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CONTENTS 16

11 The glass is definitely half empty this week in Pakistan’s business and economics Twitterverse 13 The Suzuki Mehran is dead. What 800cc car will take its place?

16 In the war between TCS and the startups, who will emerge the King of eCommerce logistics? 24 Everything you need to know about Pakistan’s likely fall from emerging to frontier market 26 UBL discards its little known Swiss subsidiary

28 Inflationary tactics Ihsaan Afzal Khan 29 Cabinet tensions and major mismanagement: Everything to know about Engro Elengy’s dry docking drama

Profit

32 After hitting Karachi, the donut revolution is coming to Lahore

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan Abdullah Niazi l Meiryum Ali l Shahab Omer Regional Heads of Marketing: Muddasir Alam (Khi) l Zulﬁqar Butt (Lhr) l Mudassir Iqbal (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: proﬁt@pakistantoday.com.pk

Readers Say There’s an easy solution to all of this. Ask Asad Umar what we should do and then do the opposite of that. Apropos: Everything to know about Engro Elengy’s dry docking drama Raza Hasan, Website There is zero R&D in the local pharma sector. Not a single FDA approved manufacturing facility compared to multiple facilities in India and Bangladesh should be a wake up call for the regulatory body. Exporting to low income countries does not show that out pharma has come up the curve when all APIs have to be either imported from India or China!. Apropos: Pharmaceuticals: how the locals are beating the multinationals Faisal Malik, Website Engro should have planned an alternate ship before instead of replacing the ship in the last hour and causing disruption for two days. The ship from Singapore could have reached on or before 20th June. Maintenance is a separate topic and this is much related to Engro not making proper arrangements. Apropos: Everything to know about Engro Elengy’s dry docking drama Hunain Pirzada, Website There can only be one ship docked at a time. Regardless of the second ship coming early or even a month earlier. The first one has to go and only then a new one will dock and start pumping gas. Which will take two days. Apropos: Everything to know about Engro Elengy’s dry docking drama Haroon Sheikh, Website

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

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Very nice explainer on the confusion around the scheduled maintenance of Engro's LNG regasification vessel, raising the spectre of impending gas shortages in the country for a brief period. Apparently the PM has had to intervene and the government is only now waking up to the fact that there is no option but to allow the scheduled maintenance on June 29, as per binding legal requirements. Power generation likely to be impacted with reduced LNG supply during this period, and govt scrambling to find a way to prevent large scale load shedding or resort to expensive diesel/furnace oil in the meantime. Apropos: Everything to know about Engro Elengy’s dry docking drama @KhurramHussain, Twitter EETL keeping Sequoia permanently makes good business sense over the long term. However, Pakistan needs to work on its inefficient energy sector. This unwanted mishap damages our energy security. Apropos: Everything to know about Engro Elengy’s dry docking drama @_AneelIqbal, Twitter

Another gas crisis in the making. Fantastic story by Ariba Shahid. Apropos: Everything to know about Engro Elengy’s dry docking drama @AmberRShamsi, Twitter The article is balanced and spells out why the dry docking needs to be done. Did the desk not read the article because the headline is somewhat misleading and implies that it’s all a ‘drama’ - which it clearly isn’t. @omar_qureshi, Twitter Response: The desk very much did go through the article. For anyone that was unable to make it through the entire article - the ‘drama’ is a reference to certain ministers turning it into a drama by creating unnecessary hurdles in the process. Apropos: Everything to know about Engro Elengy’s dry docking drama This is a great explainer on the issue if you are interested in the boring topic of dry docking of FSRU for maintenance. Ariba Shahid explains the Engro FRSU non-issue. It appears the Engro and SSGC agreement is solid, as Engro isn't worried. It is the agreement between SSGC and SNGP where the problem lies. The role of Ali Zaidi is intriguing, to say the least. Apropos: Everything to know about Engro Elengy’s dry docking drama @2paisay, Twitter Ariba Shahid explained the whole saga in the simplest possible words. What should have been a simple maintenance procedure which could have been years ahead is turned into a disaster. Utter lack of coordination between various institutions. Apropos: Everything to know about Engro Elengy’s dry docking drama @farhanmujeebk, Twitter Excellent article! Surprised Asad Umar is speaking against Engro (read the Dawn article) as the exCEO of the company. He blames them for the one year delay and not the government for shutting down ports due to COVID. This tells me he didn't leave the company on good terms. Apropos: Everything to know about Engro Elengy’s dry docking drama @asimsohail, Twitter Wow , what an excellently written article. Well done. It is not often you get to read such nicely written stuff locally, especially since other papers of record have declined in quality. Apropos: Everything to know about Engro Elengy’s dry docking drama @karachikbhai, Twitter This is so amazingly written that literally anyone can understand what gas supply issues are in Pakistan at the moment. Apropos: Everything to know about Engro Elengy’s dry docking drama @haseemuzzaman, Twitter

COMMENTS

IN BRIEF Prime Minister Imran Khan has appointed the incumbent economic affairs secretary, Noor Ahmed, as Pakistan’s new executive director at the Asian Development Bank (ADB). Ahmed is presently posted as Economic Affairs Division (EAD) secretary.

“The International Monetary Fund (IMF) is holding open, constructive discussions with Pakistan as part of a sixth review of the country’s 39-month, $6 billion financing programme that began in 2019. We aim to resume the discussions in the period ahead,” Gerry Rice, IMF spokesman

Board of Investment (BOI) Chairman Atif Bokhari has resigned due to “personal reasons”, becoming the third head of the department who has prematurely left office during the tenure of this government. Prime Minister Imran Khan had appointed Bokhari as the BOI chairman in March last year and he joined the office in April.

$1.5 billion:

Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5 billion annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region. The acrimony between the two longtime allies has eased after Prime Minister Imran Khan met Saudi Crown Prince Mohammed bin Salman in May.

Federal Minister for Finance and Revenue Shaukat Tarin has said that the FBR will not be able to harass anyone as a thirdparty will carry out audits of tax defaulters. He said that notices would be sent to tax evaders through third parties. While Pakistan fights a battle with India for securing the Geographical Indication (GI) tag for its Basmati rice in the European market, the concerned department of Ministry of Commerce (MoC) has been headless for more than 22 days after IPO Chairman Mujeeb Ahmed’s term ended.

Pakistan has secured a $4.5 billion worth of three-year trade financing facility from Jeddah-based Islamic Trade Finance Corporation (ITFC) to cover import cost of crude, petroleum products and liquefied natural gas (LNG).

The glass is definitely half empty this week in Pakistan’s business and economics twitterverse

here was a lot going on this week, which is why there is such an extensive number of tweets we have covered in this week’s social media roundup. The MCSI degradation is on top of the list, and we also implore all of our corporate readers to take a break and not kill themselves over their job. Ariba Shahid brings you all this and more.

The glass is definitely half empty

Pay me more please

Either my salary is shrinking or everything else is getting WAY too expensive. Disposable income should now be called negligible incomes. However, in all seriousness there is a surplus of labor with businesses working on slim margins. Even though the minimum wages have increased, we NEED MORE MONEY.

The secret ID card collection

Everything can be constructed as good news if you’re optimistic enough. With the MSCI mulling over downgrading Pakistan’s status to a frontier market, we can’t help but be annoyed at the countless tweets on twitter being optimistic. We don’t understand why people do not get that a downgrade is a downgrade. It simply means you’re not good enough to be there. Regardless of the number of opportunities it opens for you, no one really picks being a big fish at Iqra university, or any university over being a small fish at Harvard by choice. That decision is usually based on money, but that is a different conversation.

SOCIAL MEDIA ROUNDUP

We’re going to stop asking questions about why they need so many photocopies of CNICs. Instead, we’re going to focus on where they keep these copies. Do they dig up a hole every few years and bury them? Do they recycle the paper? Do they collect them so they can make fun of our pictures? What is up bro?

Please take a break

A short punchline

Digital Pakistan. That’s it, that’s the joke. Anyway, not all cards have numbers. What should matter is that your payment has been received. But I guess that isn’t important because who cares?

Never having taken a vacation or some time off is not a flex. It just shows you may be insecure about being away from work, do not have much going on in your private life because of work, or society has conditioned you to be a corporate slave. Go take that much needed break. Go. We dare you.

Take a chill pill

How to get a loan

Is it possible to provide loans without making people jump through hoops? The formal financial system is complicated and sometimes all it takes is for someone to look at informal ways to realize how inefficient the formal system sometimes is. If it takes an hour max to finance a rikshaw at a store, banks with large networks should be able to do the same more efficiently.

Over the past few weeks we have established that Linkedin is cringeworthy. However, today no matter how much we want to, we will not focus on that. Instead we’re going to say that working in the corporate world is fine. There’s no harm in that but becoming a corporate slave is something we are not on board for. Dude, relax, take some time off work for your baby. And if you do not want to, at least don’t post about it on linkedin to show off. Maybe it will also give you some time to think and reflect on the reality of the soulless corporate existence that you have chosen to make your life.

SOCIAL MEDIA ROUNDUP

By Shahab Omer

or the longest time, the only 800cc car in Pakistan was the Suzuki Mehran. That timeless machine that launched millions of car enthusiasts either into an enraged frenzy or nostalgic murmurings. When it was first launched in 1989, the Suzuki Mehran was priced at Rs 90,000. By the time it was discontinued in March 2019, it was retailing at Rs 750,000. In a thirty year period. The storied history of the Mehran can be told as the history of the automobile industry in Pakistan. And while that is a whirlwind in its own right, its discontinuation is promising. The Mehran was a tin-box of death on wheels with zero quality assurance whatsoever. With it gone, Suzuki has come out with the 650cc Suzuki Alto an automatic car built on the model of the Japanese refurbished cars that have made such a dent in Pakistan’s automobile industry. It is a much safer vehicle with more features and comfort. It is also significantly more expensive. However, for once, it is not just Suzuki or one of the Big Three (Suzuki, Honda, and Toyota) dominating the market. In the 800cc segment of cars, where there was once only the Suzuki Mehran in Pakistan, there are now new entrants. Pakistani motorcycle manufacturer, Road Prince, in

AUTOMOBILES

partnership with a Chinese company, has recently introduced an 800cc Prince Pearl in Pakistan. Another manufacturer, United, has also introduced the 800cc United Bravo. And this was all before the latest budget, which if it is any indication, might mean a boom in the manufacturing and sales of this category of car.

