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DECADES-OLD FINANCIAL DISCREPANCIES ENOUGH TO CONVICT? his past week the only question that persisted perplexing everyone nationwide and predominated the news channel waves was: has the Sharif’s goose been cooked? Following the damning 275-page JIT report that highlighted glaring inconsistencies in the first family’s lifestyle and declaration of wealth, all eyes are on how the Supreme Court interprets it. This week our cover story analyzes the report from a purely corporate and financial angle, to address the three issues that are at the core of this case. Is the source of income used to obtain the assets owned by the Sharif family legitimate? Are the funds used to buy those assets abroad legally transferred from Pakistan? And, the final and most tricky part, determining which of the assets are subject to how much tax and whether the family has fulfilled its tax obligations? Lack of documentation is consistent throughout the Sharif family’s presentation of their case. In addition, the stories of the immediate family (Nawaz Sharif and his children) do not add up either. Perhaps the most important piece of the puzzle is Mian Sharif, popularly known as Abbaji, who passed away over a decade back. One of the major oddities is the fact once his steel mill was nationalised, Abbaji was able to secure a loan as 100% capital investment in Gulf Steel Mills from the BCCI Dubai. That in itself is highly unlikely even for a bank as bent as the BCCI was. The story only adds to what is further deep in the realm of the ridiculous with the Sharifs’selling their stakes in the business for AED 12 million within two years. What happened to the loans? No one knows. That stash was said to be invested into a Qatari real estate business, and for the Sharif’s sky has been the limit ever since.

Profit’s research reflects one phenomenon that stares one smack in the face: the Sharif family’s mounting political clout from the mid-1980s onwards is directly proportional to the astronomical increase in their assets, here and abroad. The pattern that emerges in the research is suggestive of brazen use of power whereby the family is able to borrow large amounts from banks for their businesses – the more powerful the political office, the bigger the loans and writtenoff amounts. Aside from some misused financial terms, the JIT report still cannot pin the Sharifs down with concrete evidence, maybe for the simple reason that the abuse of power and defrauding banks are crimes extremely tough to prove anyway. How the apex court interprets the JIT’s exertions, only time will tell. Our other major story is on the Pakistani mobile phones market. The market leader in the low to mid range phones is Qmobile. It is a success story that is being taught as a case study in some of the best business schools in the world. However it is now feeling pressure from new entrants who have adopted Qmobiles strategy of aggressive marketing. There are two very prominent threats to Qmobile at the moment. One being Oppo in the smartphone market that plans to make a dent in Qmobiles higher end phone sales. Second is Nokia which has reninevented itself by aiming towards the lower end market with feature phones. We analyse whether it's is possible for Qmobile to retain its market share with two big new players and multiple smaller ones .

Babar Nizami

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Editor Reporting: Farooq Baloch l Reporters Aisha Arshad l Arshad Hussain l Usman Hanif l Syeda Masooma 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 Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: proﬁt@pakistantoday.com.pk

FROM THE MANAGING EDITOR

“Pakistan Railways exceeded its yearly targets and will achieve a revenue of more than Rs53b.” Minister for Railways Khawaja Saad Rafique

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“Energy and infrastructure projects are nearing completion, which has opened a new era of trade and industrialization in Pakistan” Minister for Planning, Development and Reform Ahsan Iqbal

is needed for the Federally Administered Tribal Areas (FATA)’s internally displaced persons’ emergency recovery after having already spent USD 12.75 million, it is learnt. FATA Development Indicators Household Survey, 2013-14 reported that the proportion of fully immunized children between 12 to 23 months is 33.9 per cent compared to the national average of 76 per cent.The percentage of stunted children children is 49 per cent as compared with that national average of 44 per cent. The security situation in the affected areas also remains an area of concern. Of the original $ 6 million, $ 3.9 million was to be allocated to KP and $ 2.1 million to FATA. As noted, an AF of $ 2.75 million was approved in June 2012, and a further AF of $4 million in January 2015. The entire grant amount of $ 12.75 million had been disbursed by closure.

$114m

slide in total exports was recorded during the financial year 2016-17 reaching $20.448 billion in (July-June) 2016-17 from $20.787 billion in the same period last year, the data released by the Pakistan Bureau of Statistic (PBS) revealed. The ministry of finance announced several exports’ incentives this year, but none of them was implemented including Rs 180 billion package to the textile industry, which was announced in January 2017. In the recently announced budget for 2017-18, the finance ministry was set to give some major incentives of rebate and Zero-rated Sales Tax, to top five important textile sectors, for enhanced exports of their products, but Ishaq Dar did not announce any of these incentives in his budget speech. On Month-on-Month basis, the country’s exports increased by 17.52 per cent and stood at $1.912 billion in June 2017 compared to $1.627 billion in May 2017, PBS data revealed. However, on year-on year basis, the exports declined by 16.16 per cent in June 2017 compared to $1.646 billion in June 2016.

1.67pc

$958m worth of loans were disbursed throughout the financial year 2016-17 by the World Bank (WB) to Pakistan. WB also didn’t approve $500m loan for energy sector reforms. In order to ease pressure on its foreign exchange reserves, the government obtained a loan worth $700m from Standard Chartered Bank at an interest rate of 4.47pc. World Bank has provided a policy based guarantee for obtaining this loan and is charging a 0.5pc a year fee for it. The overall interest rate payable on this loan would total to 4.97pc a year. Asian Development Bank (ADB) and WB had extended $2.2b loans to Pakistan for furnishing out energy sector reforms in the last three years. But WB didn’t support the sub-programme-III through which the ADB extended a $300m loan for power sector reforms last month.

BRIEFING

“Dhabeji SEZ would be a model for Pak-China industrial cooperation” Sindh Board of Investment Chairman Naheed Memon

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Rs885m

have been allocated by the Balochistan government for the fisheries sector in the current financial year 2016-17. Provincial government is taking effective steps to improve living standard of fishermen and their working conditions in Balochistan. Moreover, interest-free loans worth rupees one billion will be disbursed among fishermen. Another project of fish processing unit in Pasni will be started soon and it will cost Rs500m.

increase was recorded in the imports of tea during financial year 2016-17. Pakistan spent $ 491 million on the import of tea during last 11 months to fulfill the domestic requirements of the commodity. Roughly 187,070 metric tons of tea was imported into the country during last eleven months of current financial year as against the import of 159,003 metric tons of same period of last year. However, soyabean oil imports into the country during the period under review fell by 35.35 percent as compared with the imports of the corresponding period of last year. During the period from July-May, 2016-17, about 87,551 metric tons of soyabean oil valuing US$ 112.531 million was imported to fulfill the domestic requirements as against the imports of 134,943 metric tons valuing US$ 174.59 million during the same period of last year.

3,19pc

increase in target of meat production has been set by the government for the financial year 2017-18. The beef production targets were fixed at 2.155 million tons by increasing the average production to 9.74 per cent. He said that during the period under review, about 717,000 tons of mutton would be produced by enhancing the existing production capacity to 5.88 per cent. During the financial year, 2017-18, poultry production targets were fixed at 34.33 per cent and the produce about 1.391 million tons of poultry meat for domestic consumption, he added. Under the plan, an investment of Rs 60 billion would be made in major areas of investment including productivity increase through genetic improvement, supporting feed lot, fattening of large and small ruminants, and development of meat processing and marketing infrastructure.

13pc

Rs177b

wind power project license in Sindh province has been granted to Iran-Pakistan Wind Power Limited (IPWPL). It is one of the first major steps to promote trade ties between Iran and Pakistan after the Joint Comprehensive Plan of Action (JCPOA). The two bordering countries signed an agreement in April 2017 to open commercial bank branches to conduct trade through formal channels. ational Electric Power Regulatory Authority (Nepra), has granted the power generation license to IPWPPL for a 20-year period from the day it starts commercial operations. Pakistan is right now importing 75 MW electricity from Iran while the country has already announced its readiness to increase electricity exports to Pakistan respectively to 2000 and 3000 MW.

losses have been recorded by the Pakistan Steel Mills till now according to its officials. The liabilities of PSM have massively increased, out of which Rs14b mark-up has to be paid on a loan of Rs36b it obtained from the National Bank of Pakistan and Rs 39.4b are owed to the incumbent government. The total liabilities stand at Rs 138b. Recently, the government had given a bailout package worth Rs18.5b besides releasing Rs 8.5b for paying employee salaries. The Economic Coordination Committee revealed that PSM hadn’t been operational since June 2015 due to restricted gas supply from Sui Southern Gas Company (SSGC).

50MW

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“Devaluation has always pushed inflation higher and made common life miserable in the past.” All Pakistan Business Forum President Ibrahim Qureshi

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131pc

increase in current account (CA) deficit was recorded during July-May 2016-17. The State Bank of Pakistan revised the figures for the current account deficit (CA) which increased to $10.64b. Earlier the central bank had originally reported a CA deficit figure of $8.93b in the first 11 months of FY 2016-17, which is $1.71b less than the revised figure. The main reason attributable for the rise in CA deficit is because of debt servicing, plunging exports and due to increase in international oil prices. The deficit has gone up from 1.8pc in FY 2015-16 to 3.8pc during first 11 months of FY 2016-17 as a percentage of GDP. Total imports during FY 2016-17 amounted to $43.45b in comparison to $37.22b a year ago, rising by 16.7pc. Exports in the same period were valued at $19.78b in comparison to $20.10b during FY 2015-16, registering a fall of 1.5pc.

were remitted by overseas Pakistani workers during financial year 2016-17 down 3.1pc or $610m, compared with $19,917b received during the same period in the preceding year. During June 2017, the inflow of worker’s remittances amounted to $1.840 million, which is 1.46 per cent lower than May 2017 and 11.24 per cent lower than June 2016. The country wise details for the month of June 2017 show that inflows from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted to $438.07 million, $414.22 million, $265.37 million, $252.46 million, $232.89 million and $56.97 million respectively compared with the inflow of $582.84 million, $434.9 million, $274.1 million, $309.27 million, $232.27 million and $50.33 million respectively in June 2016. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during June 2017 amounted to $179.98 million together as against $189.37 million received in June 2016.

$19.3b

year on year growth was recorded in Pakistani auto sales excluding taxi schemes. Sales of Pak Suzuki Motor Company (PSMC) have increased by 17 per cent YoY (ex-taxi scheme) in 2016-17 due to strong sales of Wagon-R up by 37 per cent year-on-year. Also introduction of newer model of Cultus recently should support sales going forward. Sales of Honda (HCAR) have outperformed peers, posting 52 per cent YoY growth due to successful introduction of new Civic model and introduction of new SUV variant BR-V. Indus Motors (INDU) sold 59,911 units in 2016-17 down 6 per cent YoY. Although total sales have declined, focus remained on production of higher margin Fortuner, which has shown stellar growth of 128 per cent YoY. Also, buyers are postponing their purchase of Toyota corolla waiting for widely anticipated face lift of corolla in 2017-18.

