the other two. The remuneration packages offered by the two online giants are a cherry on the cake for the drivers, especially young adults with a drive to provide better for their families. Careem pays 80% of the fare earned on each ride to the vendor. In addition to this, the company tops up the difference to meet the guaranteed amount of Rs4,200 per day for business cars, Rs3,500 and Rs2,800 per day for economy and Careem Go respectively. Furthermore, vendors aren’t the only beneficiaries in the sport. Aside from the monthly salaries they get from the vendors, drivers can earn fortnightly bonuses of up to Rs9,000 based on performance. They are required to complete 100 rides in 14 days, maintain a rating of 4.5 points and uphold a ride acceptance rate of 90% “Hundred rides in 14 days is a piece of cake for me”, says Shabbir, who has been driving Careem for a few weeks now. Shabbir works 11 hours a day and covers an average of 170 kilometers each day. On the other hand, Uber pays the drivers on hourly basis. It pays Rs520 per hour to the vendors, out of which the partners get Rs391 for each hour on duty. It also provides a bonus of Rs5,000 on 30 rides in two days.
A bumpy ride he entry of Careem and Uber in the country may have opened new opportunities for unemployed youth, but they are far from delivering standards practiced by drivers in developed markets. Only within few months of the launch, many passengers have pointed out flaws in the
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THESE VENDORS AND DRIVERS, WHO WERE ALREADY INVOLVED IN RENT-A-CAR BUSINESS, AREN’T THE ONLY ONES BENEFITING FROM THE GROWTH OF THESE RIDE-HAILING SERVICES. A WHOLE NEW BREED OF COLLEGE GRADUATES ARE BECOMING A PART OF THE LEAGUE
training of both captains and partners. In a diverse and multifaceted metropolis like Karachi, the drivers need more than just basic training of how to use the app and navigate the roads. For customers, detailed background checks of the drivers are very essential along with the expectation that they shall be treated respectfully. “I have a constant fear while I’m in the car with the driver and this is mainly because he is very casual and lacks professionalism”, said Zainab, a university student and a regular user of Uber and Careem. With a growing middle-income class and an ever-expanding presence of women in the workforce, the Pakistani market holds massive potential for the companies. But the factor of substandard quality and performance cannot be ruled out. “If the two cab services play their cards smartly and improve on a few things, they are one of the best things to happen to Karachi,” added Zainab.
PERSONAL FINANCE
EVENT
Lars Bergymeyer Dr. Ruksana David
Falling Walls Lab, 2016 Held in collaboration with DAAD, Falling Walls Lab took place at FCCU Lahore on September 27
Dr. Noel Israel Khokhar
Pir Saad Ahsanuddin
Ramzan Sheikh
Dr. Joseph Jones
Manzoor Shaikh
Mariam Shams Khalid
Naeem Zamindar, Accmun fund
Ali Raza Siddique
Jahngir Khan Tareen
Ruksana Zia & Seemi Elahi
Awais Shaffique, Winner
Najam Sethi
Dr. James A Tebe
BeYOND BORDeRS
Here's What Really Happened at That Company That Set a $70,000 Minimum Wage an Price took a walk in the woods with a friend who was struggling to live on less than $50,000, about a million dollars below what he was making. Some two weeks later, he instituted his minimum wage of $70,000 and challenged other entrepreneurs to follow him.