What does the budget change?

n the budget speech, the government has proposed a reduction in sales tax on vehicles up to 850 cc and abolition of FED (Federal Excise Duty). This, of course, has caused a few heads to turn. The proposed big cuts in taxes and duties will also reduce the prices of these vehicles. However, the problem is that none of these companies have yet announced the official price of the car at a lower price. All these three vehicles are assembled entirely in Pakistan and according to the budget proposals, FED on them will be completely abolished while sales tax will be 12.5%. However, the benefits are not just for the local assemblers. A lot of cars in the 850cc category are also imported from Japan after being refurbished. These cars, often known as ‘Japani Alto’ include cars like the Mira and the Suzuki Hustler. Withholding tax on such imported vehicles has been abolished.

It is pertinent to mention here that 2.5 percent FED is levied on the production cost of each vehicle manufactured in the local factories, which will be abolished in case of approval from the National Assembly. If both proposals are approved, there is a good chance of a 7 percent reduction in the prices of 850 cc and lower power vehicles manufactured in Pakistan. The Suzuki Alto is currently priced between RS 1.2 million to RS 1.6 million depending on its variant, and if the budget proposals are approved, the price of the Alto is likely to fall by RS 84,000 to RS 132,000. Similarly, the average price of a Prince is RS 1.149 million, which will be reduced by about 80,000 after a 7 percent reduction. Bravo manufactured by United Company is priced at around RS 1.1 million in Pakistan, which is likely to be reduced by about RS 80,000. Experts in the automobile sector believe that the reduction in taxes and duties will lead to a reduction in car prices, which will further strengthen the automotive sector. Ali Asghar, a small businessman from Faisalabad, was one of the many people that decided immediately that they would buy one of these cars when they heard the announcement in the federal budget speech that a proposal has been made to abolish FED (Federal Excise Duty) on vehicles up to 850 cc and the sales tax rate has also been reduced from 17 per cent to 12.5 per cent. However, his experience has been

It is very encouraging for the common man and in general the price of our car (United Bravo) is likely to be reduced by RS 70,000. There is no solution in the world to the problem of delay in supply and demand of vehicles. We assemble as many cars as we can get orders Zawar Tahir, United Motors

less than ideal. “I was thinking of buying a car a little before the budget, but since the prices of cars are very high, my pocket was not allowing me to buy a brand new car. On the other hand, some car dealers in Lahore also advised me to not buy a car now as the budget may reduce the price of the cars. To my surprise, when I called a local assembler of 850cc cars to buy a new car, the representative of the company replied that the car was not available due to high demand and the company has not yet announced the final price of 850 cc. I was very disappointed and decided to buy a second hand car from the market but even in the market the price of the used car was higher than before. I came back without buying a car and kept thinking that the government has announced but where is the low priced car?” he informed. An official of Pakistan Motor Dealers Association told Profit that proposals have been made to reduce taxes but our local assemblers do not have the capacity to meet the demand for vehicles. “If we look at the data available on the website of the Pakistan Automotive Manufacturers Association (PAMA), we can see that a total of 133,000 cars of 1300 cc, 1000 cc and below 1000cc during July 2020 to May 2021 were manufactured and during the same period, about 140,000 vehicles of the same category were sold. Similarly, from July 2020 to May 2021, the total production of vehicles from 1300 cc was less than 100,000 units. On the other hand, vehicles with a capacity of 1,000 cc and below had a total output of just over 40,000 units during the same period while a little more of 44,000 units have been sold and that’s about 8,000 units more than last fiscal year. From these statis-

tics, it is very easy to estimate that the production of a car of 1000cc or less in the country is already low,” they said.

Structural problems

“W

e have assemblers here not manufacturers and this is the reason for low production. If we look at the past, we can see that Suzuki became Pak Suzuki in 1982. Similarly, in 1991 Toyota and in 1992 Honda set up assembly plants in Pakistan. According to the agreement, Suzuki was to transfer the technology to us five years after the agreement, but we still import and assemble car parts. We are not manufacturers. Local companies still have to be told separately for essential and basic amenities like airbags, which are also charged separately,” said the official. These are some of the most pertinent structural problems that the automobile industry is subject to in Pakistan. The official added that on the one hand, the government has proposed to reduce the tax rate on vehicles and on the other hand, the demand for these vehicles will increase.“But in Pakistan, it takes one to six months from the time the car is booked to the time it reaches the customer. And if one wants to buy a car urgently, they have to pay a hefty fee in the form of the exploitative ‘on’ schemes that so many people run.” “Waiting from booking to delivery has fostered a ‘on money’ or premium on car culture in the market. In ‘on’ culture, vehicles are booked by different investors and the vehicle booked by these investors is immediately handed over to the customers on payment of an extra amount. The

We are currently working on how to reduce the cost of the car. We have to look at the price and overheads of our material first. If we talk about increasing the demand for cars, it will definitely increase, but the demand for cars has been increasing for some time Tayyab Naseem, director of Regal Automotive Industries

majority of car buyers prefer to purchase directly from automobile manufacturers, which takes at least one to six months between booking and delivery to the buyer.” The way this works is that car dealers make large bookings in advance with the assemblers in Pakistan. They agree to buy cars in a large quantity, sometimes even at a better price, and they wait 1-6 months to get these cars. Once they have received the order, they do not register the cars on their name. They simply wait for people to come to their dealership. Now, a person can go directly to Suzuki or Toyota or KIA and ask to book a car, but they will have to wait at least 6 months, and sometimes even longer than that. What these dealerships offer is the opportunity to pay cash and leave with a car. The only catch is the extra money you have to pay on top - the on price. The past year has seen an increase in the trend of charging ‘on money’ or ‘premium’ in the sale and purchase of automobiles due to the decline in production capacity of automobile companies in the country. The echo of the increase in on money was also heard in the meeting of the federal cabinet on December 29 when several ministers mentioned the prices of vehicles manufactured in Pakistan and especially on money. In the same meeting, Prime Minister Imran Khan also directed the Federal Ministry of Industries and Commerce to prepare a report on the decline in production of automobile companies during 2020. However, car dealers claim that there are fewer cars in the market and more buyers, which is why the trend and rate of wool money has increased. Most dealers do not even give the buyer a proper receipt for the on-money. Dealers give the buyer a raw receipt that mentions items such as service charges. In fact, there are fewer new cars and more buyers in the market and everyone wants to get a car without any delay. Dealers consider premium money to be their only profit and say that the investment they have made is for business and profit only. Because dealers facilitate the buyer, they charge a premium. The official further informed this scribe that like every year, this year too, before the budget, showroom owners have been offering to give a delay free car delivery in case of booking a car. “Every year the government is going to make decisions in the budget about the import of used cars, so every year a car assembler company in Pakistan gives the

The buyers will get relief on bookings of these vehicles. Like new cars, only the sales of second-hand 850cc cars will be affected, however, the impact will not be the same. I think that the impact will be half compared to the new cars Suneel Munj, the chairman of PakWheels

impression to the government that we are ready to give cars immediately, but in practice this does not happen. Even today, cars are not being sold in the market without on-money. The government has taken some steps to eradicate on-money culture but they are not enough. The new vehicles have been introduced by various companies, the price of which has not been announced yet, but their booking is currently underway. The federal government had consulted with stakeholders on vehicle policy before the budget and a budget proposal was sought. At present, the rate of on money for vehicles less than 1000cc in the market is at least RS 80,000 to RS 100,000, while the purchase of a large vehicle costs at least RS 200,000 in premiums. Now in a situation where the production of vehicles is low and the buyer has to pay a premium on the purchase of the vehicle, the price of the vehicle has not decreased. The reduction in taxes on car prices can only benefit if the on-money culture is eliminated and our companies manufacture cars in Pakistan instead of assembling them. Otherwise, no matter how much taxes are reduced, the dream of getting a car for the common man cannot be fulfilled,” he said.

What do the stakeholders say?

li Hameed, director of marketing for Sazgar Engineering Works Ltd, a car manufacturer in Pakistan, told Profit that although his company does not

manufacture vehicles with a capacity of 850 cc or less, the reduction in taxes by the government will be very convenient for the common man. “Buyers of cars with a capacity of 850 cc or less are always price sensitive. The reduction in taxes will greatly facilitate such buyers, but it will not affect the sales. Because every manufacturer has a limited capacity to manufacture a car and obviously the increase in sales will only happen by increasing the capacity. Now it depends on the manufacturers whether they increase their production capacity keeping in view the demand,” he said. Tayyab Naseem, director of Regal Automotive Industries, which manufactures Prince Pearl, speaking to Profit said it was too early to say whether the government’s decision would benefit the common man. “We are currently working on how to reduce the cost of the car. We have to look at the price and overheads of our material first. If we talk about increasing the demand for cars, it will definitely increase, but the demand for cars has been increasing for some time. The auto industry is boosting overall, but a final decision on car prices has not yet been made,” Naseer maintained. Zawar Tahir of United Motors believes that tax relief was given by the government to the common man but not to the manufacturers. “But still it is very encouraging for the common man and in general the price of our car (United Bravo) is likely to be reduced by RS 70,000. There is no solution in the world to the prob-

Buyers of cars with a capacity of 850 cc or less are always price sensitive. The reduction in taxes will greatly facilitate such buyers, but it will not affect the sales Ali Hameed, director of marketing for Sazgar Engineering Works Ltd

lem of delay in supply and demand of vehicles. We assemble as many cars as we can get orders. Now, as soon as we get a car booking, it takes time to prepare,” he said. “For example, you have to import a CKD of a car, then assemble it and then be able to go on the road. Now if a customer comes to us and wants to buy a car, we book his car and give him a time of four months. In the meantime, if the buyer wants to buy a car immediately, he can buy it from any dealer by paying premium money and we have nothing to do with all this. The import duties of parts of cars have not been reduced, meaning that this relief has been given to the common man and not to the manufacturer. Now, when it comes to sales, nothing can be said about it, but obviously sales will be affected. We have been getting queries since the budget in which people are asking what the difference in the price of the car is. We have not yet officially announced a reduction in the prices of vehicles as we have not yet received a notification from the FBR (Federal Board of Revenue). It will now be seen after the notification that the sales tax has been reduced by five per cent or the rate has been slightly reduced. As soon as the notification is received, the companies will announce the official prices.” Suneel Munj, the chairman of PakWheels informed Profit that the prices of only cars under 850cc will reduce, which means the rates of Prince Pearl, United Bravo and Suzuki Alto will go down. “The buyers will get relief on bookings of these vehicles. Like new cars, only the sales of second-hand 850cc cars will be affected, however, the impact will not be the same. I think that the impact will be half compared to the new cars,” he said, “For example, the prices will reduce from RS 70,000 to RS 113,000 hence, the prices of second-hand cars could reduce in the range of RS 30,000 to RS 60,000. The reduction in prices will impact the sales of these cars, rather they are already going good. It is a good decision by the government to reduce taxes, however, the government needs to be vigilant because in the long run, the car manufacturing companies may increase the base prices of these vehicles and bring it back to previous rates,” Munj said. n