14pc

worth of water being wasted annually by Pakistan said Wapda Chairman, Lt Gen (retd) Muzamil Hussain. While apprising the committee, chairman WAPDA said that albeit Pakistan receives 145 million acre feet of water every year, only 14 million acre feet of water is preserved. The cost of the NeelumJhelum power project was Rs 4 billion in the beginning. Now the project’s costs have increased to Rs 500 billion,chairman also regretted that only two dams had been built in the country over the past 70 years. Annually, about Rs 40 billion is repaid with regards to loans, of which Rs 5 billion consists of loans, while Rs 35 billion comprises annual interest payments, Hussain said. Total annual payments come to about Rs 57 billion when the project cost is added to this amount.

Rs29b

79pc

increase was recorded in oil and gas exploration in the last four years. n its stride to achieve self-sufficiency in the energy sector, the government took a number of initiatives, which resulted in drilling of 179 exploratory wells and 194 appraisal / development wells in potential areas by different E&P companies. The sources termed increased number of discoveries a ‘record’ set by the present government in a short span of four years, which so far added 944 mmcfd gas in the transmission network across the country and 32,343bopd in the domestic production. The government granted 46 exploration licences and 33 leases, carried out 25,568 L.km 2D and 19,478 sq.km 3D seismic surveys, besides it made 1,073,283 metre drillings, which is 52 percent higher than the last government’s tenure.

BRIEFING

Having dominated the Pakistani market for more than half the current decade, the local mobile giant is now facing stiff competition from new entrants, with the likes of OPPO, Infinix, Lenovo and Maxx all jostling for a larger share of the pie at its expense. Profit explores how phone makers are positioning themselves as market shifts focus to 4G â€“ the new battleground for smartphone wars

By: Farooq Baloch

hen it comes to hardware technology, one hardly finds a local brand as big as Qmobile. Regardless of which side of the argument one stands, Chinese phones imported and distributed as a Pakistani brand are a source of national pride, they canâ€™t deny one thing: Qmobile is huge a success story.

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Founded in 2009, the Karachi-based company took the market by a storm within a few years, surpassing longtime market leader Nokia to become the largest mobile phone company based on the number of handsets it sells in the country – in the process the brand earning the attention of Harvard Business School! Qmobile’s rise to fame can largely be attributed to its aggressive marketing campaigns – incorporating retail branding, product placement and brand endorsements from the hottest celebrities from across the subcontinent, the Bollywood stars included. This last, but by no means the least, to gain the maximum number of eyeballs endures.

“The recenT enTry of brands such as Xiaomi, as well as The presence of oTher chinese brands like infiniX and oppo, is providing consumers wiTh a wider choice of smarTphones aT more affordable prices”

high-end features for a pi‫מּ‬ance make it rock

Nabila Popal, Senior Research Manager at IDC

hat aside, one cannot deny Qmobile provided products with fairly highend features at prices affordable for most Pakistanis and became very popular in lower income groups, especially in the rural areas. If it were not for Qmobile, many Pakistanis would have to wait longer to buy their first smartphone. The local giant has been rocking the market for many years as none of the Chinese kickoffs that stormed the market about the same time could threaten its dominance in the country. However, things have started to change off late. With students in Cambridge studying Qmobile’s success phenomena, its leadership in Pakistan has been put to the test because some internationally estab-

lished players have entered the market with aggressive strategies, threatening the status quo for the first time in recent years. The major factor that attracted new players is a rapid consumer shift from basic feature phones to smartphones, thanks to the explosive growth in the country’s mobile broadband users, which increased from under four million before the rollout of 3G and 4G services to 41 million at the end of May 2017. The market size has also increased and varies depending on which data or study one quotes, but by most accounts, it ranges from one to two million mobile phones per month. With mobile operators selling more than a million new broadband connections every month, the demand for smart devices

has increased manifold. As a result, the smartphone penetration has reached 30 percent, up from less than 10 percent when Qmobile launched its own range of affordable smart devices. And that has changed things.

pakistan, undergoing the inevitable transition akistan is following in the footsteps of other more developed markets as it undergoes the inevitable transition from feature phones to smartphones,” says Isaac Ngatia, a research analyst at International Data Corporation, a global market intelligence firm based out of Massachusetts. This shift is being driven by rollout of supporting infrastructure and improved offers from both local and international vendors, and a general increase in smartphone demand, he says. Pakistan’s mobile phone market continued its strong growth during the first quarter of 2017, registering a year-on-year increase of 10 percent in shipments and 22 percent in value, according to IDC. Shipments of smartphones for the period increased by 28 percent, it said. This shift resulted in an influx of new players over the last couple of years. These are mostly established companies that have launched with aggressive plans and seem to be changing the market dynamics. “The Pakistan smartphone market is growing increasingly competitive,” says Nabila Popal, a senior research manager at

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IDC. “The recent entry of brands such as Xiaomi, as well as the presence of other Chinese brands like Infinix and OPPO, is providing consumers with a wider choice of smartphones at more affordable prices,” she adds. Of all the latest entrants, OPPO seems to be the most aggressive in its strategy. The company is known to have a focus on brick and mortar model with a large sales team and distribution network. According to both IDC and GFK, two multinational firms that provide market research, OPPO was one of the top four smartphone brands in Pakistan, closely following Huawei – Qmobile and

Samsung being the top two. According to the data available with Profit, Qmobile, which remains the strongest player in the entry level smartphones that sell for $100 or less, is losing ground in mid-range ($100-$250) 3G phones to OPPO and Infinix as of February 2017. “OPPO is doing what Qmobile did in the beginning,” said Parvez Iftikhar, an Islamabad-based expert on information and communications technology – in a March2016 interview with this correspondent, Iftikhar had predicted Qmobile would face stiff competition going forward once play-

THE MAJOR FACTOR THAT ATTRACTED NEW PLAYERS IS A RAPID CONSUMER SHIFT FROM BASIC FEATURE PHONES TO SMARTPHONES, THANKS TO THE EXPLOSIVE GROWTH IN THE COUNTRY’S MOBILE BROADBAND USERS, WHICH INCREASED FROM UNDER FOUR MILLION BEFORE THE ROLLOUT OF 3G AND 4G SERVICES TO 41 MILLION AT THE END OF MAY 2017

ers like Xiaomi enter Pakistan. “They have come with a strong brand and are giving good competition to the likes of Qmobile, which is very much visible,” the ICT expert said of OPPO. They are spending a lot of money to even brand small shops just like beverages giants Pepsi-co and Coca-Cola once did, he said. Closely following OPPO is Infinix, another strong contender in entry level smartphones. A market survey by Profit indicates a similar trend. The majority of the mobile phone shops Profit spoke to in Saddar’s electronics market, the largest in the city, said Infinix was one of the top competitors for Qmobile. Giving an example, Muhammad Muzzakir of Velatronic said the Infinix Hot 4 smartphone offers specs similar to that of Qmobile’s E2 but the former is much cheaper and sells more at his shop. “We haven’t received any complaints about this phone so far,” he said of Hot 4. OPPO and Infinix aren’t the only players challenging what has long been a Qmobile stronghold, Huawei and Lenovo are also aggressively competing with it in both the low and mid-range smartphones segment. A relatively new entrant, Lenovo has

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become one of the top 10 smartphone brands in the country. And it doesn’t want to stop here. “We envision positioning ourselves in the top five cell phone companies,” Sharay Shams, General Manager Lenovo Smartphones Middle East, told Profit. The company recently unveiled its Moto Z line of smartphones through its subsidiary Motorola Mobility in Pakistan and is targeting a full array of smartphone segment from $100 to $750. Smartphones remain the growth area thus the ultimate target for new players, but the feature phone segment too seems to be going through some changes, in other words, more worries for Qmobile, which controls more than half of that market.

Nokia regains lost ground fter initially losing to Qmobile, Nokia has sustained its market in the feature phones selling between $30 and $75. In fact, the Finnish giant has increased its share to more than 60 percent of the market when it comes to a price range of $30-$50 as of February 2017, up from 40 percent of the fiscal year 2016. “Qmobile is one of our major competitors,” Kamran Khan, Head of Near East for the Home of Nokia Phones (HMD) told Profit in an interview. The Nokia country head said

“WE ENVISION POSITIONING OURSELVES IN THE TOP FIVE CELL PHONE COMPANIES” Sharay Shams, General Manager Lenovo

Pakistan was among top three markets for them in the region. Nokia has relaunched its classic 3310 feature phone recently and trying to regain the market it lost earlier through various measures. The company has partnered with Jazz, the largest cellular operator in Pakistan, for the launch of its new range of smartphones including Nokia 6, Nokia 5 and Nokia 3 as well as its feature phone Nokia 3310. Under the partnership, Jazz will offer promotions to customers on these phones under the deal. The company also partnered with Zeiss for improvement of their phone’s camera technology. “Nokia’s partnership with Google and Foxconn on Android would take it one step ahead of their competitors,” Khan said talking about the company’s plans for smartphone segment. Qmobile must be watching Nokia

closely, but it has a host of other players to deal with as well. If one goes below $30, Maxx is catching up very fast and several other small players like VGO Tel, G5 and Rivo too seem to be doing well. Experts, as well as research firms like IDC, believe the feature phone segment, which has stagnated, will continue to show some resilience to smartphones in the short term. However, barring Qmobile, none of the top players seems to be competing for these low-priced phones.

Focus on 4G oth Huawei and Samsung are more focused on smartphones, saying they don’t see value in the basic feature phones. The latest shipment trends also indicate the vendors are concentrating more on the fast growing high-end segments, especially 4G. “It is important to note that market is leapfrogging to 4G-enabled handsets, with shipments of these devices up 189 percent in Q1 of 2017,” IDC said in a press release. This implies vendors are preferring to ship in 4G phones as they wait for the operators to roll out their networks while hoping consumers will experience the convenience of 4G whenever and wherever it becomes available, it said. However, that also explains the rising competition and changing dynamics of the smartphone market. For example, Huawei remains the third largest smartphone brand in the country, much like its global position, but its share in 4G segment is shrinking. OPPO, on the other hand, has done exceptionally well to become the second largest 4G brand. (Our

queries to OPPO to know their views about this and other issues were not entertained.) With competition becoming more intense, Qmobile is not the only company to take a hit. Samsung, the undisputed leader in highend phones, also got some hammering in the mid-range phones. The Korean giant saw its share in 3G phones shrunk from nearly 20 percent in September 2016 to less than 10 percent in February 2017. Samsung’s responses to our queries were awaited till the filing of this report, but an official aware of the developments in the company told Profit, Samsung is now largely aiming for the 4G market. “Consumer trend is shifting towards 4G, so overall market is gearing for a piece of it,” the official said. Requesting anonymity, he said Samsung is not bothered about the competition and welcomes it instead because it will expand the market size. The smartphone market is too small compared to regional peers, he said.