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Before Dan Price caused a media firestorm by establishing a $70,000 minimum wage at his Seattle company, Gravity Payments... before Hollywood agents, reality-show producers, and book publishers began throwing elbows for a piece of the hip, 31-year-old entrepreneur with the shoulder-length hair and Brad Pitt looks... before Rush Limbaugh called him a socialist and Harvard Business School professors asked to study his radical experiment in paying workers... an entry-level Gravity employee named Jason Haley got really pissed off at him. It was late 2011. Haley was a 32-yearold phone tech earning about $35,000 a year, and he was in a sour mood. Price had noticed it, and when he spotted Haley outside on a smoking break, he approached. "Seems like something's bothering you," he said. "What's on your mind?" "You're ripping me off," Haley told him. Price was taken aback. Haley is shy, not prone to outbursts. "Your pay is based on market rates," Price said. "If you have different
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data, please let me know. I have no intention of ripping you off." The data doesn't matter, Haley responded: "I know your intentions are bad. You brag about how financially disciplined you are, but that just translates into me not making enough money to lead a decent life." Price walked away, shocked and hurt. For three days, he groused about the encounter to family and friends. "I felt horrible," he says. "Like a victim." An entrepreneur since he was a teen, Price prided himself on treating employees well at Gravity, which he co-founded in 2004 with his brother Lucas Price. Three years before, as a 16-year-old high school kid, Dan Price saw bar owners being gouged by big financial firms every time they swiped a patron's credit card. By first outsourcing technology, and then building its own systems, Gravity offered lower prices and better service, and grew rapidly for four years -- until the Great Recession nearly wiped it out. Traumatized, Price kept a lid on wages even after the economy recovered -- to save the company, of
course! Why can't employees see that? Yet the more people tried to cheer him up about his wage policy, the worse Price felt. Finally, he realized why: Haley was right -- not only about being underpaid, but also about Price's intentions. "I was so scarred by the recession that I was proactively, and proudly, hurting my staff," he says. Thus began Price's transformation from classic entrepreneur to crusader against income inequality, set on fundamentally changing the way America does business. For three years after his face-off with Haley, Price handed out 20 percent annual raises. Profit growth continued to substantially outpace wage growth. This spring, he spent two weeks running the numbers and battling insomnia before making a dramatic announcement to his 120-member staff on April 13, inviting NBC News and The New York Times to cover it: Over the next three years, he will phase in a minimum wage of $70,000 at Gravity and immediately cut his own salary from $1.1 million to $70,000 to help fund it.
The reaction was tsunamic, with 500 million interactions on social media and NBC's video becoming the most shared in network history. Gravity was flooded with stories from ecstatic workers elsewhere who suddenly got raises from converted bosses who tossed them out like Scrooge after his epiphany -- even, in one case, at an apparel factory in Vietnam. Price was cheered at the Aspen Ideas Festival and got an offer from The Apprentice reality-show impresario Mark Burnett to be the new Donald Trump on a show called Billion Dollar Startup. Gravity was inundated with rĂŠsumĂŠs -- 4,500 in the first week alone -- including one from a highpowered 52-year-old Yahoo executive named Tammi Kroll, who was so inspired by Price that she quit her job and in September went to work for Gravity at what she insisted would be an 80-85 percent pay cut. "I spent many years chasing the money," she says. "Now I'm looking for something fun and meaningful." Price had not only struck a nerve; he had also turbocharged a debate now raging across
the American landscape, from presidential forums to barrooms to fast-food restaurants. How much -- indeed, how little -- should workers be paid? While financiers and C-suite honchos have showered themselves in compensation, most Americans haven't had a raise, in real dollars, since 2000. Especially in the wake of the recession, entrepreneurs and corporate bosses have tightly controlled costs, including wages. That boosts profits -- and bonuses. But at what cost? In a U.S. economy that is more than two-thirds consumer spending, GDP growth is chained to income growth. Workers can't spend what they don't have, nor do they have the home equity to borrow and spend. Weak wage growth helps explain why this long economic expansion has been so tepid. Until Price dropped his wage bomb, much of that debate was punditry. He gave it a name and a face: a modern Robin Hood helping the working class by stealing from himself -- and perhaps from shareholders of other companies whose bosses are now also putting
employees ahead of profits: #imwithdan! Was it coincidence that Walmart, that paragon of parsimony, coughed up raises for its lowestpaid workers? Then the inevitable backlash came. Price has been pilloried on Fox News and trashed by the multimillionaire Limbaugh ("I hope this company is a case study in MBA programs on how socialism does not work, because it's gonna fail"). A Times story in July was so laden with quotes from disgruntled customers and staff that Price's worried friends called to say he always has a place to stay if things don't work out. Others accused Price of orchestrating a clever publicity stunt. ("If it was," he replies, "I'm a genius.") Shortly after Price announced his minimum, his brother Lucas sued him, claiming Dan had previously paid himself "excessive compensation" and asked the court to order Dan to buy Lucas's 30 percent share of Gravity "at fair value" or dissolve the firm. Lucas declined to comment; Dan denies his brother's claims. Price isn't backing down about pay going