AUTOMOBILES

LOGISTICS

By Taimoor Hassan

ho delivers your packages? Everytime you order something off Daraz, or make an impulse buy from the latest Instagram thrift store, or buy a pair of shoes online from a store because you don’t have it in you to visit an outlet, how does your purchase get to you? Easy. A delivery service picks it up and has it delivered to you in however long it takes. The website will let you know how many business days it is going to take, and the delivery service will message you when they have picked up the package, when it is on its way to you, and when it will be delivered by. In Pakistan, the likeliest scenario is that you will be paying cash-on-delivery (COD) for your purchase. The process you might think is quite simple. What you do not know is that behind the seemingly simple business of eCommerce logistics, big bucks are at stake, and a number of players are working the field to try and become the undisputed King of eCommerce logistics. At present, eCommerce in Pakistan is relatively small, although estimated to be a USD 5 billion market.The global average for eCommerce transactions as a percentage of total retail was in the 15 per cent range pre-covid. In comparison, Pakistan’s eCommerce sales are between 1 to 2 per cent. The potential, however, is massive. Pakistan has a gargantuan population, and for the past few years there has been a concentrated effort to make people more comfortable with a digital Pakistan. While eCommerce might be small, there are already established marketplaces like Daraz and Telemart in Pakistan, and there is ample space for more marketplaces to come and for existing ones to grow. So if eCommerce becomes the behemoth so many are counting on it to become, managing the logistics of delivery will become a very large and very profitable undertaking. Currently, there are a few different kinds of players in the eCommerce logistics market. The first are the major players which include TCS, Leopards’ Courier, and Muller and Phipps (M&P). (Editor’s note: Even though TCS is twice as large as Leopard’s and M&P but for analysis we have put all three in the same category). Despite eCommerce being very small in Pakistan right now, these companies are investing heavily in eCommerce deliveries. These are the companies that are very firmly at the top of this very tiny (for now) hill. Behind them are companies like BlueEx and CallCouriers, who also started off as courier companies delivering documents, but have made a very

obvious pivot towards only doing eCommerce deliveries. And then there are the startups. They seem to be everywhere in Pakistan these days and in every industry imaginable. All of them looking to make it, all of them hungry, all of them very much in the game. In the eCommerce logistics world, the prominent ones are Rider, Swyft Logistics and Trax. The summit is a clear one. Every single one of the companies named above want to be the go to logistics service provider to online marketplaces. The reason TCS and the other legacy companies are on top right now is because of their sheer size and their vast network that has existed for so many years before online marketplaces were even a thing. Others like BlueEx and CallCouriers are in it simply because they got in on the game early. The real players to look out for here, or so they claim, are the startups. They might be at the bottom of the pile right now, but armed with technology they are making quick work of scaling the eCommerce logistics mountain. But will they be able to push ahead of TCS and the old guard of logistics? Or will they get kicked back down the steep slope? Profit looks at the future of eCommerce logistics in Pakistan, and what company is most likely to come out as the King of this industry.

How are incumbents set up?

ere’s the rub. Companies like TCS have been around for a very long time. TCS, for example, started operations in Pakistan in 1983 with 12 stations. In the nearly three decades since, they have developed a sprawling infrastructure all over Pakistan and a massive fleet that has proven itself to be reliable. However, this infrastructure was built mostly to deliver letters and documents for large clients such as banks, corporations, and the government. The new kids on the block like Rider, Swyft, and Trax believe this is the core of the issue. They think that the big players have tried to fit eCommerce deliveries into the same model that they used for delivering letters and documents. They claim eCommerce logistics is a completely different ball game and that they have the tech to do it right. The big companies have the momentum, the infrastructure, the experience, and most importantly they are cheaper. The startups are more accurate, they offer a better customer experience (vital in the eCommerce game), but they are more expensive. Which methodology will succeed? To be fair to companies like TCS and Leopards, they have been trying to delve into this segment for a while, and that is despite the fact that it is still a very small as we have mentioned earlier. It was in 2006 that TCS did its first (sort of) online delivery, which was

COD delivery, way before the advent of online marketplaces and online stores, and when the internet was restricted to business primarily. The arrangement was with a foreign company that was the distributor of BlackBerry phones in Pakistan that they were selling via TV ads. “So TV sort of had commercials followed by the customer calling a certain phone number so that's how we got started in eCommerce and we have been the pioneers and remain the most preferred client for our B2B partners or the online shops owing to our operational excellence and our customer service,” says Qasim Awan, director and head of eCommerce at TCS. While their eCommerce business is 15 years old, TCS has been in the courier business for the last four decades, delivering letters and documents to large clients that include banks, corporations and the government, and therefore has its operations set up according to that. All the riders and operations are customised to ensure that the courier business flourishes because, really, eCommerce is a very small portion of the company’s business right now and the major chunk of its revenue comes from the courier business. “When the internet boom started, some of our courier business was taken away by it but it was replaced by eCommerce,” says Qasim. This is one place in which there is once again proof of Pakistan being a very slow evolving country. The internet should have wiped out the need for letters and parcels, but even today banks send out monthly statements to their customers in print - most of them get thrown away. This should have been a big dent to companies like TCS, but it wasn’t, so they ended up only puting some resources into eCommerce because of its relatively small size. While the courier business gives TCS and the likes a natural edge, it also puts a burden on them of having a very profitable business in the form of courier business. “Courier business is an extremely profitable business which requires a network effect to do it well so the barrier to entry is very high,” says Abid Butt, former CEO of E2E Logistics Company. “Because of a high barrier of entry, these guys could charge high prices to customers and that resulted in high profitability,” he adds. And because it is very profitable, eCommerce business becomes a challenge for these businesses. “Consider this: an envelope on average weighs something like 150-250gms. In a 1kg parcel, you can have five envelopes. For delivering one envelope from Lahore to Karachi, big logistics companies are going to charge Rs150-200. For a kilogramme, that’s Rs1,000 for five envelopes if the envelope weighs 200gms,” says Butt. “For eCommerce, to deliver a package from Lahore to Karachi will cost Rs200 only. So a courier company is getting

“If you look at the market landscape in Pakistan, 80-85 percent of orders reach their end destination. The reason being there is no visibility because things are done manually” Salman Allana, founder of Rider

Rs1,000 to utilise a rider to deliver a 1kg envelope against Rs200 for using the same rider to do an eCommerce delivery. So of course their natural inclination would be towards Rs1,000. Not only in terms of profits but also in terms of volume,” he adds. Here’s where we would like to explain a bit how these usual courier deliveries are different from eCommerce deliveries. Each one of you reading this piece has some time in your life received a letter at your house that was slid under your house gate. Most of you would also have received bank letters at your home or at your office where they get delivered in bulk. And because they get delivered in bulk at a single location, the deliveries are swift, seamless, and profitable. For delivering, let’s say a bank’s letter at your home, the rider does not have to call you to know the directions, he will not even ring your doorbell because there is no personal interaction, no signatures required. There is also no cash that the rider has to collect either for the delivery that he is making. From estimates given to Profit, courier [documents or letters] deliveries take between 20-30 seconds for riders to complete. Now compare that to an eCommerce delivery. The rider appears at the residence to deliver the parcel, has to ring the bell, asks for the name of the recipient, discloses the order charges, gets the signatures and then waits for a few minutes to collect cash against the order. The entire duration for the rider can easily go to about 15-20 minutes for single delivery. “For the document deliveries that we do in a single day, we do just half of that in eCommerce parcels,” a rider from one of the older logistics

companies told Profit. It is wildly simple: documents bring higher revenue for companies like TCS and Leopards Courier, and are delivered easily. On the contrary, eCommerce deliveries are tough and timely and require more dedicated manpower. “eCommerce is not a high margin business. It is not a great margin sub component of the courier industry to be in, which is why you would see a phenomenon that traditional courier companies all over the world do not react as enthusiastically to eCommerce as newer entrants.There is an economics angle as well. But volumes keep us interested in this particular game,” says Qasim. That is why eCommerce does not constitute a large component of TCS’ overall business. It is in fact quite small but a fast growing one, as Qasim tells us. Now, your usual courier delivery experience does not require cash collection and the eCommerce delivery experience, for the large incumbents, becomes more difficult because there is cash involved that the rider collects most of the times he makes a delivery and has to make a stop to deposit that cash. It is cash most of the time because cash is still the king and market estimates put the number of cash on delivery (COD) orders in eCommerce at 90-95% and only the remaining 5-10% are orders for which payments are made before the product is delivered.