Qmobile, Samsung neck and neck oth Qmobile and Samsung market themselves as number one smartphone brand and often take a jibe at each other. Who leads the mar-

ket remains a grey area unless both the companies share their financials. The latest IDC data says Qmobile accounts for more than 50 percent of the smartphone market, while GFK studies reflect Samsung has its nose in front with a slight lead over the former in volume and is much ahead of them in value. Both of them dominate in one way or the other, but barring some competition in the mid-range phones, the two have not been competing directly. And this is evident from the fact that Samsung is increasingly focused on the high-end 4G market while low-priced feature phones and entrylevel smartphones remain Qmobile’s stronghold. With new entrants challenging the status quo, Samsung seems to be playing on its strength by moving focus to 4G segment – this may have come at the expense of mid-range 3G phones though. On the other hand, Huawei, which entered the market much ahead of OPPO, Infinix and Xiaomi, denied comment on rising competition from OPPO in 4G segment. As far as Qmobile is concerned, it will be challenging for the local giant to weather the storm, for it wasn’t really targeting the high-end market in the first

“THE RECENT ENTRY OF BRANDS SUCH AS XIAOMI, AS WELL AS THE PRESENCE OF OTHER CHINESE BRANDS LIKE INFINIX AND OPPO, IS PROVIDING CONSUMERS WITH A WIDER CHOICE OF SMARTPHONES AT MORE AFFORDABLE PRICES” Nabila Popal, Senior Research Manager at IDC

place. The local giant had a small share in 4G phones, and that too seems to be shrinking over the past few months. As competition in entry-level and mid-range smartphones intensify, can the local giant prevent its Iron Grip on the market from slipping away? “We are still the largest smartphone brand in the country,” Group Director Qmobile Zeeshan Qureshi said adding the company was selling more than 300,000 smartphones per month. “The resale value of Qmobile is also very high, one of the reasons for the brand’s success.” The NUST graduate disagreed Qmobile was losing market to new players. Private studies, such as that of GFK don’t provide correct estimates because of their limited reach, he said.

High taxation encourages smuggling ftikhar, the ICT expert seconded Qureshi but added no private study can fully document the market as not all players import all of their phones legally. In fact, according to Iftikhar and some industry sources, the import data provided by customs authorities may also not provide the exact figures. “I think about half of the market is not importing legally. Since the government increased taxes on import of mobile phones, the smuggling or grey market has increased,” Iftikhar said.

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High taxation on import of mobile phones remains a major problem for every single player in the market, and more so for those importing feature phones. The government imposed import duty Rs650 on low-end smartphones in the latest budget, which is in addition to a regulatory duty of Rs250. “If an importer evades Rs1,000 tax on a single smartphone, and pays Rs200 per phone to a Khepia, imagine how much that translates to his profit on a Khep of thousands of mobiles,” Iftikhar said explaining how taxation results in grey market expansion There has been a 123 percent increase in taxes over mobile phones, which benefits the grey market and create problems for legitimate industry, Qureshi said adding the government should reduce taxes to encourage legal imports.

The ‘selfie aspect’ hile he disagreed with the findings of the private study, which show newer players gaining more ground in the market, Qureshi admitted they were little late to respond to a paradigm shift in the market: ‘the selfie aspect’. Qmobile has overcome that issue with its new range of smartphones A Series and X Series, two of their aggressive product launches, he said. Responding to a question about Nokia, Qureshi said they don’t see it as a comeback. “Nokia has always remained strong in that segment, selling 150,000 to 200,000 units,” he said. Let alone losing the market, the company’s group director said they are going to launch some new products, including LED lightings and TVs. However, the local giant doesn’t seem to ignore the fact that the market is shifting

to 4G. It has entered a partnership with Telenor Pakistan, the second largest cellular operator, for larger 4G penetration in the country. That said, it won’t be a smooth selling for any brand to dominate in the 4G segment, the new battlefield for smartphones. With competition so intense, no player seems to be taking it lightly. “4G hasn’t penetrated many areas of Pakistan, but by the time it comes online, this turns into a potential market for smartParvez Iftikhar, Islamabad-based expert on phone makers,” said Shams of Lenovo, information and communications technology which has partnered with the logistics giant Muller and Phipps (M&P) and Mobile Sales and Distribution to reach far-flung selfie aspect. Qmobile has overcome that areas of the country. issue with its new range of smartphones A A large geographical area of Pakistan Series and X Series, two of their aggressive still lacks 4G coverage but most brands are product launches, he said. already positioning themselves towards 4G Responding to a question about market, the area where most of the growth Nokia, Qureshi said they don’t see it as a is expected to come. comeback. “Nokia has always remained Smartphone shipments, which were strong in that segment, selling 150,000 to 50 percent of the total imports in the first 200,000 units,” he said. Let alone losing quarter, will increase by 21 percent for the market, the company’s Group Director 2017, IDC says. “Expansion of the counsaid they are going to launch some new try’s 4G network coupled with the shipment products, including LED lightings and TVs. of 4G-compliant devices will be the key However, the local giant doesn’t seem to factors fueling this growth,” it adds.lates to ignore the fact that the market is shifting to his profit on a Khep of thousands of mo4G. It has entered a partnership with Tebiles,” Iftikhar said explaining how taxalenor Pakistan, the second largest cellular tion results in grey market expansion. operator, for larger 4G penetration in the There has been a 123 percent increase country. That said, it won’t be a smooth in taxes over mobile phones, this benefits selling for any brand to dominate in the 4G the grey market and creates problems for segment, the new battlefield for smartlegitimate industry, Qureshi said adding the phones. With competition so intense, no government should reduce taxes to encourplayer seems to be taking it lightly. age legal imports. “4G hasn’t penetrated many areas of While he disagreed with the findings Pakistan, but by the time it comes online, of the private study, which show newer this turns into a potential market for smartplayers gaining more ground in the market, phone makers,” said Shams of Lenovo, Qureshi admitted they were little late to rewhich has partnered with the logistics giant spond to a paradigm shift in the market: the Muller and Phipps (M&P) and Mobile Sales and Distribution to reach far-flung areas of the country. A large geographical area of Pakistan still lacks 4G coverage, but most brands are already positioning themselves towards 4G market, the area where most of the growth is expected to come. Smartphone shipments, which were 50 percent of the total imports in the first quarter, will increase by 21 percent for 2017, IDC says. “Expansion of the country’s 4G network coupled with the shipment of 4G-compliant devices will be the key factors fueling this growth,” it adds. n

“QMOBILE ARE SPENDING A LOT OF MONEY TO EVEN BRAND SMALL SHOPS JUST LIKE BEVERAGES GIANTS PEPSI-CO AND COCA-COLA ONCE DID”

‘AFTER LOSING TO QMOBILE INITIALLY, NOKIA HAS SUSTAINED ITS MARKET IN THE FEATURE PHONES SELLING BETWEEN $30 AND $75. IN FACT, THE FINNISH GIANT HAS INCREASED ITS SHARE TO MORE THAN 60 PERCENT OF THE MARKET WHEN IT COMES TO A PRICE RANGE OF $30-$50 AS OF FEBRUARY 2017, UP FROM 40 PERCENT OF THE FISCAL YEAR 2016’ 18

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Secret Stash, moving pricey acquis itio at a discount – with both buyers an ns from one t d selle rs bein o another g winn By: Aisha Arshad ers

‘I

n business you don’t have to acquire a huge number of clients to be successful,’ this is the simple philosophy of Secret Stash – an online clothes and accessories buy-and-sell platform targeting a niche market.

But what is so niche about a website that sells clothes like any other in the age of digitalization when there are hundreds of others doing the same thing?, one may ask. To find out more about this startup that deals with a narrow market – and is happy to do so, Profit sat down with Nazish Hussain. Defining her three-year old venture, Nazish says: “Secret Stash is Pakistan’s premier online website where you can buy and sell high-end designer items at a discounted price, anonymously.” An alumni of George Washington University, from where she did her graduation Hussain’s corporate career revolved around top multinational

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like P&G and Unilever, where she has worked – and ‘loved’ doing it – in advertising, digital media and communications departments. Her career was progressing smoothly, just as she had imagined while growing up in an entrepreneurial family where her father owned his business while her mother ran her private school. Hussain never aspired to have a business of her own.

‘KNOWING THE PSYCHE OF THE PEOPLE SHE WAS TO DEAL WITH, SHE INTRODUCED THE ANONYMITY OPTION. THAT HELPED HER GAIN CUSTOMERS SOON ENOUGH’ 19

Stumbling on the idea fter six years in the corporate world, she travelled over to San Francisco, on a vacation. Strolling and browsing in the streets of the City by the Bay, she stumbled upon an unexpected idea for a startup – to open a store where used high-end designer products could be sold for lower than the market price. “They have a lot of high-end vintage stores over there and it’s a really interesting concept,” said the entrepreneur. “I was thinking, oh, it’s so interesting, as the buyer has the option of going for designer stuff at a discount and the seller had the opportunity to divest it for cash. Why have we nothing like that in Pakistan, I wondered,” said she, reflecting on the seminal idea.After the vacation, Nazish went back to her work but the thought of setting up a local high-end store that sells used items stayed with her. Finally, after speaking to numerous colleagues and friends about her idea’s feasibility and many positive responses, she quit her job in March 2014 and commenced work on building her vintage store in the country. Her own experience in digital media, and the emergence of many e-commerce players in the market, motivated Hussain to set up online venture. In December 2014, ‘Secret Stash’ was launched, targeting a very select yet strong market.

The big ‘niche’ ou have to remember that in 2014 the ecommerce landscape was very different and still very new

“Y

compared to now,” said the 33-year old. The designer wear is a much-hyped segment of Pakistan’s retail market, with the lawn alone as big as Rs40 billion, the whole idea of buying slightly used items – although high-end – or selling your own designer goods was entirely new. Hence, not a very large group was going to go for it. “The idea was not to obtain big numbers. I wanted Secret Stash to stay niche and in all honesty in a country of 200 million people if you target just one per cent, it’s still two million people.”

‘THE IDEA WAS NOT TO OBTAIN BIG NUMBERS. I WANTED SECRET STASH TO STAY NICHE AND IN ALL HONESTY IN A COUNTRY OF 200 MILLION PEOPLE IF YOU TARGET JUST ONE PER CENT, IT’S STILL TWO MILLION PEOPLE’ 20

Working within the constraints azish knew the constraints that limited her startup’s functionality, but she was more than ready to tackle them. “One of the things that I realized about our society was that people were very concerned about other people’s opinion. The idea that what I am wearing is old or someone else’s, a lot of people do not want anyone to know that,” said Nazish. Knowing the psyche of the people she was to deal with, she introduced the anonymity option. That helped her gain customers soon enough. Now, as Secret Stash’s website clearly mentions, the buyer and the seller both need not know of the other party and the deal is only through the entrepreneur that verifies both of them.