up. Now he's going all in. He revealed to Inc.that he has sold all his stocks, emptied his retirement accounts, and mortgaged his two properties -- including a $1.2 million home with a view of Puget Sound -- and poured the $3 million he raised into Gravity. As majority owner, he is not exactly penniless. But if Gravity fails, so does Price. "Most people live paycheck to paycheck," he says. "So how come I need 10 years of living expenses set aside and you don't? That doesn't make any sense. Having to depend on modest pay is not a bad thing. It will help me stay focused." And business owners will stay focused on him. The Dan Price Pay Experiment will either be hailed as a stroke of genius showing that entrepreneurs have underpaid their workforces to their companies' detriment, or as proof positive that Gravity is being run by a well-intentioned fool. Being comfortable wasn't a goal in Price's family when he was growing up in rural southwest Idaho, near Nampa. He and his five siblings took turns waking at 5 a.m. to make breakfast before Bible readings and prayers led by their Evangelical Christian parents. Though his family struggled financially, Price never thought of his enterprise as a way to make money. Inspired by his father, Ron Price, a self-employed consultant who often spoke of living according to your values, Dan says he just wanted to help friends like Heather, who ran the Moxie Java coffee shop
STRATEGY
in Caldwell, Idaho. But make money he did, rounding up more than 200 clients and in a good month netting $12,000. By the time he entered Christian Seattle Pacific University in 2004, Price had developed a more sophisticated business model: processing credit card transactions himself using outsourced technology. Though fluent with computers, his real skill was negotiating -- cobbling together deals with the myriad firms involved in making a single credit card swipe go through smoothly. While continuing to serve his Idaho customers, he found enough new ones in Seattle to start Gravity Payments with Lucas, fiveand-a-half years older, and already a college graduate. Dan and Lucas were 50-50 partners in Gravity and shared responsibilities but had a falling out about 18 months after launch. Lucas was frustrated at being given menial tasks by his kid brother, and in 2008, they agreed that Dan would become majority owner. Lucas is now an executive at the Seattle texting startup Zipwhip. Funded in part by Dan's savings, credit card debt, and student loans (diverted to fund
everything," he says. Always stingy with pay, he had offered employees the usual startup promise: We'll give you an exciting place to work, and you'll learn so much you'll eventually be financially successful -- either here or elsewhere. But after his encounter with Jason Haley, he decided to try a new tack. The 20 percent raises Price implemented in 2012 were supposed to be a one-time deal. Then something strange happened: Profits rose just as much as the previous year, fueled by a surprising productivity jump -- of 30 to 40 percent. He figured it was a fluke, but he piled on 20 percent raises again the following
ing around making $1 million a year, and I'm working shoulder to shoulder with people in her situation who are every bit as good and valuable as I am." As a numbers guy, he knows all the statistics. Even as the nation's productivity has improved 22 percent since 2000, median wages have risen only 1.8 percent, adjusted for inflation. Wages have actually fallen by 3 percent since the recession. Meanwhile, productivity gains are going to CEOs who earn, on average, about 300 times more than typical workers, compared with 71.2 times in 1990, according to the Economic Policy Institute. (Price's $1.1 million salary was about 23 times the $48,000 average at Gravity.) Such trends have driven the push for a $15 minimum wage in some cities, including Seattle. "I began wondering what my friend would have to make so she wouldn't have to worry about a $200 rent hike," says Price. He recalled a 2010 study by Princeton behavioral economist Daniel Kahneman finding that, while people did not feel happier on a daily basis as their income rose above $75,000, they were decidedly unhappier the less they earned below $75,000. At Gravity, new hires made
his venture), the company grew rapidly as Gravity built its own technology and brought the card-processing systems in-house. He somehow graduated from college in 2008, won several business awards, and met President Obama. Then the recession hit and Gravity fell rapidly to earth. Revenue dropped 20 percent, and vendors and clients went bankrupt. Price was spooked. "We almost lost
year. Again, profits rose by a like amount. Baffled, he did the same in 2014 and profits continued to rise, though not quite as much as before, because Gravity had to do more hiring. "But I was still bothered and I didn't know why," he says. In March, Price went walking with a good friend who earned less than $50,000 at another firm. She was smart, capable, and worked 50 to 60 hours a week. But her Seattle rent was rising another $200 a month, and she was struggling with student debt and worried about how to pay for basics. "I was so angry," Price says. "Here I am walk-
$35,000 a year. By any measure, Gravity was doing relatively well. Revenue hit $150 million in 2014 and was growing 15 percent per year on $7 billion in customer transactions. Profits hit $2.2 million -- actually a so-so 1.46 percent net margin, below the industry average. About 40 percent of the profits went to Dan and Lucas as dividends (Dan put his in an emergency savings account for the company). The rest went back into the business. "We had a great culture and hundreds of people were applying for positions, so we could have gotten away with underpaying for a while longer," he says. But Price worried that employees with money troubles would fail to provide the topnotch service that had made Gravity successful. He also believed that low starting salaries
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"I JUST DECIDED I'M GONNA DO $70,000. I DON'T CARE IF I HAVE TO STOP PAYING MYSELF OR I HAVE TO WORK 20 HOURS A DAY. I'M GOING TO DO IT."