Sorting kerfuffle

his is where the problem comes in. Up until now we have been talking about how legacy companies have the advantage of experience and infrastructure. However, they have the wrong

kind of experience. Their fleet is not used to or good with cash handling, and it takes much longer to deliver an eCommerce package than it does to deliver simple letters. “Things are bound to be difficult. Legacy companies have a fleet of thousands that are trained to deliver documents, which they have been doing for decades now. They will naturally have trouble if you ask them to deliver eCommerce deliveries. Another friction is that these riders receive incentives based on the number of deliveries they make. Courier deliveries can be done quickly while eCommerce ones take time. That’s simply a lost incentive for these riders and that frustrates them,” says Abid Butt. For every pickup that a rider makes at a B2B client like bank for documents or at a marketplace’s fulfilment centre in case of eCommerce orders, he takes it to the hub or the warehouse of the company where these parcels are sorted based on their dropoff location. While Profit was not able to get a tour of these facilities and spectate the processes involved, from a version in the market, the scenes at the hub where sorting is done looks something like this: experienced workers would be manually putting envelopes in boxes labelled according to the city and the neighborhood where they have to be delivered. There would be boxes which would be labelled as Gulberg, Lahore or DHA, Lahore and like that for other cities and localities, running in hundreds. These parcels would be placed in these boxes by these workers who have been around for a while, who know the exact location of the box for let’s say Johar

LOGISTICS

“At Trax, we have built plugins for Shopify, Magento and built customs solutions, our delivery management system. Our bookings and integrations are done through APIs. All that is based on a cloud system. Even if 50,000 orders are booked, our system is not down and we are integrated with major players in the industry” Muhammad Hassan Khan, CEO at Trax Logistic

Town, Lahore, and wouldn’t mind throwing the parcel, confident that it went into the right box because hey, they have been doing this for a while. All the corresponding entries would be recorded manually on paper sheets that would be time consuming and inefficient and difficult to reconcile. The workers at these stations are in a rush, and they are incentivized to sort at high speeds. So a lot of the time, they are throwing products into the relevant boxes and not even looking back to see they are going in the right bins. The problem with this arrangement is that if the package goes into the wrong box, there is little chance that the company would know who made the mistake and the error can not be pointed out. And the parcel is also lost. Now if it had been a bank letter, it wouldn’t have been much of a problem. However when it comes to eCommerce, it is a big problem. Imagine ordering a trendy pair of earphones on Daraz never to see it and only rate Daraz worse because you had a bad experience. And because the package went AWOL at the sorting station, it is a cost for the online marketplace if it is lost for good and a cost again if the parcel was retrieved but went back to the marketplace and a re-attempt at delivery is to be made. Furthermore, there are no constant engagements with customers about their delivery orders. “If you look at the market landscape in Pakistan, only 80-85 percent of orders reach their end destination. The reason for this shocking statistic is that there is simply no visibility because things are done manually,”

says Salman Allana, founder of logistics startup Rider. It is not only that, however. Online marketplaces and logistics companies have identified fake attempts by riders for products that they report were delivered but weren’t actually. “With legacy courier companies, nobody would really know if the rider went to the address where he was supposed to make a delivery, or if the customer was really not available,” says Muhammad Uns, CEO of Swyft Logistics. Then you have riders who would start calling customers about the address without trying themselves to figure it out. Sometimes customers won’t pick up the phone or someone won’t be at the house and that would result in a failed delivery, which would have to be delivered again. That would eventually lead to sometimes the arrangement becoming expensive for the logistics company, while sometimes it would be a bad experience for the customers. TCS’ Qasim Awan, while talking to Profit, acknowledged that while sometimes deliveries can get late because of their riders, sometimes, it would be late because the riders would keep waiting at the fulfilment centre of an online marketplace and the parcel would not be handed over to the rider timely.

The challengers

t this point, you might be thinking that the startups have it in the bag, and that the legacy companies are bound to face a meteoric crash. They

have fewer successful deliveries, and their culture is not client friendly. And the startups claim they are going to fix all of it through technology and innovative, scalable processes . The serious competitors here are three. Rider, which was founded in early 2019. Swyft Logistics, which started operations in late 2019, and Trax Logistics which was founded in mid 2017. All heavy on technology. Rider claims to have adopted a lean fleet model, maintaining 300 full-time riders and growing in line with their Shipper base. They leverage their crowd-sourced ‘Out Rider Program’ to fulfil demand spikes, scaling to 800+ riders during peak sales such as 11/11.They claim this lean model gives them competitiveness amongst the new players. Both Swyft and Trax claim to have a last mile delivery fleet of 1,000 plus riders. Their process all the way from picking an order from a marketplace to delivering the parcel to the end customer is very different. As Salman Allana, CEO of Rider, explained to us technology and process innovation has been incorporated into these cycles to make deliveries more efficient and successful. This is how it works. After picking a customer’s parcel from a marketplace’s facility in, say, Lahore, Rider brings it back to its warehouse, just like it happens in the case of TCS. “At the time of pickup, our team already has visibility on when this parcel is arriving and to which sorting center, so our inbound team is standing ready, pre-alerted, expecting the shipment,” says Salman. “All our staff have automated devices.

TEXTILES

Parcels are scanned inbound. The moment the scan happens, the customer gets an SMS or notification through the Rider Customer App with an estimated delivery time. The customer is provided with a customer service phone number should they have any questions or concerns For Rider, removing customers’ ‘package anxiety’ is key to our tech and process design. We want customers to take back control and visibility of their online orders,” he says. “Behind the scenes, between pickup and delivery, a single parcel moves through multiple stages. The orders are scanned inbound by operations staff, armed with android-based in-house developed applications. This app guides them through an accurate primary sort - a split based on cities. Different city orders are transported through our own B2B trucking network. We used to outsource city to city truck movement, but quickly found major pain points associated with that. So we built our own B2B trucking solution which is becoming a major part of our business.” With pick-up, sorting, and city to city transit processes completed, the package is then sent to the closest delivery station depending on the customer’s location. “These delivery stations are the last stop before the parcel reaches your doorstep. Our route optimization technology tells us which parcels should be in which delivery bags and for which delivery routes. This gives us an edge on delivery time efficiency. Once ready to deliver, the rider scans your parcel and you receive a notification that your order is out for delivery Your live tracking lin tells you the parcel will arrive in 10 stops or five stops. We calculate the ETA based on maps and traffic data, letting you know the exact time slot your parcel will be with you,” Salman says. At delivery, if the customer is not reachable, the rider marks this delivery as ‘failed’ and ‘ready for a second delivery attempt’. The customer will receive a notification that their delivery was attempted but failed for a specific reason (customer not available, cash not available etc.). Through customer verification, Rider operations staff are able to check if the delivery agent made a legitimate delivery attempt or not, solving a key problem in the industry. Here, Rider seems to go one step further by analyzing delivery agent behavioural patterns and geo-tagging technology to catch problematic riders. TCS and others have nothing of the sort, which is why they have to rely on their rider’s word. And as TCS has already said, their riders marking a delivery failed without even going to the location is a real problem for the company. Essentially, Rider’s technology and process optimization decreases the lead time that makes the delivery faster. Iterations with regards to customer engagement means that

“With legacy courier companies, nobody would really know if the rider went to the address where he was supposed to make a delivery, or if the customer was really not available” Muhammad Uns, CEO of Swyft Logistics

the customer also has visibility of the order and constant engagement with the customer and notifications allowing them to change address based on the time slot between which rider is going to arrive means that the attempt is more likely to become successful than in the absence of such engagements. Why does success rate matter? The majority of the eCommerce deliveries are cash on delivery and failed delivery means the cost of the delivery was incurred but cash against it was not collected. Reattempt means further cost and if the bulk of these deliveries are unsuccessful, chronic cash flow issues can choke growth especially of small online marketplaces. Similar optimisations have been brought about by Swyft Logistics. It has also brought technology where sorting would happen not in hours but in minutes based on AI (artificial intelligence) and ML (machine learning). The parcels are sorted automatically rather than people doing it and technology helps the startup decide which parcel has to go to which side of the city. “At Trax, we have built plugins for Shopify, Magento and built customs solutions, our delivery management system. Our bookings and integrations are done through APIs. All that is based on a cloud system. Even if 50,000 orders are booked, our system is not down and we are integrated with major players in the industry,” says Muhammad Hassan Khan, CEO at Trax Logistics. “Once the order is delivered, our rider collects the cash, and because everything is

live, as soon as the order is delivered, we close our receivable with the rider and open the payable with our shipper and we are able to IBFT that money to our shippers which removes a huge pain point for them,” adds Salman. Timely cash settlements are important for online marketplaces. Let’s just say it’s make or break for these companies, especially smaller ones. If a logistics company takes 15-20 days to settle the cash they collect on COD orders with a marketplace, it can be really bad for small online retailers. And 15-20 days is what startups say was the time that the big companies took to reimburse cash to marketplaces for these orders. And because these startups have digital payments arrangements, they are friends of these eCommerce startups that they have partnered with and also their saviours. “We have partnered with JazzCash and EasyPaisa and our riders also carry card machines in case customers do not have cash and the rider comes back, which can incur additional costs,” says Muhammad Uns, CEO of Swyft Logistics. All of these startups have been able to get some eCommerce delivery volumes. In the case of Rider, Salman claims that his startup has been able to do as many as 1 million deliveries since its inception, with a first attempt success rate of 87%, and an overall success rate of 92-95%. On the other hand, Swyft claims a success rate of as high as 96%, while for Trax, an online marketplace shared that Trax’s success rate on their platform was in the high 80s. But incumbents are here to stay Let us make one thing clear, however.

LOGISTICS

“It’s the days when eCommerce is on the boom that our expertise comes into play. Not only do we have large fleets, we have operational flexibility with which we can carry out these deliveries. The size of the company means that we are able to take this volume in and cater to it and make these deliveries” Qasim Awan, director and head of eCommerce at TCS

Despite all of this, companies like TCS are not going to be easy to dislodge, especially since they seem to be making a real and concentrated effort of moving towards tech forward solutions themselves. From the market intelligence collected by Profit, legacy players in the last mile eCommerce delivery space also have success rates above 80 per cent and they are improving. Certain commentators also questioned if Rider or others would be able to maintain their success rates when they scale. To recall, Rider has a full time fleet size of 300 riders, (scaling to 800+ in peak time), and both Swyft and Trax have a last mile delivery fleet of 1,000 plus riders, whereas heavyweights TCS and Leopards both have 4,000 to 5,000 riders in their fleets. Would they be able to maintain the same success rates when they reach the scale of TCS or Leopards? Also, what will happen when the venture capital money runs out? Marketplace owners who have worked with startups as well as legacy logistics companies, and who chose not to be named, also tell Profit that legacy logistics companies offer same day deliveries within the city and more or less deliver in the same timeframe as startups which essentially means that the unique propositions on the back of technology are being matched by legacy logistics companies because, and it will come later, they have also started focusing on automation. They further say that legacy companies can be less expensive because they tend to undercut prices to stay ahead of competition and have started doing instant cash settlements (24-48 hours) like startups.