Another major limitation was that not many people seemed interested in buying a very expensive yet second-hand product. Nazish was not even going to target that segment – her core target audience and focus was entirely different, as she had decided to cater exclusively to the ones who were ‘interested’. “A lot of people aspire to own a certain thing [designer], but maybe they do not have that kind of budget; so it affords them an option of possessing what they desire of but at a fraction of the price,” said Nazish. So how does Secret Stash work? Like any regular ecommerce website, an order can be placed on Secret Stash for the slightly used designer product – which has a detailed description including its imperfections (if any) as well. Once Secret Stash receives the order, a confirmation call is made, and following that the product is delivered within 3-4 working days. Additionally, for a client in Karachi an additional option is available; they can visit the store in-person and check the product firsthand before buying it. A flat 20% commission is what Secret Stash charges on successful sale of each item.

Spread its wings wider

aving run the startup for almost three years, and having built a sizable clientele across many cities locally, Secret Stash is now

“SECRET STASH IS PAKISTAN’S PREMIER ONLINE WEBSITE WHERE YOU CAN BUY AND SELL HIGH-END DESIGNER ITEMS AT A DISCOUNTED PRICE, ANONYMOUSLY” Nazish Hussain, Founder & Sole Proprietor, Secret Stash spreading her wings wider, by entering into export – embarking on it only recently when she dispatched a shipment to India. When one asked Nazish where her buyers mostly came from, she mentioned far-off upcountry places in the Punjab and the KPK – making it evident that the lady entrepreneur has hit the right chord with upscale buyers. “Karachi is largest in terms of both buyers and sellers, but Lahore, Islamabad and Rawalpindi have a very high number of buyers who order regularly from us,” said she, speaking of her core customers. One of the foremost reasons why Nazish has been able to attain a significant number of patrons is her commitment to maintaining quality. To this end, all sellers are required to first send the product to Karachi – where

‘THE DESIGNER WEAR IS A MUCH-HYPED SEGMENT OF PAKISTAN’S RETAIL MARKET, WITH THE DESIGNER LAWN ALONE AS BIG AS RS40 BILLION, THE WHOLE IDEA OF BUYING SLIGHTLY USED ITEMS – ALTHOUGH HIGH-END – OR SELLING YOUR OWN DESIGNER GOODS WAS ENTIRELY NEW’

Secret Stash is based at – and only after examining the product firsthand for its originality and condition it’s uploaded on the website for sale. And what if a product is not sold? If a product is not sold out within 30 days, Secret Stash discusses it with the seller as to what should be done and whether price should be brought down further. In case the product still doesn’t get the required attention, Secret Stash returns the product to its original owner after a period of two weeks without the latter losing any money in the process. Having secured a customer base, Nazish maintains Secret Stash still has a long way to go. With her growing recognition in the market – something she cherishes as her “biggest success” – she aspires for Secret Stash to be recognized internationally as Pakistan’s one-of-its-kind store. Until that transpires, she is content with doubling her clientele year-on-year locally. n

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THE MOST OMINOUS PART OF THE REPORT COMES IN PAGES 209 THROUGH 228, WHEN THE JIT LAYS OUT DOCUMENTATION ABOUT THE PRIME MINISTER’S INVOLVEMENT IN THE FAMILY BUSINESS AND UTILIZES ANNUAL ACCOUNTS OF THE COMPANIES THE FAMILY OWNS AS WELL AS THE PRIME MINISTER’S INCOME TAX AND WEALTH TAX (NOW DEFUNCT) STATEMENTS

COVER STORY

By: Farooq Tirmizi

THE EMPIRE THAT NAWAZ BUILT: An economic and financial analysis of the JIT report COVER STORY

he final report of the Joint Investigation Team (JIT) into Prime Minister Nawaz Sharif and his family’s foreign assets (the “Panama Case”) is the ultimate Rorschach test of Pakistani politics. The PML-N supporters see a conspiracy to destroy their party. The PTI supporters see a chance to clean up national politics. The PPP supporters are wary of the influence of the anti-democratic element of the establishment in the JIT hearings, even if they are not directly sympathetic to the PM. And we at Profit, financial news aficionados that we are, see a chance to answer a question that has burning in our minds: how rich is the Sharif family and how did they get there? Most elements of the JIT report have been already picked apart from the legal and political angles. The economic angle, however, has largely remained unanalyzed. We believe this is a pity: the JIT report is fundamentally an examination of a family business’ assets and finances. It is also a unique opportunity for the people of Pakistan to understand how the wealthy but un-corporatized elite of Pakistan actually manages their businesses. And much more interestingly, what is the exact mechanism through which political power or connections can be translated into financial wealth? Our analysis digs into these and other relevant questions with respect to the nexus between power and money as it relates to the Sharif family. We would like to add the caveat that our analysis relies entirely on the data presented in the final JIT report. We have not independently examined financials from the Sharif family businesses or other related entities. Specifically, our analysis examines the credibility (or lack thereof) of the Sharif family’s claims from a business perspective. We then try to understand the most likely scenario as far as the true source of the Sharif family’s wealth, leaning on data provided in the JIT report, but also adding our own independent analysis of the same data. We then examine what those insights – both the disputed and undisputed accounts of the Sharif family business – mean insofar as how wealthy, powerful families operate their commercial enterprises. Finally, we make estimates on what we think is the net worth of the prime minister and his family, and what their future is likely to be from a

business perspective.

The undisputed facts e start, however, by recounting what we know about the family and factors that are not in dispute. It is now accepted both by the Sharif family and the government’s investigators that the family owns four apartments on Park Lane in London’s tony Mayfair neighbourhood. The precise apartment numbers are not in doubt, neither that the family has had use of those apartments since at least the mid-1990s (the precise date from when the family owned the apartments initially is in dispute though.) What is also not in dispute is that in addition to a paper mill, a textile mill, two sugar mills, and an assortment of small businesses inside Pakistan, the Sharif family owns a steel mill in Jeddah, Saudi Arabia as well as significant real estate holdings in London and possibly other parts of the UK. The family also owns a company based in the UAE. What is disputed, however, is which family members own exactly how much of what. And most crucially, how did they get the money to buy all of these assets in the first place? Beyond this narrow set of facts, virtually everything else is disputed, with the Sharif family presenting one view – albeit a poorly documented one – and the JIT taking

strong exception to the lack of documentation, or even allegedly fabricated documentation, to prove sources and uses of the family’s wealth.

The Sharif family version of the story t stake are three separate but intertwined legal issues. The first is whether the source of income used to obtain the assets owned by the Sharif family is legitimate. The second is whether the funds to purchase those assets were legally repatriated. Both of these two issues are addressed in some detail in the JIT report. A third issue that is not as well discussed is how much of the income derived from the assets owned by the Sharif family is subject to taxation and whether they have been fulfilling their tax obligations. The Sharif family has to prove that the answers to all three questions are above board: the source of wealth used to purchase the assets was legitimate, that the channels used to move money outside Pakistan were legal, and that they paid any and all taxes owed on income generated from those assets. The first thing to know about the Sharif family version of the story is that there is no family version of the story. Each family member appears to state something different from all of the others, and while

some family members agree on some matters, there is hardly any matter on which all family members can agree on a single version of the facts. To make matters worse, most family members have trouble agreeing with themselves, submitting one version of events in their written testimony and evidence submissions and then contradicting themselves when they appeared before the JIT in person. Broadly speaking, however, the family appears to agree with a few basic statements. In a nutshell, the story as far as the Sharif family is concerned starts with Mian Muhammad Sharif, the prime minister’s late father, known fondly by the family as Abbaji, who was a mildly successful entrepreneur in Punjab in the 1960s and early 1970s, with a thriving steel business, prior to nationalisation. The family provided wealth statements from 1970 that state that Abbaji’s net worth in that year was over Rs1 million (about Rs54 million in inflation adjusted terms in 2017). That would make him comfortably upper middle class in Pakistan in that era and start to bump into the lower end of the country’s economic elite. The story gets murkier from there. At some point in the late 1970s, Abbaji decided to set up a steel mill in Dubai and started the business in 1978 called Gulf Steel Mill. The family claims that the entirety of the startup capital for that business came from a loan from the Dubai branch of the Bank of Credit and Commerce International (BCCI). This seems like a particularly convenient explanation, since it would mean that no money ever left Pakistan and the Sharif family would not have to explain how they got around Pakistan’s then-highly stringent capital control regulations which made it all but impossible to legally move money out of the country. It is also a proposition so unlikely as to border on the absurd and the JIT regards it as such. No bank in their right mind – not even one as crooked as the BCCI – would provide a loan to start a business when the owners of the business are putting up none of their own money into it. That is a surefire way to start losing money. The family does not offer any documentary evidence that such a loan ever existed. The story, however, only gets more fantastical from there. The Sharif family then claims that they were able to sell their stake in that business for a profit of AED 12

million within two years. When asked about what happened to the loans on the business, the family and its surrogates admit that part of the amount was used to pay off loans, meaning that the profit – if such a sale happened at all – was far less than that amount. The JIT used the Sharif family’s own declarations of Gulf Steel Mills’ liabilities and calculated that the AED 12 million amount would not even cover all of the debt the Sharifs had taken on to set up the business (itself a questionable assertion). The Sharifs admit the company did not earn a profit during the two years they owned it, which means the loans could not have been paid off through the profits either. So to recap so far: Mian Sharif set up a steel mill in Dubai in 1978 with 100% borrowed money from the BCCI. The steel mill did not make any profits during the time the

family owned it, and they sold it in two years for a price of AED 12 million, yet despite not having paid off any of the loans through the company’s operating cash flow, the family was left with the full AED 12 million as a profit. Sounds ridiculous? Oh, we have only just begun. That AED 12 million was then reinvested in the real estate business run by a member of the extended Qatari royal family, Hammad Bin Jassim bin Jaber Al-Thani. Now, that assertion unto itself would not sound so unbelievable, but the family produced no hard evidence that such a transaction ever happened, except two letters from Al-Thani himself, which appear to contradict each other, at times within a span of two paragraphs. That is not even the most astounding

COVER STORY

assertion. What gets interesting is the reason they used those letters as proof: because the family claims that AED 12 million ($3.3 million in 1980 or about the equivalent of $9.7 in 2017, adjusted for inflation) was transferred in cash and no written documentation was kept by either party. This is chalked up to “cultural traditions in the Middle East at the time” despite the family admitting that they used cheques for transactions exceeding a few thousand dollars even in the 1970s in the UAE. This is the point where the math starts to get fuzzier. According to the Sharif family’s assertions before the JIT, that AED 12 million investment grew so rapidly that they were able to buy high-end apartments for themselves in London, set up a much larger steel mill in Saudi Arabia, and launch a huge real estate investment business in the UK. The Sharif family’s investment in AlThani’s business is either one of the most successful investments in Pakistani business history, or they are fabricating this story to cover up the true source of funds used by the family for their asset purchases and investments outside Pakistan. The JIT appears to be utterly convinced it is the latter and they offer some evidence to back up that assertion.