were simply wrong -- contrary to his values, which his father had always taught him to respect. "I just decided I'm gonna do $70,000," he says. "I don't care if I have to stop paying myself or I have to work 20 hours a day. I'm going to do it." The plan will eventually double the salaries of 30 workers and give raises to 40 more making less than $70,000. Phased in over three years, this will cost $1.8 million. The minimum jumped to $50,000 immediately and will climb by $10,000 in each of the next two years; those who earn $50,000 to $70,000 will get $5,000 raises. Price has vowed not to raise prices, lay off staff, or cut executive pay. More than half the cost will be
2,000 within two weeks. Customer acquisition costs are typically high, so in that sense, the strategy has paid off. And in this business, customer retention is key. Gravity's 91 percent retention rate over the past three years -- far above the industry average of about 68 percent -- has been crucial to its success. Maria Harley, Gravity's vice president of operations, looks at a different set of numbers. While the company had to hire 10 more people than anticipated to handle the new business, most nonlabor costs -- rent, technology, etc. -- have remained the same, thus improving operating ratios. "We don't need our sales to double," she says. "We only need them to increase marginally -- by about 25 to 30 percent. When I started being more logical than emotional about this, I said, 'This is totally possible.'" Six months after Price's announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have
maximizing the value of Lucas's share. Dan says Lucas has refused his offer to buy him out for $4 to $5 million. (Lucas's attorney says the suit is unrelated to the raises.) When asked about his brother, Dan maintains his usual upbeat, grateful attitude: "We're in such a great place with the company and Lucas helped me get here. Anything he gets, I won't begrudge. I'll be glad he got it and think he deserves it." Asked how he can remain so charitable when his own brother is suing him -- Lucas was best man at his wedding -- Price laughs and says he's been seeing a family therapist for about a year. Brother or not, he vows to fight fiercely to protect his company. "I will do anything to help Lucas reach his financial goals," Dan
offset by Price's pay cut. Unless revenue grows, the rest will be covered by that $2.2 million profit, leaving little margin for error. Since that April made-for-TV moment, Price says he's had no second thoughts -mostly because he's been learning how his employees had been struggling. Garret Nelson, 31, a salesman in Boise, Idaho, got a $5,000 raise, to $55,000, allowing him to pay for teaching supplies and music lessons for his five homeschooled kids. "People back in Idaho said he was nuts," says Nelson, who went to middle school with Price. "But it really energized the employees." Is there a magic number that keeps workers focused while still generating a profit? Price calculated a figure but never imagined the publicity he's gotten would boost new customer inquiries from 30 per month to
also doubled. Gravity did lose a few customers: Some objected to what seemed like a political statement that put pressure on them to raise their own wages; others feared price hikes or service cutbacks. But media reports suggesting that panicked customers were fleeing have proved false. In fact, Gravity's customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit -- a nonevent. Jason Haley isn't one of them. He is still an employee, and a better paid one. In fact, the biggest threat to Price's company isn't his strategy; it's his brother. Lucas's lawsuit, scheduled to be heard in May, could ruin Gravity. Price estimates legal fees will reach $1 million by then. The suit was filed on April 24, 11 days after the pay-raise announcement -- perhaps to pressure Dan to sell when Gravity was in the limelight, thus
says, "as long as it doesn't lead to price increases to our merchants, decreases in services to them, pay cuts, or other types of cutbacks to our investments in our team." Raising your cost of doing business is generally not considered the best way to increase profits and improve market position. Yet the finish line for Price may be when he can lift his own salary up to market rate -making it easier for the company to replace him, if necessary, and show CEOs that sacrifice by the boss is only temporary when overhauling a company's wage structure. He'd also like to get his $3 million loan back -- invested to "take us from a low to a high margin for error," he says -- but won't sweat it if that doesn't happen. "I started with nothing," he says. "I can always make enough to support myself."