Let’s pause here a bit

ricing makes the startups uncompetitive right now. For instance, for within city deliveries, legacy companies would charge Rs80 for a single parcel which can go as low as Rs60 because these companies are resorting to price wars. In contrast, Rider could cost as much as Rs120 for the same intracity delivery. On the same note, Swyft also said that they were not inexpensive, without disclosing any numbers. Why do these startups charge more? Because the better success rate they claim, in the 90s that Rider and Swyft claim, saves losses that come with a lower success rate that legacy companies have when reattempts are made. Because these losses are being averted, these startups think a premium should be paid to them. But as per testament from a marketplace owner, they would rather opt for a lower price with TCS or Leopards because they have another differentiation factor that makes them most compelling: both these companies have the widest coverage for these deliveries in Pakistan, delivering parcels to destinations more than others. “The differentiation factor here is coverage. When you are signing up a company for delivery, you would prefer to partner with a single company rather than multiple companies and then you would prefer one that offers the best coverage. We can’t ignore this,” says an online marketplace CEO. In response to the point on coverage, Rider CEO, Salman concedes that traditional players have a large established network, con-

sisting of brick and mortar branches. However, according to him the startups, including Rider, having learnt from the successful global e-com logistics players, are developing innovative, low-cost, efficient, and flexible ways to aggressively expand their networks. “Solutions such as micro-distribution centers and mobile warehouses will enable us to expand quickly in the near future”, says Salman. The way the requirements of the eCommerce marketplaces are structured, players like TCS, because they are so big, are simply not expendable. “There would be areas of expertise that we won’t have at Daraz Express but TCS would have that expertise and we work with to improve our customer experience,” says Ehsan Saya, managing director at Daraz. A problem here is also that besides Daraz, many of the online retailers are big fashion brands that form the bulk of the eCommerce volumes, which have an established presence in physical retail and, therefore, have less cash flow issues. Khaadi, Sapphire and the likes, because they have less cash flow issues, happily partner with the big in business because they are also big in business and don’t really mind long cash settlement cycles. Companies like TCS and Leopards also know that they are big and leverage their position to negotiate deals that ensure that they remain big. For instance, TCS would make its network and vast coverage available to companies if they give the entirety of their volumes to the company. They would also offer better prices to secure big clients, effectively staying ahead of all others and that reflects in TCS’ top position in this pyramid. While there are no solid

numbers of how much market share is owned by companies in eCommerce logistics, most versions in the market put TCS at the top spot, followed by Leopards Courier as a close second. CallCouriers and Muller and Phipps (M&P) contend for the third and fourth spots and then rank the startups Swyft and Rider. Boldly, however, Trax claims the third spot for itself based on its in-house market research and boldly, it also says that its delivery network now matches that of TCS and Leopards. Whatever the case, with all of the startups fighting for fourth place, TCS and Leopards are firmly in first and second place. Now, eCommerce volumes are erratic throughout the year, with over 50 per cent of the volume coming on a handful of big days like Eid days or 11.11. Last mile logistics companies are, therefore, faced with the tough choice of staffing for the entire year, low days or days when there is a boom. It is also here that because of the year round staffing for their courier business, TCS’ apparent weakness becomes its strength. It simply becomes the go-to option for marketplaces because it is the only one that can handle the large volumes on these days. “It’s the days when eCommerce is on the boom that our expertise comes into play. Not only do we have large fleets, we have operational flexibility with which we can carry out these deliveries. The size of the company means that we are able to take this volume in and cater to it and make these deliveries,” says Qasim. “For us, customer satisfaction is of prime importance. If our customer is running let’s say a lawn campaign, we can dedicate entire sets of fleets to ensure timely deliveries for our customers,” he adds. Startups have been able to scale on the back of technology. The question is would legacy companies sit idly by and let these companies scale further? Legacy companies are already ahead in terms of size, scale and market share. They are matching the USPs of the startups already and in our conversation with TCS, Qasim said that his company was taking automation seriously and working on strengthening the human resources component of the business to consolidate further. They are also improving their tech capabilities, but it is always easier to build a tech infrastructure from the ground up rather than from the top down. “Automation has benefits. It increases your speed, it decreases your costs and it decreases human error in this business which can be really costly because of a lot of permutations and combinations in the deliveries, especially in eCommerce. Automation is important for us and we invested in hardware and software in this regard. It is also important for us that our workforce remains highly motivated. Automation is important but I would not say it is a panacea for how to improve this business even

though it is very critical,” he says. Now Rider and others have started with technology, learning while the scale was small and bringing optimisations on that. While TCS is big and can’t really incorporate technology into the giant corporate machine in one go, or at least that is what the startups believe. Any automation would mean training professionals and fleets which could affect customer experience and eventually hurt the company’s market presence. But Qasim does not seem worried. “Innovation is not difficult for TCS. We have been evolving and innovating based on customer demand and this is another phase in our evolution in terms of bringing certain investment, certain Capex and vehicles. We have just gone through the largest fleet revamp in our history right in the middle of Covid-19. This was a big investment. We have also had automation spells driven by a dedicated team that did time motion studies, figuring out all what has been happening with regards to all our hubs and warehouses and how all the processes can be turned. So yes our scale is larger, but I don’t think it will be difficult for us,” he says. “We have carved out TCS eCommerce Solutions which can be considered sort of a startup and we are trying to make it as agile as possible. Being a startup is great but it is also not the be all and end all because startups also lack a certain network. The key for us is not to have an agile business unit. The key for us is to have an agile logistics network overall. Yes, we could have a specific unit set up in Karachi, but if the agility could not be there in Khyber Agency what good would it do? It is not a bad idea but we are a very operation-focused group. That remains our main priority and if that is achieved, everything becomes smooth,” he says. While TCS shared its plans, we have only heard of a version that mentioned Leopards Courier’s plans to also scale aggressively in the eCommerce last mile delivery space. The company has reportedly set up a new facility in Karachi to cater to increasing volumes but the automation plans of the company are unknown.

The threat to all

ere’s the scary part. All of this, all of the efforts being made by TCS and the high flying attempts could be for naught. Why? Because the eCommerce marketplaces could try and dominate the logistics themselves. eCommerce is currently only around 1-2 percent of the total retail in Pakistan and we can only make assumptions about who is going to dominate the industry as the industry grows in volumes. So while it is difficult to give a verdict here, we can make sense of the direction this industry is going to go and the example we have is of Am-

azon, the global eCommerce giant that started its deliveries partnering with logistics companies United Parcel Service (UPS) and United States Postal Postal Service (USPS), started its own logistics fleet and grew it to a scale large enough to threaten even the existence of its once delivery partners. In Pakistan, the logical equivalent of Amazon is Daraz that started its own logistics fleet Daraz Express (DEX) through which it does around 50 per cent of the deliveries. For the rest it has partnered with TCS, LCS and even Rider. The market sentiment in eCommerce is that marketplaces should not outsource customer experience to third party logistics companies, something companies like Amazon have been religious in following. That is the way it went for Amazon, and it will be logical if it goes the same way for Daraz. On the other hand, Daraz contended that is not the way they would go. “No, we will not remove partners because the main reason is that when we have campaigns, we also scale our business quickly, and we will never be so efficient that we can do it all ourselves. Our relationship with partners is phenomenal. Nor do they look at DEX as competitors and nor do we look at them as competitors. We get into the room and we say that we did this, this is the data that we improved, you should do the same. So we will not get to the place where 100% of the orders will be covered by DEX, and we don’t aim for that. What we have internally aimed for is 6065% of our orders will be done through Daraz Express and we will continue to partner with other players,” says Ehsan Saya. Yes, we are questioning the existence of the last mile eCommerce industry but that is for some time to come, according to industry stakeholders. “There is enough in the pie for everyone. The opportunity has been further exploded by the pandemic. There is enough room for everyone. Though it is worth noting that it is not an easy business to get into. A lot of players rush into it but it only gives illusions of returns,” says Qasim. “In fact, a testament to that is we don’t just have partners that are big, in smaller cities we have launched a platform called logistics marketplace where we partner with small players where we get them up and running. You look at this one city where the success rate is not as good and neither for our partners so why don’t you start doing deliveries in the city because you know it well and if your costs are good, we will give it to you because you can do it more efficiently. We are trying to make sure logistics overall gets stronger. So no, we are not planning to replace others. On days where our volumes go up, we can not just do it on our own. We need our partners. That is not on the cards for us at all,” Saya says. n

LOGISTICS

Everything you need to know about Pakistan’s likely fall from

emerging to frontier market The glass is not half full, it’s leaking

By Ariba Shahid and Abdullah Niazi

n the World Trade Center in Manhattan, New York, there are a bunch of fancy men in fancy suits deciding the future of foreign investment in Pakistan. Morgan Stanley Capital International (MSCI) is the world’s leading market index provider, and their decision about the status of the Pakistan Stock Exchange (PSX) as either a developed, emerging, frontier or standalone market will have a lasting impact on foreign investment in Pakistan. The above paragraph is a load of jargon that means nothing to anyone that is not a student of finance or the economy. What is happening, essentially, is that MSCI calculates the worth of different markets around the world and assigns them different rankings. A developed market is the best ranking and a standalone market is the lowest ranking. To calculate these rankings, MSCI provides market indices. A market index is usually a single number that is calculated from different economic factors, like prices or income. These numbers are calculated to be able to compare different economies in different countries. An example for such an index would be the Gross Domestic Product (or GDP). Pakistan currently has Emerging Market status with the MSCI, but it has recently threatened to downgrade Pakistan to a Frontier Market. If the downgradation happens, it will be the second time Pakistan has been downgraded and it will become the only country to be downgraded twice by the MSCI. This means that foreign investors will now look at Pakistan and not be as excited about

investing there. Essentially, the downgrading would mean Pakistan appears a riskier investment than it would if it remained an emerging market. Profit explain how the MSCI works, makes its calculations, what its history with Pakistan is, and what a downgrading to frontier market might mean for foreign investment in Pakistan.

How it all works

he last time Pakistan was at a bleak edge like this was in 2008. Back then, Pakistan had the status of an emerging market, which was an ideal place to be in. Pakistan was far away from the dreaded stand alone market status, and had stayed in the emerging category since 1994. The names of these categories are not particularly important, nor do they mean much. All you need to know is that a developed market is the highest rank, followed by emerging markets, frontier markets, and then finally standalone markets at the bottom rung. For countries that fall under the developed category, the ranking is not particularly important. These are large, stable players in the world economy like the United States, Canada, the United Kingdom, Japan, Germany and Australia. The only Middle Eastern country that has this status is Israel, whil Hong Kong is the only Asian country other than Japan to have this status. These are countries where there is no shortage of investors trying to get an in. The real competition is between countries that are either in the emerging markets list or in the frontier market list. These are the countries that are very much trying to look for foreign investors and make themselves attractive opportunities. Naturally, frontier markets

are considered riskier investments so less prolific investors usually end up investing there. Emerging markets status is coveted. Currently that is where Pakistan is at. The question at this point might be how the MSCI determines which country falls under which category. The MSCI has been classifying Emerging and Developed markets since the introduction of the MSCI Emerging Markets Index in 1988. An index, as explained earlier, is calculated from different factors in an economy, like the prices of products or the income of the people operating in the economy.The MSCI uses three such factors which are: 1) economic development, 2) size and liquidity of equity markets, 3) market accessibility for foreign investors. The first indicator the MSCI uses to calculate its index is self-explanatory. It looks at the quality of life of the people operating in the economy and sees whether it is improving or worsening. The second one is a little more complicated. Essentially, liquidity of equity markets means how readily a person can turn their assets into cash. This is an important factor, particularly in Pakistan’s case. Market accessibility is simply about any barriers that foreign investors have in entering an economy - basically how hospitable an economy is to foreign entrants. Using these three factors, the MSCI calculates the market index of a country and through that index it categorizes countries as either developed, emerging, frontier, or stand alone.