The JIT report’s version of events he JIT does not explicitly state what it believes happened in reality, largely because it does not have sufficient direct evidence on the matter. The investigators have just been able to establish that much of what the Sharif family is stated is false, but that does not mean they know yet what is true. (It does not help that the JIT report appears to be written by somebody who clearly does not know how to read financial documents. They keep referring to needing to ascertain the source of each of the Sharif family companies’ “working capital” even though they are obviously referring to “paid in capital”. The distinction may not sound meaningful, but a financial inquiry should involve financial experts who do not make elementary mistakes like that. There are also other instances where the JIT appears to not fully grasp the importance of certain financial terms or tactics.) There is, however, some compelling

circumstantial evidence as to how the Sharif family may have actually financed their investments abroad. And this is where the story gets highly complicated. Since this is the part where the JIT does not offer explanations, we have applied our own analysis on the JIT’s data to come up with what we believe is a plausible – and perhaps even the most likely – picture of what happened. To understand how the Sharif family’s assets build-up, it is first necessary to look at how the family transfers money between companies and between family members: they almost always use the term “gifts” for transfers between family members (or more recently, “remittances”) and they use intercorporate loans to transfer money between companies. This is highly significant, not

just because it explains how the family runs the business but provides a clue into how they might have acquired the money to build those businesses in the first place. The first clue was buried deep inside the JIT report on page 133, where the JIT notes that the Hill Metals Establishment (the family’s steel mill in Saudi Arabia, set up in 2006, in Jeddah) repeatedly sends payments to Prime Minister Nawaz Sharif in amounts that very much look like regular dividends, despite the fact that HME was set up using loans that have covenants explicitly restricting dividends to far lower than the amounts paid out. That led us to believe that the Sharif family, much like many other family businesses around the world – were mixing personal expenses with business expenses. HME called its payments to the prime

minister “gifts” because it could not call them dividends without running afoul of the loan covenants it had signed to finance part of the business. A more likely scenario is that the “gifts” likely appear on HME’s financial statements as some sort of business expense, which would make them tax-exempt and lower the company’s overall tax liability. That little bit of circumstantial evidence gives us insight into potentially one way the Sharif family extracts money from its businesses while minimising tax liability: make payments to its principal investors into something that resembles a business expense on the company’s financial statements. That may sound unsavoury and unethical, but it is not necessarily illegal, depending on how those payments are structured. The second way appears to be intercorporate loans, which have two big advantages, the first of which is taxes. Say Company A invests money in Company B. If the money is an equity investment, the only way to move money back to Company A would be through dividends, which are, by definition, a post-tax transfer of funds. However, if the same amount of money is moved as a loan, the interest can move back to Company A as a taxexempt payment (though the principal repayments would still have to be post-tax). A clue into the how this might be a preferred methodology for the Sharif family business comes in page 140 of the JIT report, which describes how Hasan Nawaz, the prime minister’s son, uses loans to invest in his real estate business rather than making equity investments. Mind you, his business is not providing debt financing for real estate. He raises that separately through British banks and financial institutions. He just structures even his equity investments in those properties as a debt transaction. This use of debt comes up again and again throughout the report.

The ominous part gain, the use of intercorporate loans between group companies is not necessarily illegal, or even immoral for that matter. There can be many legitimate uses of this technique. However, taken together with another JIT insight about the Sharif family’s businesses, this can start to look more ominous, while at the same time providing a picture of the true source of the family’s spectacular increase in wealth.

‘BEYOND THE NARROW SET OF FACTS, VIRTUALLY EVERYTHING ELSE IS DISPUTED, WITH THE SHARIF FAMILY PRESENTING ONE VIEW – ALBEIT A POORLY DOCUMENTED ONE – AND THE JIT TAKING STRONG EXCEPTION TO THE LACK OF DOCUMENTATION, OR EVEN ALLEGEDLY FABRICATED DOCUMENTATION, TO PROVE SOURCES AND USES OF THE FAMILY’S WEALTH’ The most ominous part of the report comes in pages 209 through 228, when the JIT lays out documentation about the prime minister’s involvement in the family business and utilises annual accounts of the companies the family owns as well as the prime minister’s income tax and wealth tax (now defunct) statements. The businesses seem ordinary and – frankly – not very well run. Most of them seem like relatively small businesses when you consider their total revenues or net income, but that is not the part one needs to focus attention on. The most relevant detail from those financials is the total amount of debt outstanding in those companies, specifically the size of the debt relative to paid-up capital, how that debt changes over time, and when exactly that debt rises. The most glaring example of this is Ittefaq Brothers (Pvt) Ltd (described on page 212 of the JIT report). A company with a paid-up capital of Rs1.15 million, Ittefaq Brothers had loans outstanding of Rs2 million in 1980, shortly before the family started coming to the fore in national politics. A Rs2 million loan on a company with that kind of paid-up capital is normal and perfectly acceptable. By 1981, however, just as the Sharif family started getting close to the corridors of power, that loan number shot up to Rs15 million. By 1990, at which point Nawaz had been Punjab chief minister for five years, the amount of loans outstanding were Rs236 million (approximately $11 million based on the exchange rate at the time and worth approximately $20 million today, adjusting for inflation). Miraculously, however, in 1991, the year Nawaz took office as prime minister for the first time, the loans vanished from the company’s books. One of two things is possible: either the company is horrendously bad at keeping its books, or, more likely, the family used Nawaz’s newfound political influence to get

itself loans far in excess of what might be considered normal for a business that size. And once he reached the peak of his political influence, he may have “persuaded” the banks to write-off the loans. Ittefaq Brothers may be the most egregious example, but it is by no means the only one. In company after company, the Sharif family saw their ability to borrow from banks dramatically increase as their political stature grew. And in more cases than one, the loans had a tendency of being written off or otherwise vanishing from the companies’ balance sheets. And shortly thereafter, the family would be seen to be in possession of assets outside Pakistan. Within three years of the Ittefaq Brothers’ loans disappearing, the Sharif family were seen using their Park Lane apartments in London. It must be stated categorically that there is no direct evidence that the Sharif family abused their political power to get loans or have them written off, and government investigations have lasted almost two decades trying to prove that case and have thus far not succeeded. There is also no proof that the amount of money written off was sent abroad, or constitutes the source of funds for the family’s foreign assets, and once again, this would be a nearly-impossible case to prove.

The bad news buried in the evidence f, however, the circumstantial evidence is pointing us in the right direction, then we as a nation face a problem. The problem is that the crime allegedly committed by the prime minister and his family is the abuse of power and bank fraud, two cases that would be extremely difficult to prove. It would have to be proven beyond a

COVER STORY

reasonable doubt (and not just using circumstantial evidence) that the prime minister made an active effort to exert pressure on bank officials to extend loans to companies owned by his family. It would be equally hard to prove that the loans were then written off under political pressure, and not, say because the businesses went bankrupt because the family that supposedly runs them is too busy running the country. It seems difficult, if not outright impossible, to prove intent in both of those cases because they are both fundamentally crimes of intention. That leaves the prosecutors with the somewhat more manageable, but still not easy, the task of trying to prove that the money was moved outside the country illegally. And while Pakistan still imposes some restrictions on citizens moving money out of the country, it is not a law that the government is particularly enthusiastic about and even the JIT does not seem to endorse going down that path. The logic here is this: “if I earned my money legally, and paid taxes on it, I should then be allowed to invest it wherever I want, including outside the country.” In short, the prosecutor must either try to make the impossible – but morally defensible – case for abuse of power, or else try to put people behind bars for a different crime by choosing to prosecute on the basis of a law that the government is already weakening and may soon abolish. It is not an easy choice and we do not envy the JIT or the Supreme Court.

So how much is the prime minister’s net worth? eaving aside the legal questions of how the case might proceed, it is interesting to try to determine just how much wealth the prime minister actually has. In order to estimate this, we will rely on the two companies that the PM and his family have the most documentation about – Hill Metals Establishment, and Flagship Investments Ltd (the UK real estate company). Both companies produce about $2-3 million in cash flows each year, according to the limited financial data made available to the JIT. Assuming the high end of that for each year for both companies, and applying a multiple of 10 for the total company valuation (high for most types of

‘THE FAMILY’S PAKISTANI COMPANIES ARE HARDER TO VALUE… BUT ONE CANNOT IMAGINE THEM BEING WORTH MUCH MORE THAN THE REAL ESTATE, SUGGESTING THAT THE PRIME MINISTER AND HIS IMMEDIATE FAMILY HAVE A NET WORTH PERHAPS JUST NORTH OF $110 MILLION. THIS, OF COURSE, IS A VERY ROUGH ESTIMATE SINCE THE DATA THAT WE WOULD NEED TO PRODUCE A MORE PRECISE CALCULATION IS SIMPLY NOT AVAILABLE’ companies), we get a valuation of approximately $60 million. Add in the value of the family’s real estate at around $25 million, and one gets a number of $85 million. The family’s Pakistani companies are harder to value since they frequently do not produce reliable financial statements, but one cannot imagine them being worth much more than the real estate, suggesting that the prime minister and his immediate family have a net worth perhaps just north of $110 million. This, of course, is a very rough estimate since so much of the data that we would need to produce a more precise calculation is simply not available.

A bleak outlook otice how, in the beginning of this article, we stated that a look at the Sharif family represents a look at the “un-corporatised” economic elite of Pakistan. That is because many of the wealthiest Pakistanis are increasingly turning to creating more professional corporate structures for their businesses, even as they choose to retain many of the seth-like culture of management. The Sharif family is different in that they appear to have not made any effort to corporatize their businesses at all. Indeed, the fact that the family cannot agree on who owns which part of the business (there is a document that outlines the split after Abbaji died, but the details get murky for businesses that were built after his passing) suggests that they have not thought a lot of details through. That can be fine so long as a strong patriarch like Abbaji is around to keep his sons in check. But Abbaji passed away over a decade ago, in 2004, and the family is al-

ready splitting up. For instance, Shahbaz Sharif and his sons have completely separated their businesses from Nawaz and his children since at least 2009. (Interestingly, the JIT seems to go out of its way to go soft on Shahbaz Sharif: on at least eight occasions, it chooses to either believe Shahbaz’s version of a story if there is a contradiction with another family member, or else not admonish him for any failure to produce documentation, a crime for which it viciously lambasts everyone on the Nawaz side of the family.) And if Nawaz and his children do not choose to adopt a more professional management style soon, their family business may face even greater risks than their family’s political prospects.