"MOST PEOPLE LIVE PAYCHECK TO PAYCHECK. SO HOW COME I NEED 10 YEARS OF LIVING EXPENSES AND YOU DON'T?"
STRATEGY
TALKING HEADS
“If the systems are there, companies tend to run themselves. It is the same with employees – empower them to take performance related decisions and let them do the job.” Javed Afridi CEO Haier, Pakistan
“There are no systems and processes in local (Ad) agencies; it all depends on how the owner wants to run the agency. They don’t want things to change because they will lose business; it is as simple as that." Imran Afzal CEO, JWT Pakistan
Why Chinese banks and Chinese equipment (for CPEC)? Because coal is so backward and reviled an energy source that nobody makes the equipment any more and no self-respecting bank in the world will finance it any more. Farooq Tirmizi Financial Analyst
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“Considering that a great chunk of Microfinance Banks’ loan portfolio consists of agricultural loans, artificially repressed prices of agricultural commodities tend to have a debilitating effect on the players working in rural areas”. Ghalib Nishtar President and CEO, Khushhalibank
“We believe this service (Baa Khabbar Kisaan) will play an integral role in ensuring farmers get their due reward for playing an important role in the society by transforming their ability to increase crop yields, improve efficiency and grow incomes” Aamir Ibrahim CEO, Mobilink
If you ask me, the ultimate vision should be a PFDC L’Oreal Bridal Week that is recognized globally. There should be people everywhere sitting in awe of the craftsmanship that we have here. This will put Pakistan on the global map.” Musharaf Hai CEO L’Oreal
TALKING HEADS
BOOK REVIEW
Learn ‘n Go N 2012 Erik Brynjolfsson and Andrew McAfee took a ride in one of Google’s driverless cars. The car’s performance, they report, was flawless, boring and, above all, “weird”. Only a few years earlier, “We were sure that computers would not be able to drive cars.” Only humans, they thought, could make sense of the countless, shifting patterns of driving a car—with oncoming traffic, changing lights and wayward jaywalkers.
I
Machines have mastered driving. And not just driving. In ways that are only now becoming apparent, the authors argue, machines can forecast home prices, design beer bottles, teach at universities, grade exams and do countless other things better and more cheaply than humans. Mr Brynjolfsson and Mr McAfee, an economist and scientist respectively at the Massachusetts Institute of Technology’s Centre for Digital Business, first described this in 2011 in their self-published e-book “Race Against the Machine”. “The Second Machine Age”, which grew out of that earlier work, is an ambitious, engaging and at times terrifying vision of where modern technology is taking the human race. Innovation has always driven advances in mankind’s standard of living, from agriculture to electricity. Information technology, the authors argue, is quantitatively and qualitatively different. It is, thanks to Moore’s law, exponential: its effects, barely perceptible for the first few decades, are turning explosive. It is also digital. Formerly complex tasks can be mastered then reproduced and distributed at almost no cost. Finally, it is recombinant, merging separate, existing innovations and innovators through networks and crowdsourcing. This will have one principal good consequence, and one bad. The good is bounty. Households will spend less on groceries, utilities and clothing; the deaf will be able to hear, the blind to see. The bad is spread. The gap is growing between the lucky few whose abilities and skills are enhanced by technology, and the far more numerous middle-skilled people competing for the remaining jobs that machines cannot do, such as folding towels and waiting at tables. Economists believe innovation is always good for society because workers displaced in one industry will find jobs supplying new goods and services. The authors acknowledge this but ask, “What if this process takes a decade? What if, by then, the technology has changed again?” Some people, they gloomily predict, will have nothing that employers will want even at a salary of a few dollars per hour, citing the example of horses, put forward by Wassily
LIFE
Leontief, an economist; they were never able “to adjust to the invention of the tractor.” This has a familiar ring. A few years ago there were credible estimates that a quarter of American jobs could be sent offshore. Those apocalyptic totals seem unlikely ever to be reached. Mr Brynjolfsson and Mr McAfee may be similarly right about the potential for machines to displace middle-class workers, but wrong about the magnitude. In case they turn out to be right, they offer prescriptions. People should develop skills that complement, rather than compete with computers, such as idea generation and complex communication. Policymakers should improve basic education, pour money into infrastructure and basic research, admit more skilled immigrants, and shift the burden of taxes from wages to consumption. This is sensible, but unsatisfying: it may expand the circle of winners and reshuffle its membership, though it seems unlikely that it will fundamentally alter the growing gap between them and the losers. The authors may not have the solution to growing inequality, but their book marks one of the most effective explanations yet for the origins of the gap.