Pakistan and the MSCI

akistan has had a rocky history with the MSCI. For starters, normally when the MSCI gives a country a ranking, that country usually only moves up,

not down. Pakistan, however, is only one of five countries that have ever been downgraded by the MSCI. Back in 2008, Pakistan was categorised as an emerging market. But this is also when the country was facing the height of terror attacks, and building the economy was difficult when bombs were exploding in major cities with alarming regularity. It was also at this point that the stock market crashed in 2008. As a result, the Karachi Stock Exchange was temporarily closed to prevent the flight of foreign investors from the market. Once the market opened again, foreign investors pulled out their investments from the country and the MSCI relegated Pakistan’s status from that of an emerging market to a frontier market, causing the country’s equity market to lose access to trillions of dollars. While this was a major blow, making Pakistan only the third country to ever be downgraded by MSCI, it also helped set a new resolve that would take Pakistan forward. As the first civilian government in almost a decade took the reins and Pakistan took a hold of its internal security, things began to improve. Since those dark days of the 2008 crash, Pakistan has performed consistently and the country’s equity market delivered, with improved regulation standards and market fundamentals. As a result of this, the PSX was declared the “best-performing stock market in Asia in 2016.” This was quickly followed by the MSCI deciding to give it the much-coveted emerging market index status. This was really an underdog story. Hounded by terrorism at home and downgraded to just a step above rock bottom (stand alone status), Pakistan fought back and its stock market became the best performing one in Asia in 2016. Not only did Pakistan get redemption by the improvements in the PSX, it went ahead and regained its earlier position by being declared an emerging market in 2017. Within four years, however, Pakistan is in hot water again and at risk of being downgraded to the status of frontier market. The decision is to be finalized by September 2021, with November 2021 set for reclassification. Now, remember that the three factors MSCI uses in its calculations are economic growth, liquidity in equity markets, and market accessibility. Currently, the factor on which the MSCI is nailing Pakistan is the second one: liquidity. “Although the Pakistani equity market meets the requirements for Market Accessibility under the classification framework for Emerging Markets, it no longer meets the standards for Size and Liquidity,” said the MSCI in a notification. “The index continuity rules have been applied since the November 2018 Semi-Annual Index Review to artificially maintain the required three constituents in

the MSCI Pakistan Index. Since the November 2019 Semi-Annual Index Review, there have been no securities in the MSCI Pakistan equity universe that meet Emerging Markets Size and Liquidity criteria within the MSCI Market Classification Framework.” Essentially, what all of this means is that Pakistan has been trying very hard to keep its status but its market has not responded favourably to it. Now, Pakistan can still make it out of this without taking the hit. Pakistan can still retain its emerging market status if it matches the quantitative criteria by September and that is possible when “the banks in particular would have to nearly double their market capitalisation, which seems improbable… unless there is a significant rally in the 3 main MSCI EM stocks (LUCK, HBL and MCB),” said an equity analyst. Essentially, LUCK, HBL, and MCB are the most important indicators in Pakistan’s index calculations, and if they can rally, then Pakistan will retain its status. However, the question many analysts are raising is whether we really want to retain this status, or whether being a frontier market would suit Pakistan better.

Is downgrading really such a bad thing?

espite the looming downgrading, some analysts think not only will it not negatively affect foreign investment in Pakistan, it might even help out. You see, an emerging market and a frontier market attract very different kinds of investors. An emerging market attracts cautious investors while those that want to invest in frontier markets are willing to take more risks. In the nine years Pakistan was a frontier market, it did well as one. Emerging markets are countries that are in the process of becoming a developed economy. They are also called less economically developed countries. While they are not as economically advanced as the US or Japan, they are well on the way. Emerging market countries include Russia, Mexico, India, Saudi Arabia, and currently Pakistan. These markets have greater liquidity and are more stable than frontier markets. Frontier economies are less advanced economies in the developing world. It is generally believed that emerging markets earn greater returns with lower risk, whereas frontier markets are considered riskier. These countries usually have equity markets that are less established compared to emerging markets, are smaller, less accessible and are more risky. Political uncertainty, poor liquidity, problems with regulations, substandard financial reporting, and currency fluctuations are some deterrence for investors.

So while Pakistan would generally be considered a small fish in a big pond as an emerging market, it would be a better prospect for frontier market investors. However, there is still the fact that if you’ve read the paragraphs above, you can see that no matter how much visibility Pakistan may get by this downgrade, it still very much remains a downgrade. How you interpret the downgrade depends on how you would like to see it. If you’re a glass half full type of person, you’ll probably be celebrating the fact that Pakistan can be a big fish in a small pond. That means with the downgrade to emerging markets, Pakistan may have greater visibility to foreign investors. However, it is important to note that weightages are important when it comes to such indices. But before that it is important to know that market reclassification is not something that happens often (even though it has happened quite a lot for Pakistan - both up and down), investors do not always factor the potential effects of it when making investments. In 2017, when Pakistan exited frontier market status, it had a weightage of approximately 9%. However, with the current proposed reclassification to frontier market, Pakistan would be able to grab 2.3% indicative weightage. A significant slump in comparison to the past. This also largely depends on the state of Argentina’s reclassification and potential upgrade from standalone to frontier market. As per AKD Securities, “While Argentina is downgraded from MSCI EM as a standalone index, potential reclassification to FM could further compress Pakistan’s weight in the index.” Meanwhile, Topline securities thinks this “may turn out to be beneficial for Pakistan in terms of increasing visibility amongst foreign participants” one cannot forget that not assets under frontier funds have not fared well and have fallen to US$4bn, down from US$15bn in 2014. This is primarily due to the fact that FM markets have not been able to make up for the risks that are attached to them. Based on that, these markets have experienced significant outflows too.” However, as per AHL Research, “Pakistan’s weight will gradually go up as markets rebound and attract pre-corona foreign inflows”. The report further said that it is likely that the outflows from EM funds would be offset by the inflows from FM funds, which are mostly active, through a net inflow of $100 million.” AHL believes this is possible keeping in mind the fundamentals of the KSE 100 being stronger than counterparts and decent valuations. “Overall dynamics of the KSE-100 index are comparatively stronger than the peer markets with a higher weight such as Kazakhstan, Kenya, and Bangladesh etc.” n

EXPLAIN-IT-LIKE-I’M-FIVE

discards its little known Swiss subsidiary

That’s right, UBL had a Swiss subsidiary since 1967

t’s a curious piece of information. On the 12th of June 2021, United Bank Limited (UBL) announced that it was winding up its wholly owned subsidiary in Switzerland. The only question that this really led to was how and why on earth did UBL have a subsidiary in Switzerland in the first place? And much to the surprise of many, UBL (Switzerland) AG has been around since 1967. It only has one branch in Zurich, Switzerland, and used to be known until 2013 as United Bank AG Zurich. According to the notice, UBL has decided to voluntarily wind up the subsidiary as part of its global realignment strategy. “This decision is in line with UBL’s strategy to exit from non-core markets,’’ the notice explained. According to the bank, UBL and UBL (Switzerland) AG will continue to ‘work closely with all stakeholders throughout the winding up process to ensure that UBL (Switzerland) AG is wound up in an orderly manner, fulfilling all its obligations and complying with all applicable laws, rules and regulations.’ Most importantly, the notice stressed

that UBL’s decision to wind up UBL (Switzerland) AG will not have any material impact on the overall operating and financial position of the UBL. The decision is a bit of an about turn for the bank, which previously had touted the subsidiary as an important part of growth, especially in the early part of the decade. First, some context. UBL was founded by Agha Hasan Abedi in 1959. As of 2020, the bank operates 1,356 inside Pakistan, and 14 branches outside Pakistan. It is also itself a subsidiary of Bestway (Holdings) Limited, a wholly owned subsidiary of Bestway Group Limited (founded by British-Pakistani Mohammad Anwer Parvez). UBL used to have five subsidiaries: United National Bank Limited (UBL UK), UBL Switzerland AG, UBL Bank (Tanzania) Limited (UBTL), United Executors and Trustees Company Limited, Pakistan (UET), and UBL Fund Managers Limited, Pakistan (UBLFM) (the asset management arm). We say used to, because by 2021, only two will be standing: UBL UK, and UBLFM. The remaining three are all in the process of being winded up. What happened? The easy one is UET: it was incorporated in Pakistan in 1965 as

an unlisted public limited Company and is a wholly owned subsidiary of UBL. The board of directors in their meeting held on February 19, 2020 resolved to wind up the company, which was inactive to begin with. Then, there was UBTL. It had been established in 2012, and yet, just a few years later, in May 2019, UBL entered into an asset and liabilities purchase agreement with EXIM Bank Tanzania Limited. Exim took over control of UBTL’s assets and liabilities in November 2019. Today UBTL has ceased its banking operations and is in the process of voluntary wind up and liquidation. Which brings us to UBL Switzerland AG. The bank, which has been run by Faisal Basheer since 2011. Basheer, by the way, was last in Pakistan in 1977, when he completed his bachelors from Karachi University. He then joined the other bank founded by Agha Hasan Abedi, BCCI, and was with that bank from 1978 right up until the very end in 1991 when the bank collapsed. At the time, he was the country head for Germany, in Frankfurt, He then stayed on in Frankfurt for the next nine years, before moving to a banking job in Nigeria. He joined the UBL family in 2005, moving

to Qatar, and then to Bahrain, before ultimately returning to Europe in 2011 as the CEO of its Swiss subsidiary. The bank is tiny: it had 13 employees as of 2019, and was the 209th largest bank in Switzerland in terms of total assets (a market share of 0.01%). It was also the 63rd largest foreign-controlled bank in Switzerland (out of 71 foreign-controlled banks). There is scant information on the subsidiary’s financials in the annual reports of UBL, in fact, the years 2015 and 2016, entirely omit key details of the subsidiary. But initially, UBL Switzerland was considered important: in both 2013 and 2014, the directors report noted that UBL’s International business remains a critical contributor to the overall bottom line and a major competitive advantage. The renewed focus on leveraging UBL’s international network has synergized business with the subsidiaries in Switzerland and the United Kingdom.’ The year 2017 was also a very good year: profit before tax increased by 13% over the previous year, mainly driven by a rise in trade related fees. The balance sheet continued to expand, led by growth in deposits and borrowings.