The wrongheaded focus on Maryam Nawaz ne last bit: the recent focus on Maryam Nawaz as a potential culprit appears to be misguided: the Sharif family appears to practice the sexist Pakistani tradition of forcing female family members to “voluntarily surrender” their inheritance in the family business to their male relatives. Female family members are compensated for this loss of economic control by being given ownership over the urban real estate, which is most likely why Maryam’s name appears on many of the ownership documents for the London apartments. Just because her name is on record there, however, does not mean she has any idea where the money came from. She is from a family that actively goes out of its way to economically disempower women. Holding her responsible for the money trail of those apartments seems misguided.

COVER STORY

He does not believe in fancy titles, and in one of the companies he is associated with, he is called Chief Disaster Officer By: Masooma Syeda

EDUCATION

artner in four successful businesses, with two more in the pipeline, he is a family man who makes it a point to see his three year old daughter at least three to four times a day. Born in the UK, and spending his early years in Yorkshire before moving to Lahore, he speaks fluent english and Punjabi with a British accent. an alumnus of aitchison College and Lahore University of Management Sciences, he believes that it is the parents’ and not the schools’ responsibility to ensure that students are not conceited. He doesn’t hesitate to blacklist

clients who cancel his contracts but is quick to forgive when they apologize without putting them through egotistical rides. He is infuriated at his former business partner for cheating in business, but is meticulous to never mention the name of the company or the person while narrating his story. He makes quarter of a billion rupees a year and shows up to work in jeans and slightly wrinkled t-shirt. His actual designation in one of his businesses is ‘Chief Disaster Officer’ but he prefers to be called the ‘People Manager’. His name is arif Jalil Piracha, partner-owner of SmartPrep, Klockwork, MaP, and naina.

SmartPrep is a standardized test preparation service provider based out of Lahore. According to Arif, it is the lowest priced service available to students, with additional cost advantages to students belonging to certain schools in exclusive contracts with SmartPrep. “My partner still has serious reservations about this but my take is that if you are good to your cause, if your intentions are good, and if you are good at what you are doing then money is always secondary. It’s a good business but there is also the aspect of giving back to society.” He insists that financial soundness should not be the only determinant for a student’s success. “If someone is from a less privileged background the only thing weaker in them could be their communication skills. But they will be harder working, and they will be more dedicated and they will grow.” He laments that students that come out of privileged schools go abroad and create brain drain but such students are less likely to leave the country. “If we are able to educate them, they will remain in the country and these are the people who will make this country the success that it should be.” In addition to the claims of being the lowest priced, Arif is also convinced that he is the market leader. “Firstly it’s obviously the gut feeling. Secondly, our presence in institutions is higher than anyone else. We have exclusive contracts with most of the schools in Lahore here which means that those schools will not go to any other organization and finally, we also have basic benchmark for the volumes that people are

doing and our volumes are much higher than them.” He, however, has no empirical evidence about his market share. “It is difficult to estimate that because there is no proper data available.” He also thinks SmartPrep is better because it is designed in a way to live irrespectively of its owners. “In other test prep organizations, owners are also the teachers. Our main

competitor was LEADS academy, and when unfortunately its owner [Mehmood] passed away, the company also went to the dogs. In our case, I don’t teach even though I can. We have proper staff and we have been able to build a brand where we continuously hire teachers, train them, and constantly rehire to replace those who have left. If I teach, it’s only because it is a passion, not because I have to.”

Elaborating on his role as the owner and manager of this business, he said, “I would introduce myself as a people manager. I manage our clients, vendors, staff, products, services etc.” He said cheekily that in Pakistan people give themselves fancy titles even though these do not fit or explain their actual jobs. “At my wife’s company [Naina – a bridal clothing manufacturer] my designation is Chief Disaster Officer, and many people get upset about it. But it fits me very well because whenever there is a problem, I am there to solve it.” Elaborating on his business practices, he said “There are limited seats for students, and we operate with the idea that we are not hungry for money, but we are hungry to teach. So in every batch when the number of students reach let’s say 16 or 17, we stop taking more children.” Despite this restriction, the fees that he charges, also lower than many of his competitors, are enough to cover his primary cost of teacher’s salaries, overheads and still leave enough to be added to his profit. There is no uniform measure of deciding fees in SmartPrep. For students coming from affiliated schools, that include Aitchison College, Grammar Schools, Learning Alliance, SICAS etc. the fees are lower, while students from any other institution have to pay higher. On average for an SAT prep course, he charges Rs 15,000. This model seems to be working well for Arif as he noted, “No one in the industry is going to share their profit margins with you, but we make about 300-400 percent. 10 percent of our revenues cover our primary costs, 10 to 15 percent goes into overheads.” SmartPrep is not the only initiative Arif has taken for education. He is also in the process of opening up a state of the art school with technological integration, whose name he has not decided yet. “It is

‘FINANCIAL SOUNDNESS SHOULD NOT BE THE ONLY DETERMINANT FOR A STUDENT’S SUCCESS.’ Arif Jalil Piracha, SmartPrep owner-partner going to be a very big school and we won’t be competing with Learning Alliance or grammar schools etc. We will have heavy integration of technology and provide students with tablets and everything. We will also be catering to under-privileged children if they clear our assessment test, which would be based on international standards and would not be entirely written.” He wouldn’t share the name of his partner but his choice of words let out as much that it’s a woman. He, however, said that his partner is a person of means, enough to fulfill the financing needs for this “3 to 4 billion rupees project.” The leadership team for the school has already been put in place, but the school is expected to become operational by 2020 and will offer Class 1 to A-Levels. He believes that there is an inherent flaw in the country’s education system and he aims to bring an institution rectifying those shortcomings. “The reason we are doing that is because we feel that there is a need in the market for good education and the need to integrate technology in the education system. The school we will be launching will use artificial intelligence and a lot of high-tech stuff to pinpoint where students’ weaknesses are, and regardless of caste, creed or affordability if a student is good, he or she deserves the chance to at least try and make it along with other others. And the reason why we have decided to

‘STUDENTS THAT COME OUT OF PRIVILEGED SCHOOLS GO ABROAD AND CREATE BRAIN DRAIN BUT SUCH STUDENTS ARE LESS LIKELY TO LEAVE THE COUNTRY. IF WE ARE ABLE TO EDUCATE THEM, THEY WILL REMAIN IN THE COUNTRY AND THESE ARE THE PEOPLE WHO WILL MAKE THIS COUNTRY THE SUCCESS THAT IT SHOULD BE’

take this initiative is because there are definitely certain inherent flaws in the current education systems.” Elaborating on what he counts as flaws, he said, “Parents are being ripped off. Let’s say if I am paying Rs90,000 per semester, I should at least get good education, sense of security, integration of technology to see where I am lacking and also, what most schools ignore – extra-curricular activities.” Pleased with his alma mater, he said, “The only school that has managed to do that in Lahore is the Aitchison. There is no other school like such in Lahore operating on that level; there are some more in the country like Sadiq Public, but then again who is going to send their kids to school in Bahawalpur just for the extra-curricular activities. There is a need for private educational institutions to realize that everything is not about money. That’s how SmartPrep also started and that is why we are still the market leaders in the country by the grace of God, but we are still the lowest priced company in the country.” He also said that in his experience with SmartPrep he has come across several parents who are ready to blame the schools for punishing their children but are not willing to consider their own responsibilities. “We don’t allow students to enter classrooms if they are more than 15 minutes late. One time a student was not allowed to attend and his father called me and started shouting at me. I mean when the parents are so irresponsible that they could not count for their children’s punctuality and they had the cheek to blame us instead. This behavior has become part of our DNA and needs to be fixed.”

EDUCATION

So overwhelming was the Karachiites response that both Careem and Uber seemed to riding a wave of popularity. During the last few months, those frequently hailing rides report that the fares have seen an upswing while quality has plummeted By: Fatima Rehman t was a harsh day at university for Sarwat Ahmed who decided to book a Careem cab in the afternoon, not the first time she preferred a ride-hailing app over other means of transportation to get home.

As the 22-year-old university student opened the application, she could witness the peak factor applied at a multiple of 2.3, which blew her mind. The intimation of a higher than usual fare ticked her off, for it made her question the very reason for using the service in the first place. A regular user of these services, Sarwat always commended these services for their punctuality, availability, and affordability –

the last one by quite much. In her words, they offered fair prices. But today was different, and with little to no choice, she had to use the service despite up jacked up rates because she didn’t feel safe to travel using some other transport. Sarwat’s story evokes a relevant question: have Uber and Careem – their unique selling point providing affordable solution to the urban transportation requirements of the people, failed to serve the very purpose that helped them shoot up the charts in the first place? “It’s been five to six months that Uber and Careem have increased the peak pricing, which is quite bothersome to their huge consumer market,” Abdul Rehman, a regular customer of Uber told Profit. Ahmed is not the only one complaining about surge in pricing, majority of the customers Profit spoke to were unanimous on the

point that these services have become expensive and are getting out of reach for many. “If I had the faintest idea it would cost this much, I would never book it,” said Sajid Hussain, who works at a local BBQ restaurant in Landhi and booked an Uber to Sohrab Goth bus stop – he was leaving for Multan to spend the Eid with his family. Uneducated, Hussain got his friend’s help to book him the ride, the friend himself wasn’t much educated and had no idea what the peak factor meant. At the end of the ride, Hussain’s total fair amounted to Rs613 but he was charged Rs1594 after a surge price of 2.6 times or Rs981 was applied. “I had been using Uber and paid under Rs500 for longer distances, it was the first time this much was billed to me,” said Salman Khan, who used his phone to book the ride for Hussain. When these services were launched they were at times cheaper than auto rickshaws, resulting in people from even low income groups using them every now and then, Khan said adding that is not the case any longer. The question that pops up right after that is what happened to Uber and Careem in the last few months that led to such upward movement in their fare format? Is it about availability of captains? Is it about number of

cars available? Or is it another tactic to make profit by cashing in on its clientele once it has established itself? “In order to ensure that we can provide you with the best availability of cars at all times, Peak was introduced. A Peak factor will temporarily increase the cost of available rides during times of excessive demand, which helps increase the supply of available cars in high-demand times and locations. Any additional costs during Peak will be fully paid to the captains to encourage them to be available during peak times.” The statement mentioned above clearly reflects on the idea that it’s all about availability of cars and captains in order to become efficient enough for catering a huge consumer market. But for many this peak pricing might also turn out to be an impact of big debts that have recently landed Uber in thick soup.