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BOOK REVIEW
Books to read Will you find time for a Founding Father? Or would you rather hit a mother lode of gold wisdom? And then there’s the case for Steve Case...
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LIFE
WEEKLY REVIEW
s p m u r t t marke volatility to e m i t l l a h B r e ac closiNg high By Nida Jaffery
espite multiple moments of intraweek weakness engendered by the United States presidential elections, the benchmark KSE-100 share index remained successful in triggering a volatile yet steady spell of northbound movement. The market sentiment remained shaky in anticipation during the first two days of the week. However, the equities experienced a knee-jerk reaction during the early hours of Wednesday due to election results, only to recover by day end. The local bourse met with a dip of more than 700 points as election results placed 70-year-old businessman, Donald John Trump as US President-elect. “The market reacted impulsively mainly because the win was highly unexpected”, said Zeeshan Afzal, Research Head at Insight Securities. “Our market was the first to take the blow as the news came right when the (region) bourse opened on
markets
Wednesday.” However, the analyst added that the local market recovered relatively early with almost all the regional markets still experiencing aftershocks. Moreover, the last two days of the week were very robust. The market gained 500 points on Thursday and attained an alltime closing high of 42,849 points at week end, with additional feathers in its warrior cap. This was mainly because analysts are optimistic about the US-Pakistan relations and are not expecting much of a policy shift
in the near future. “The republican's campaign rhetoric leads us to believe that micromanagement and unilateral actions along Pakistan's borders may ease out under a Trump presidency,” said a post-election report by AKD Securities. Silver lining: The benchmark KSE-100 share index has finally learnt to stay above the 42,000 mark despite prevailing volatility due to political tension, be it the recent US elections or the brouhaha over the Panama Papers inquiry.
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The benchmark KSE-100 share index gained 1,008 points, up 2.4% from last week’s closing 41,842 points. Foreign selling of $27.5 million was witnessed during the week, but the index still soared on the back of local liquidity. Pakistan’s equity market remained the best performing market during the week in the region followed by China, Vietnam and Singapore with 2.26%, 1.87% and 0.93% gains respectively. Other countries in the region including India, Indonesia, Sri Lanka, Hong Kong and Malaysia closed in red. All of the major sectors remained in the gainers’ list over the outgoing week. Top three gainers on the bourse were Cements, Chemicals and Commercial Banks, up 5.5%, 4.3% and 2.4%, respectively. Al-Ghazi Tractor Limited (+27.62%), Maple Leaf Cement Limited (+14.23%), Sui Southern Gas Company (+8.83%), Fauji Cement Limited (+8.82%) and Fauji Fertilizer Limited (+8.82%) were major gainers during the week. Meanwhile, laggard stocks included Shell Pakistan Limited (‐3.12%), Karachi Electric (‐2.03%), Hub Power Company Limited (‐1.57%), Oil and Gas Development Company (‐1.47%) and National Bank of Pakistan (‐0.98%). Banking sector saw net buying of $2.3 million, whereas oil & gas marketing and cement sector had net selling of $5.3 million and $4.6 million, respectively. Average daily volumes for the outgoing week posted a growth of 2% weekon-week to 494 million shares while average daily value increased 15% over the outgoing week to Rs19 billion or $178 million. For the week to come, analysts believe political risk still threatens to slow down the rally as Panamagate’s next hearing is scheduled for November 15. However, they expect market to continue its rally led by heavyweight sectors like cements, on the back of strong domestic demand, and banks, on the back of expectations of early interest rate reversal. The Pakistan Stock Exchange’s market capitalization stood at Rs8.6 trillion ($82.7 billion) at the end of the week.
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MARKETS