The bank is tiny: it had 13 employees as of 2019, and was the 209th largest bank in Switzerland in terms of total assets (a market share of 0.01%). It was also the 63rd largest foreign-controlled bank in Switzerland (out of 71 foreign-controlled banks). The year 2018 is where trouble begins: the company’s profit before tax declined by 12% over the previous year, mainly due to lower commission earnings and increased swap costs, while balance sheet size remained broadly in line with 2017. And in 2019, UBL Switzerland’s profit before tax stood at CHF 2.8 million - a decline of 12% over the 2018. Net interest income also fell by 29% over the previous year mainly due to higher swap cost and increased cost of borrowings. But the worst was yet to come: In 2020, UBL Switzerland’s profit before tax stood at CHF 1.1 million, or a decline of 60% over the 2019. Net markup income stood lower by 7% over the previous year, while non mark-up income declined by 27%. Worse, income from commissions declined by 27% year on year ow-

But the worst was yet to come: In 2020, UBL Switzerland’s profit before tax stood at CHF 1.1 million, or a decline of 60% over the 2019. Net markup income stood lower by 7% over the previous year, while non mark-up income declined by 27%

ing to the pandemic led slowdown. The balance sheet size reduced by 38% over December 2019. So, it was time to go. The bank had already closed one international operation; it figured it could handle another. According to Faizan Kamran, senior research analyst at Arif Habib Ltd, an investment bank: “The bank has been focused upon de-risking their balance sheet. The management had been focused upon curtailing international operations and the bank had also sold its Tanzania operations in 2019.” This is similar with the other large bank in Pakistan, and UBL’s competitor, both in terms of deposits, size, and history: Habib Bank, or HBL. According to Kamran, “Similarly HBL has also been winding down international operations which are not feasible. HBL had decided to sell off its Mauritius operations this year.” He went on to stress: “Both banks had faced stress on their asset quality particularly from their international operations and had therefore been focused upon de-risking their balance sheets by reducing international exposure or moving towards safer business models.”

BANKING

OPINION

Ihsaan Afzal Khan

Inflationary tactics

same. Now remember, the apples are the only product that money is being spent on in this economy. Since the money is valueless unless it is spent, the price of one apple will rise to Rs 1500. This will lead to the one person If you’re going to increase the money who has Rs 6000 to buy four apples, whereas nine people will now only be able to buy 67% of an apple each. The price of the apples has effectively supply, at least divide it more equitably increased by 50%, and the ability to buy apples has decreased for everyone ver wonder why your savings never seem to be catching up else. Two things have happened here. The first is that there has been an with the shooting prices of real estate? Why whenever you increase in currency supply, but that increase has not been evenly distribthink you’re going to start setting some money aside to get a uted since not everyone has access to bank financing, amnesty schemes, car, car prices move faster than your savings do, and you never or subsidies. In the real world, this can be seen as the difference between end up with enough? Essentially, are you ever frustrated by the business class and the salaried class, since people who are in business just how quickly money is losing its value? generate more wealth than people who are on salary. Salaries remain the The total currency in circulation or Money Supply in Pakistan in same or increase only nominally. June 2018 stood at around Rs 16 Trillion - this is all of the money held by The second thing happening is that the growth of GDP is slower the public at that point in time. Surprisingly, this amount has increased than the increase in the money supply. At the end of the day, this means to Rs 23 Trillion in the three years since 2018 - an increase of Rs 7 trillion. that there is more money to buy fewer products and prices increase resultTo put that into perspective, it is an overall increase of nearly 44% in just ing in higher inflation. This again penalizes the salaried classes disprothree years at a rate of nearly 15% increase every year. This is no small portionately. The result is an increase in inequality of income and higher happening - it is a massive change not just in the overall amount of money inflation. circulating in Pakistan, but an astronomical increase in the acceleration This is almost exactly what has happened in Pakistan, on a much at which money is being circulated. In comparison to the 15% average larger and much more complex scale. There has been a 44% increase in the increase in money supply in the past three years, the GDP has grown at an money supply over the past three years, and a lot of it has been because of average of only 1.8% per year in the last three years. amnesty schemes and bailout packages for a number of industries, which What effect does this have on the people of Pakistan? To try and were given out first to stop the economy from crumbling in 2018-19 and understand how money supply affects the entire population, let us scale then given again between 2020-21 to act as a buffer between industries and down the numbers for the sake of the example. Assume, for a moment, the impact of the coronavirus lockdowns in Pakistan. Largely, this money that there are exactly 10 people in the entire economy, and each has Rs entering the economy has landed in the pockets of the affluent, whose 1000 in their pockets. This would mean that the total currency available wealth has increased, allowing them to easily weather the inflationary (the money supply) would be Rs 10,000. Now let us assume that the total storm of the past three years. Meanwhile, the majority of the population products in the economy are 10 apples, and each apple is worth Rs 1000, has not gotten the dividends of the increase in money supply. Instead, they meaning products in the economy are worth Rs 10,000 in total. All the have only been punished by the rising inflation. The question becomes, money has to be spent to buy apples. Each person can buy one apple each where have these additional RS 7 trillion gone to? worth Rs 1,000 as currency is evenly distributed. The federal Government has spent more than what they have earned Now suppose that one of these persons, who has access to subsiin the last three years by an accumulated deficit of Rs 10,000 billion. This dized bank financing, government subsidies, amnesty schemes, or is an is not sustainable. Next year’s target for the federal fiscal deficit is Rs 3400 affluent business person and is given Rs 5000 more in addition to his Rs billion. There is still uncertainty over how the government plans to handle 1000 through one of these sources. The first thing that happens is that the the circular debt, which is nearing Rs 3000 billion, and losses/debts of state money supply grows to Rs 15000, but the number of apples remains the owned enterprises are also rising at a phenomenal rate. Adding inflationary trend of commodities in the global market with serious challenges to the revenue target set by government; inflation is the dagger threatening affordability by the majority of the population Ihsaan Afzal Khan At this point, the government is itself admitting that it is difficult to control inflation and has set a target is a business of 8.2% for the fiscal year 2021-22. Government strategy to give handouts in the shape of TERF, construction executive with package, amnesty schemes, youth loans which the commercial banks are handing out to their trustworthy clients is itself inflationary. Take, for example, the construction package and Naya Pakistan housing loans. exposure in health, This injection of money supply has boosted demand more whereas the supply of housing has not increased at a education, power similar pace resulting in a 50 to 100% increase in prices of residential plots, flats, and houses. This is making it distribution and impossible for the salaried classes to buy a piece of land or afford a flat or a 3 to 5 marla house even with the soft loans. The question remains, does the government plan on affording protections to protect the majority of the manufacturing population from inflation, or are their policies simply throwing them under the bus?

COMMENT

By Ariba Shahid

ere is what happened. A stationary ship used by Engro to regassify and store LNG was due for maintenance, which was delayed by Covid-19. Because of the delay, the ship was given permission by international regulators to continue operating without maintenance for the time being. The delays kept happening until the ship’s class society stepped in and said the ship would no longer be allowed to function unless the scheduled maintenance took place by the 30th of June this year. That is when all hell broke loose. Engro had no other choice but to tell the government that enough delays had happened and they needed to dock their ship. As a result, Sui Southern found

ENERGY

itself in a position where they would be unable to provide gas for a couple of days, and as a result would have to pay liquidity to Sui Northern, with whom they have a contract to supply LNG. The energy ministry was sympathetic towards Engro, but the finance ministry was not so much. While these two factions locked horns over who should be paying Sui Northern liquidity, the maritime ministry raised issue with the ship Engro was temporarily bringing in since it was larger than the one they were docking. In the past few days, the news has circulated widely in the media, but that has not meant things have always been clear. The above has been the simplest possible explanation of what has been happening. The details may seem a little more complex and daunting to understand because of the jargon involved. In reality, it is a case of turning what should have been a very simple, (and rather dull) routine, maintenance procedure into a bone of contention between at least three federal ministries, two government owned companies, and two important private companies. Profit explains the ins and outs of how and why Engro Elengy’s dry docking has caused such a storm among the country’s top finance and energy Czars.

Some basics

he story starts with a vessel named Exquisite. Owned by a company called Excelerate, the Exquisite is no ordinary sea-farer in that it does not actually traverse the seas. It is an extraordinary and aptly named ship

that is, in technical language, called a Floating Storage Regasification Unit (FSRU). An FSRU is a special type of ship that is a vital component required while transiting and transferring Liquefied Natural Gas (LNG) through the oceanic channels. An FRSU floats close to a coast and has pipes leading up to that coast which feed directly into the country’s gas pipelines. Ships carrying LNG carry them in a slushy form. Normally, these ships would have to be docked, the LNG offboarded, and taken off site to another place to be heated and liquified before it is ready to be transported through gas pipelines. Instead, these ships do not go to the port and instead steer close to the FSRU, which stands stationary in the water, and basically just plug themselves into the FSRU. The FSRU is equipped with the facilities to conduct the heating and liquefaction process on the ship itself. The slush is thus transported from the travelling vessel to the FSRU, it is heated and then finally fed directly into the gas pipelines. This helps reduce costs, increase efficiency, and save valuable time. The only downside is that every five years or so, FSRU vessels need to be brought ashore, docked on dry land, and given maintenance. However, since it is years before this process is needed, it can very easily be planned for. The vessel Exquisite, which is at the center of the current controversy, was the first FSRU to come to Pakistan. It started operating here in 2015, and its maintenance was due in 2020. Since 2015, it has been providing a significant chunk of gas to Sui Southern, which then contractually pro-

vides it to Sui Northern (Sui Southern and Sui Northern are both owned by the government but separate entities). In October 2019, Engro told the government that the ship needed to be dry docked, however, this could not be done because all ports and docks were shut down in wake of the Covid-19 pandemic. This posed a major conundrum for both Engro and Excelerate - the company that owned the ship Exquisite. Ships all over the world are regulated by organizations known as ‘Class Societies’, which is short for ‘Ship Classification Society.’ They monitor different kinds of ships and make sure that they are being kept up to a certain international standard, and insurance companies rely on the judgement of these Class Societies to determine whether they can continue to provide coverage to ships. In the case of FSRU ships, they are monitored by The Class Society for Exquisite is Bureau Veritas (BV). At this point Engro had done their job. They had notified the government of the need for dry docking and they had been following the directions of BV and the company that owns Exquisite. For the next year, they kept getting permission to delay the dry docking because of Covid-19. In March 2021, however, BV decided that enough time had passed. Shipyards were also functioning by now, so they made an executive decision that it was time the maintenance finally be carried out. If Engro failed to do this, the insurance cover on the Exquisite would be withdrawn or would be provided at a substantially higher premium. The date they were given was the 30th of June 2021. Engro does not own Exquisite. Instead, it is owned by Excelerate. Therefore, Engro cannot make a decision regarding its dry docking. “Engro as an operator can only request to extend this period, and Engro did through its FSRU partner Excelerate. However, the decision is an executive order from BV,” said Engro officials.