While approaching Uber after the massive rise in fares during the Eid season, the justification that came up was as follows; “When prices are surging, you’ll see a multiplier to the standard rates. For example, you might see surge at 1.8x or 2.5x. This is how much your base fare will be multiplied by, so a fare that is usually $10 would be $18 when it’s at 1.8x Surge. Uber’s fee percentage does not change during surge pricing. Because we update the rates based on the demand in real-time, surge can change quickly. Surge pricing is also specific to different areas in a city, so some neighborhoods may have surge pricing at the same time as other neighborhoods have none at all,” Uber told Profit. Also, Uber presented the solution while explaining how to identify surge in App? When demand increases in a specific area, that neighborhood will change color. You can zoom into colored areas of your app's city map to see current surge pric-

‘HAVE UBER AND CAREEM – THEIR UNIQUE SELLING POINT PROVIDING AFFORDABLE SOLUTION TO THE URBAN TRANSPORTATION REQUIREMENTS OF THE PEOPLE – FAILED TO SERVE THE VERY PURPOSE THAT HELPED THEM SHOOT UP THE CHARTS IN THE FIRST PLACE?’

ing. Such as: Yellow = increased demand, Orange = heavily increased demand, Red = Demand has reached a level that has triggered surge to take effect. The customers showed an outrage on this by boycotting the application and going for applications like U ride and Optimus more since they found them cheaper. “Applications like Careem and Uber have put off their patrons by disappointing them at times when transportation demands are massive, such as throughout this last Ramadan and specially around and on Eid day. On asking few more people about Careem and Uber’s peak pricing the conclusion came to light that the customers are majorly disappointed with the fact that rise in fares due to peak surcharge is depriving them from a facility that they loved using before. To them, ‘Happy Careeming’ has turned into a pain now! On reviewing more cases, it emerged was that surge pricing was not the only factor putting Careem and Uber in reverse gear. The depletion in quality of service too has changed drastically, leaving consumers disappointed. “Recently I booked a Careem on my way back from office as I was expecting it to be on time, for I had to leave quickly due to some health issues. Despite that I had to give numerous reminders and had to wait for 20 minutes for the cab to arrive. On another occasion, when I called the company the captain cancelled the ride. Such reluctant attitude was again reported to the company but Careem never responded back. This was dismal, as Careem claims to be providing better quality services than Uber,” one of the regular consumers of Careem told Profit. It is quite obvious that to recoup their image both Careem and Uber would have to seriously work at again being economical and give due attention to detail in terms of meeting consumer expectations.

TECH

One of the market leaders, GFC Fans, Head of Sales and Marketing Nabeel Ahmed Ilyas speaks to Profit on the state of affairs in the industry, its many challenges and how these are being turned into opportunities through new ideas and innovation By: Masooma Syeda research study by Lahore University of Management Sciences under its SME Cluster Survey Project of State Bank of Pakistan in 2011 revealed, Pakistan produced â€œon average, 10 million fans a year with an

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estimated value of Rs 18 billion, and that 95% of the industry is clustered in Gujrat and Gujranwala, with Lahore and Karachi making up the rest.â€? Post that study till 2014, year-on-year the industry experienced double-digit growth, peaking at $40 million. However, the past few years have seen a sharp decline owing to both external and internal factors, with production plummeting to

$27 million in 2016. Iraq, Sudan, Bangladesh and Yemen were among the major markets for Pakistan’s fan industry. Iraq’s domestic unrest, Sudan’s partition into North and South, Yemen’s financial crisis and war, advent of local fan industry in Bangladesh spelt a death knell to it in those parts. Locally, the energy crisis, coupled with certain government policies led to changes in consumer preferences, took its toll. Even at home, fan industry has had its interesting turns. In the 1970s and ’80s, there were four major fan manufacturers in the country – Asia, Millat, Climax, and National. None of them is top of the pack or close to it any longer. Now, three decades later, industry leaders are a different quartet: GFC, Yunas, Royal, and Pak Fans. Being the organized part of the industry, the foursome between them rustles up half of total fan production in Pakistan. The rest, a whopping 50 percent, is contributed by many unregistered players [Read: for a great part, falling in the realm of what is euphemistically called ‘black economy’] including Al-Ahmad and Ghousia! Head of Sales and Marketing GFC Fans, and Pakistan Electric Fans Manufacturers Association (PEFMA) Chairman Nabeel Ahmed Illyas spoke to Profit on the past, present and future of the industry. When he stepped in, in 2006, GFC Fans was already well-established in the industry, and under his father, CEO Muhammad Illyas, it had already entered exports. It continues to remains a purely equity-based family business, only seasonally seeking financing in peak export period. “We only do financing when we need

“R&D AND INNOVATION REMAINS OUR KEY STRENGTH. SOME OF OUR PRODUCTS CHANGED INDUSTRY PRACTICES. WE WERE THE FIRST WITH MIST FANS… WE USE BEST RAW MATERIALS, OUR MARKETING TAGLINE BEING BETTER SERVICE WITH LOWER ENERGY CONSUMPTION” Nazish Hussain, Founder & Sole Proprietor, Secret Stash to increase our production in the off-season, so we can export and stock our distributors before the peak March-June season. The cash outflow then is massive while inflows start only when the peak season kicks in; hence the need for financing to bridge the gap.” That is in keeping with the industry sentiment, which is inclined towards adhering to religious edicts, mostly opting for Islamic financing or staying out of it altogether, other than “using government’s export refinance from – loans provided at a special, low interest cost.” GFC Fans, Nabeel said, expands or contracts seasonally. “In off-season, production occasionally drops to 50% of capacity, while at peak time demand exceeds that, making it expand both vertically and horizontally.”

‘FOR MANY YEARS, I HAVE BEEN TRYING TO CREATE AWARENESS THAT Local demand, the IRRESPECTIVE OF HOW mainstay espite many external challenges, CHEAP A FAN YOU BUY Nabeel believed, the local demand is here to stay. “Fan industry is EVENTUALLY THE largely dependent on the construcELECTRICITY COST WILL tion, which is never going to stop. While the MAKE IT MORE EXPENSIVE elite amongst the socio-economic classes (SEC A) are opting for fan-less housing, our IF IT IS NOT OF HIGH target market SEC B (middle class), C (lower middle class and lower). For them SERVICE VALUE’ with every marriage, a new house, or at least

a new room is constructed; pedestal fans are always part of dowry. Replacement demand of fans also exists. In the boondocks, demand varies in correlation to agricultural output. If agriculture produce is good, landlords and farmers alike spend more money. “So, the demand for fans is likely to remain consistent, with saturation point not in sight.” As for marketing, Nabeel said, “We advertise heavily in Jan to June peak, but throughout the year our focus remains on brand building. And we stick to a three to four year plan.” On average, the company

Al-Ahmad Fans’ rejoinder n response to being dubbed as a company in the unorganized sector, Marketing Manager of Al-Ahmed Fans not only claimed that their company is tax registered, but also that belongs to the organized sector, and gets full receipts from their suppliers. He also insisted that the market had responded to their brand positively and their production was growing up year-on-year, with their current statistics standing at 5,000 fans being produced every month.

spends Rs40 million on marketing annually, regardless of the revenue. Touching Rs300 million in annual turnover, Nabeel claimed to be the industry’s biggest taxpayer, based on the reported figures of the Securities and Exchange Commission of Pakistan (SECP). “Two to three years ago, we may not have been the lead player, but now we are neckto-neck with with Pak Fans, but we have always been the highest taxpayer in the industry.”

Innovation, the key strength &D and innovation remains our key strength. Some of our products changed industry practices. We were the first with mist fans. Demand for that is on the rise. Another innovation was our metal bracket fan, replacing conventional plastic bracket used in mosques and marriage halls etc. It is now in demand. “We use best raw materials, our mar-

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‘BEING THE ORGANIZED PART OF THE INDUSTRY, THE FOURSOME BETWEEN THEM RUSTLES UP HALF OF TOTAL FAN PRODUCTION IN PAKISTAN. THE REST, A WHOPPING 50 PERCENT, IS CONTRIBUTED BY MANY UNREGISTERED PLAYERS [READ: FOR A GREAT PART, FALLING IN THE REALM OF WHAT IS EUPHEMISTICALLY CALLED ‘BLACK ECONOMY’] INCLUDING AL-AHMAD AND GHOUSIA!’ keting tagline being better service with lower energy consumption.” The government is also moving towards energy efficiency, and it has introduced three-star rating in the country. The Federal department responsible for this quality control is National Energy Efficiency and conservation Authority (NEECA), with its provincial arm, Punjab Energy Efficiency and Conservation Authority (PEECA). “This rating is not linked to energy efficiency or quality, rather to ‘service value’, which accounts for both air delivery and watts consumed.” GFC is one of the

Tax evasion rife in the fan industry How even those wanting to be honest are driven to stay dishonest On conditions of anonymity a fan manufacturer, divulged tax evasion to be rife in the industry. However, he blamed it on the suppliers and lower rung of the industry, as opposed to fan manufacturers. He said, “We cannot report the actual figures because the suppliers from whom we purchase raw materials do not give us actual receipts. If those suppliers give us receipts of the actual quantity and the price, they will have to get registered with FBR; so they understate their sales.” Along with him, other manufacturers have tried to bring push for a change in attitude downstream but such practices are so well-entrenched that until the entire industry shows resolve, it would be impossible to prevail on the suppliers and vendors. How difficult it is to alter the attitude reflected in one conscientious manufacturer’s claim, if only a member or two tried to force the change, the costs for the causing it would go through the roof to the extent that that may result in shutting of his business altogether. If one manufacturer really rams it down the throat of his suppliers, look at how he would be driven out of business: “The General Sales Tax (GST) on fan industry products is 16%. Now if the supplier bring his sales on the record by handing in a receipt, he will have to jack up his prices to not just include this 16% alone, but also tax on his overall income. The impact on overall price would be about 25%, which the manufacturer who goes by the book would have to add on to the final product. Since others would not be following suit, he would be driven out of the market. When one asked a manufacturer about the conundrum, he lamented: “People are terrified of tax officials, and they prefer not having to deal with them. There used to be 1.5 million taxpayers in the country, which has now come down to between 800,000 to 900,000, though the tax revenue has increased. That is because those who pay taxes are squeezed even more. Secondly, the lower staff from tax departments itself does not want them to be registered because it would close the tap on the ‘monthlies’ that they milk.”

companies awarded with three-star rating. “Initially given one star rating, the industry was challenged to improve. Now we get an official security sticker that customers can scratch and verify if it is real. A proper mechanism now exists. The way it works, as explained by Nabeel, is that the applicants need to send samples to accredited laboratory for testing of the fans and after testing in accordance with Minimum Energy Performance Standard (MEPS), they issue a test report for each fan which is subsequently submitted to NEECA. Thereafter, evaluation committee of NEECA examines test reports and on the basis of results, they decide whether to issue a certificate of Pakistan Energy Label for one, two or even three stars rating (more stars mean more efficient). “We feel proud that we have been awarded maximum three stars rating. Consumers can get it verified from NEECA department by scratching a code on the sticker and then sending it via SMS to 9460. Consumer will get instant authentication / verification by having return SMS from NEECA if the fan is capable enough for energy saving or not.” He added, “For the past few years we have been trying to create awareness that irrespective of how low the fan cost, this fan will become more expensive than energy labeled fan within 6 month because of high energy consumption.

How cheap is actually expensive or many years, I have been trying to create awareness that irrespective of how cheap a fan you buy eventually the electricity cost will make it more expensive if it is not of high service value.” With his company’s performance Nabeel is satisfied but not with the industry overall. Lamenting about the conditions, he said: “From sales point of view, the country’s

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FBR not willing to comment rofit tried reaching out to FBR officials to gain more insight, but none of them was willing to talk to the media. One director, however, said that there is a team of tax officials which is “responsible for ensuring that no such tax evasion takes place. But the details can only be shared with you by the spokesperson of the FBR.” Despite various attempts, the spokesperson remained unavailable and his response could not be obtained.

economy had not grown in the past few years, so the market size has remained stagnant. In the last 2 to 3 years, growth rate increased due to government policies, but it still has been very slow. “Our sales are highly dependent on the energy situation. With continued load-shedding the demand for solar fans has increased in the country. We are producing them but at a very small scale. There are some brands producing slightly higher quantity but majority of them are unbranded.” The current government’s policy of higher load-shedding in areas of higher electricity theft has caused customers from KPK and interior Sindh to move towards solar fans. “We did not shift our focus to solar fans because we were promised time and again by the government that load-shedding will reduce in a few months.” Nabeel said that industry trends have also changed in the recent past, with some innovative products reducing the demand for conventional fans. “A while ago someone started producing fans with a Baleno motor usually used in car vipers. That led to an increase in demand for that type of fans. Now at least 2000-3000 fans per day are being produced using that technology.”

‘IRAQ, SUDAN, BANGLADESH AND YEMEN WERE AMONG THE MAJOR MARKETS FOR PAKISTAN’S FAN INDUSTRY. IRAQ’S DOMESTIC UNREST, SUDAN’S PARTITION INTO NORTH AND SOUTH, YEMEN’S FINANCIAL CRISIS AND WAR, ADVENT OF LOCAL FAN INDUSTRY IN BANGLADESH SPELT A DEATH KNELL TO IT IN THOSE PARTS’ Challenges on exports front alking about the challenges on the exports front, he explained that the market for durable fans – the type produced here – can only be found in

‘ON AVERAGE, THE COMPANY SPENDS RS40 MILLION ON MARKETING ANNUALLY, REGARDLESS OF THE REVENUE. TOUCHING RS300 MILLION IN ANNUAL TURNOVER, NABEEL CLAIMED TO BE THE INDUSTRY’S BIGGEST TAXPAYER, BASED ON THE REPORTED FIGURES OF THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN (SECP)’ countries with similar weather and socio-economic conditions as Pakistan. “In continents like Europe and the USA – where summers are shorter and cooler than here – the demand is for disposable type, for storage of

‘THAT IS IN KEEPING WITH THE INDUSTRY SENTIMENT, WHICH IS INCLINED TOWARDS FOLLOWING RELIGIOUS EDICTS, MOSTLY OPTING FOR ISLAMIC FINANCING OR STAYING OUT OF IT ALTOGETHER, OTHER THAN USING GOVERNMENT’S EXPORT REFINANCE FROM – LOANS PROVIDED AT A SPECIAL, LOW INTEREST COST’ 38

durable variety exceeds the replacement cost of a disposable one. This restricts our market to the Middle East and Bangladesh etc.” Delving into details of why former markets for durable fans have evaporated, he said, “In Iraq, our agents do not have access to the ISIS-controlled areas. Partition of Sudan has left both parts financially crippled; they don’t have enough dollars to import. Bangladesh has started its own fan manufacturing industry and demand for Pakistani fans is going to plummet there sooner or later.” To stay in one market, GFC has entered into a joint venture in Bangladesh and is about to start production there. “GFC is more popular in Bangladesh than Pakistan, and many have either copied our brand name, design or packaging. But even the fakes ended up making GFC popular, creating an opportunity for us to start operations there.” GFC Fans will still be exporting fans to Bangladesh as Nabeel believes that it will take a while for the nascent industry there to match the quality of Pakistani product. In disposable fans, Pakistan does not stand a chance to compete with China, said Nabeel. “In plastic-made disposable variety, China has a clear advantage, owing to mass buying and production of raw material, moulds and dyes. So China can afford to produce such specialized moulds as they can sell these molds to other companies too, but we cannot do that.” To him the only way forward for the industry is to explore new markets, with Africa being the first. “We have already visited a few countries with trade delegations, though without much success, the difficulty is being faced in convincing them to move from low-cost disposable fans they replace every year to one time expensive ones that they can use for years. Though an eight dollar disposable fan is worth $12 there, our $20 fan still appears expensive to that market. That however is our main target if we wish our industry to grow.”

‘THE LOCAL INVESTORS, WHO STOCKPILED THE SIX HEAVYWEIGHT S IN ANTICIPATION OF SELLING THEM TO THE FOREIGNERS AND MAKE A WINDFALL, HAD TRIGGERED MARKET PRICES TO UNSUSTAINABLE LEVELS’

By Ghulam Noor Jehanian or the market, uncertainty is worse than bad news,’ so goes an oft-quoted aphorism. The question is not whether the PML-N government will soldier on or fall, it is about time-tested reality: capital markets abhor uncertainty. The Bulls continued to roll for the Pakistan Stock Exchange (PSX) well into 2017. On May 25, the benchmark KSE-100 index

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hit an intra-day, all-time high at 53,127 points – an increase of 11 per cent from January 1. However, less than two months later, on July 14 close for the weekend, despite a surge of 584 points, the index had overall plummeted to 44,337 points – a steep fall of 9,000 points from its highest. Going back a couple of days, on July 12 – the index had closed at 43,027 points, marking the year-to-date low for PSX. Such a fall was not anticipated by many. For example, just on the news of PSX’s inclusion in MSCI’s Emerging Market Index, CEO HBL Asset Management Farid Khan

was oozing optimism: “We can expect a flow of between $300 million from passive investors/index funds over the next few days.” It is also true that he was not alone in expressing such enthusiasm. There were many similarly buoyant analysts, and ‘scores of delegations of big brokerages, mutual funds, major listed companies and officials of PSX who had trotted the globe, from Wall Street to Hong Kong, before June 1 – the date when the up-gradation of PSX was to take effect – to gauge the interest of MSCI passive funds in Pakistan. The occasion was euphoric.

‘On July 14 clOse fOr the weekend, despite a surge Of 584 pOints fOr the day, the index had Overall plummeted tO 44,337 pOints – a steep fall Of 9,000 pOints frOm its highest. gOing back a cOuple Of days, On July 12 – the index had clOsed at 43,027 pOints, marking the year-tO-date lOw fOr psx’

steep fall eople have been pointing fingers toward declining oil prices around the globe, the trimmed business timings during Ramzan and the Gulf crisis, amid much more, as plausible reasons for the dwindling performances of the stock market. Then the most abrupt cause: the threat of ouster to Prime Minister Nawaz Sharif in the wake of the Joint Investigation Committee presenting its damning report to the Supreme Court of Pakistan. The JIT, among others, had previously summoned the prime minister’s children, Hassan, Hussain, and Maryam, and then the PM and his finance minister. That put the stock market, along with the PM’s future was on a roller coaster.

a li‫מּ‬le historical context t was mid-May 2017 when the investors’ excitement was at its highest. It was the time when Morgan Stanley Capital International (MSCI) had announced the up-gradation of the Pakistan Stock Exchange (PSX) – the three stock exchanges which had merged into one in January – to the emerging market (EM) from the frontier market (FM) in its semi-annual review; to reclaim the status was a dream nurtured for so long had come true. Taking the development as an omen, the stock market rose by almost 3,000 points up in anticipation prior to the inclusion date. Pakistan remained in the MSCI EM Index from 1994 to 2007 but was demoted to MSCI Frontier Market index after the

2008 market crash that led to its closure, leaving foreign investors trapped and unable to leave the market. The country’s weight in the MSCI Emerging Markets index in this inclusion was to be 0.10 to 0.15 per cent, which took effect on June 1. Experts were hoping for huge trading activity and a bullish trend in the market as huge foreign inflows was expected ahead of the inclusion from investors who followed the MSCI EM index. According to Qaisar Mahmood, a leading stock markets expert, “The D-Day would be on June 1, 2017, when Pakistan would formally join the Emerging Market regime that provides Pakistan stock market access to estimated USD 1.5 trillion investable funds with investors.” Such was the level of positivity and euphoria surrounding the news. But contrary to the predictions, the business proceedings were disappointing. A tumultuous bloodbath overshadowed the happy news of PSX’s inclusion in MSCI’s Emerging Market Index. The index busted; it fell by 1811 points. Stocks of 388 companies were traded, of which only 38 gained in value, while 343 declined as seven remained unchanged. Ahsan Mehanti of Arif Habib Corp while commenting on the day’s activities, had stated: “Panic selling continued amid concerns over unexpected foreign outflows after MSCI Emerging Markets upgrade and pressure in global crude prices on supply glut risks.” The inclusion on its day did no good. The bust – which was contrary to all expectations – was a result of a few factors which came into play, at the day of trading. Firstly, it was the ultra-positive feedback due to which everyone was awaiting inflows on the day itself. However, no one had contemplated the possibility that the Frontier Market Funds – which held back a weighty investment of approximately $ 7 billion in the PSX – would go on a selling spree. Secondly, six companies had been de-

clared up for the main MSCI EM index, which included: Habib Bank, Engro Corporation, MCB Bank, Lucky Cement, United Bank and Oil and Gas Development Company. EM passive funds were supposed to target only those six. Adding to that were the local investors, who stockpiled the six heavyweight s in anticipation of selling them to the foreigners and make a windfall, had triggered market prices to unsustainable levels. However, when perplexity struck the market on the total lack of interest shown by EM participants, the same local investors ran helter skelter to change positions. In the chaos that followed, the six stocks saw a major fall. The same six make up KSE-100’s largest share. And hence when they fell, the market automatically took a tumble.

wrapping it up part from the prime minister’s bad news, the toll that PSX has taken in the last two months is a story of how analysts and stock market gurus misunderstood and misrepresented the possible threats and opportunities. Historically, this error has been witnessed during the financial analysis of the US markets – during the Great Depression, the dust bowl, and the infamous Franklin Delano Roosevelt’s bank closure. The magnitude of Asian markets’ crisis of 2007-08 was also wrongly predicted. Though the analysts and pundits had predicted the PSX to remain on an upward trajectory – some even claimed that it will leapfrog to 60,000 points by the end of the year – the truth has so far, turned out to be sour. To the predicament of global capital markets, open eyes and ears do not thrive unless they are complemented by open minds. The knack of jumping to conclusions often hurts where it matters the most.

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