Too many chefs

his resulted in a tussle in the federal cabinet over the status of the Exquisite. Neither the government nor Engro owns the Exquisite. This means that no matter what, it will go for dry docking on the 30th of June, and a meeting of the CCOE yesterday (Tuesday) indicated that the interruption in gas supply would most likely be approved between the 29th of June to the 5th of July. And that, somehow, is the best case scenario. On the one hand are Tabish Gauhar and Hammad Azhar from the petroleum and power divisions. On the other hand are Shaukat Tarin, Azam Swati, and Ali Zaidi from the finance, railway, and maritime ministries. Gauhar and Azhar are sympathetic towards Engro and

have an understanding of the dry docking requirements, but are facing backlash for “being lenient” towards EETL as per a report by Dawn. The other side believes they are favouring Engro. So how did we get here? Immediately after Engro notified the stakeholders involved that the dry docking could no longer be delayed, the concern became what would happen to the supply of LNG. Since the maintenance was an expected occurrence, there was already a provision for this in the contract between Engro and Sui Southern. The maintenance process of an FSRU usually takes at least 2-6 months in which it is taken apart, cleaned, and put back together. During these months, Engro gets a new FSRU ship that fills in for the time that the original is gone. Engro had already made an agreement with Excelerate to bring in a new ship called Sequoia for the time being. This resulted in two things. The first was that Sui Southern realised they would not have any gas for at least two days. The process of replacing an FSRU ship is not so simple as plugging one out and plugging the other one in. The Sequoia has already set out from Singapore and will reach Pakistan by June 26, 2021. It will then take at least two days for the new ship to be connected, and then at least three more days as the gas from the new ship gradually increases to normal levels. This means for the first two days there will be no gas supply at all, and that there will be less gas for the three days after that. This spells trouble for Sui Southern (SSGC), which supplies gas to Sui Northern (SNGC). Due to the disruption in supply from the Engro, SSGC will face liquidity damages. As per one source, the liquidity damages can range between $1-1.5 million. It is said that SSGC is pushing for the dry docking to take place in August because there is already a scheduled shutdown for which SSGC will not have to pay liquidity damages for. Profit has reached out to SSGC for a comment but has not received a response at press time. Meanwhile, the cabinet faction of Shaukat Tarin and Azam Swati believe Engro should be covering the bill for Sui Southern, a sentiment echoed by the Chairman of the Cabinet Committee on Energy (CCOE), Asad Umar, who said that “Sui Southern should not have to pay liquidated damages for the fault of Engro.” This is where Ali Haider Zaidi and the maritime ministry come in. While the maritime ministry has absolutely no involvement in any of this energy related business, it raised a concern saying they had not been told that a new ship was coming in. They made a particularly big fuss about this because the Sequoia is a larger ship than the Exquisite. Legally, Engro is not allowed to increase their capacity just because they have a larger ship, so it should not

make much of a difference. However, this has caused problems because of existing tensions over what Engro is supposed to supply to Sui Southern. The original agreement between EETL and SSGC was for the supply of 400 mmcfd. Later on, this was brought up to 600 mmcfd. While this resulted in a pending NAB enquiry, the fact that the Sequoia FSRU is 780 mmscfd, there are concerns by stakeholders over EETL expanding its capacity. This also proves to be a problem for the Ministry of Maritime Affairs considering the fact that if EETL Is enhancing its capacity through Sequoia it will hamper plans by Energas and Tabeer Energy’s plans to set up two new LNG terminals - and according to sources, Ali Haider Zaidi is sympathetic towards these two new companies that want to set up here. In any case, the government cannot get more than 600 mmcfd gas from the EETL even if EETL brings in an FSRU with capacity to regasify LNG of 900 mmcfd. It must be remembered, however, that the Sequoia has been brought in on a temporary basis until the Exquisite is gone for dry docking. It is possible that EETL is mulling on keeping Sequoia permanently, considering its greater capacity and also the fact that it requires dry docking after a span of 15 years. However, for this Engro will need fresh government approval to increase their capacity, which is a completely different conversation.

What’s happening now?

he law Division, being headed by Farogh Naseem, came up with its opinion after receiving input from the legal teams of SSGC, EETPL, SNGPL, PSO, LNG, marine lawyers, and Excelerate. As per the inputs received, the law division has suggested dry docking to go on as planned resulting in the terminal being shut from June 29 to July 5. To investigate the drama, the government has appointed Railway Minister Azam Swati to investigate the reasons behind the delay in the dry docking. Moreover, in order to deal with the impact of the dry docking, the Petroleum division has suggested RLNG/ gas curtailment measures based on priority. The measures aim to supply maximum RLNG to power plants as well as the export industry. While the RLNG supply to K Electric may be reduced, the gas saved from CNG and non-export industries may be diverted towards K Electric. As per a story by Tribune, the oil and gas companies have informed the government that the entire exercise will cost consumers $25 million as they will be required to substitute gas with furnace oil and high speed diesel in power plants to supply electricity. n

ENERGY

By Abdullah Niazi

round the turn of the 21st century, Pakistan was fast on its way to becoming one of the many darlings of globalization. In 1997, the American fast food chain KFC set up its first branch in Pakistan and was quickly followed by McDonalds opening its first branch in September 1998. Both fast food giants started operations in Lahore. Before the entry of these two fast food chains, the only prominent international chain that had already been established in Pakistan was Pizza Hut, which established its first branch in the country in its iconic hut-shaped building in Lahore’s M M Alam road in December 1993. All three of these franchises significantly changed the culinary landscape of not just Lahore, but the entire country. Crowds milled outside their stores for their opening, people made reservations to eat at Pizza Hut, local fast food restaurants started shuttering up and very quickly these chains started spreading all over the country. It was a fast food revolution, a complete overhaul in which Pakistan was entering the auspices of being an American ally and thus being open for business. So when Dunkin Donuts decided it would allow franchises in Pakistan, it had examples to learn from. Pizza Hut, McDonalds, and KFC had all become wildly successful, and all of them had started in Lahore.

Dunkin Donuts had a very different product, but Lahore was hungry for more products straight from America. The only question was how Dunkin Donuts would present itself. One must remember that at this point, while it was fast food, the newness and curiosity surrounding these American franchises meant eating at these places was considered an excursion of high society. So when Dunkin Donuts opened its doors to the Lahori public in 2000, they did so in the still developing but very

new-money area of Defense. Very quickly, they too became incredibly popular. Except what they had going for them other than having American brand value was that they were also a coffee shop with bright orange colours which were the height of aesthetic appeal in the early 2000s. Dunkin Donuts now became a ‘cool’ spot. It was where you went on first dates and where you got a box packed to take as a gift to someone’s house. But in the past two decades since Dunkin Donuts has opened, it has not seen the kind of success that KFC and McDonalds have seen. KFC currently has more than 92 outlets all over Pakistan, and McDonalds has nearly 80 outlets. Pizza Hut has fallen behind on this front, but that is mostly because it has been beaten by Dominos, another foreign chain that now has nearly 50 locations across the country. In compar-

ison, Dunkin Donuts has 12 branches in Lahore and Islamabad combined, and 10 in Karachi and its surrounding areas. The surprising thing, however, is that unlike Pizza Hut, Dunkin Donuts’ failure to expand convincingly has not been because competition has beaten them out. There is no other foreign franchise chain selling donuts and coffee, even though many shops have opened locally and done decent business. Now, however, it seems that local donut chains born and developed in Pakistan are about to give Dunkin Donuts and other local donut shops a serious run for their money. At the helm of this charge is O Donuts, known more commonly as OD Pakistan. And unlike Dunkin Donuts and all of these other chain franchises, their story begins in Karachi, where they began operations two years ago and already have more points of sale than Dunkin Donuts with 14 branches where their products are available. Long gone are the days of Lahore being the center of new kinds of food in the country, and the ancient City now very much takes its culinary cues from the coastline metropolis. Which is why two franchise branches of O Donuts are set to open in Lahore in around a month’s time around Eid. And if their wild popularity in Karachi is any indication, they are about to be the next big thing in Lahore’s food landscape.

The OD story

Donuts started because there is no Krispy Kreme in Pakistan. Krispy Kreme, for those unaware, is another American donut chain famous for being better and more popular than Dunkin Donuts. Somehow, however, they have never shown any real interest in Pakistan, despite rumours in 2019 that they were looking to move into Pakistan. When the popularity and as a result the quality of Dunkin Donuts began to fall in Pakistan, people visiting abroad began to bring back boxes of Krispy Kremes to show people how good donuts could be. And while Krispy Kreme had no intention of coming to Pakistan, people were already starting to get ideas. Small artisan donut shops began opening not just in Karachi, but also in places like Lahore. So when O Donuts finally did start opening in Karachi, people were ready for it.

“We have been having Krispy Kreme for a while. That is a standard for us. Since it wasn’t there in Pakistan, we were surprised to see something like O Donuts and how good they were. We immediately thought it would be a good idea to approach the owners since Lahore is a vacant market and the response in Karachi was so overwhelming” Haroon Sheikh, Franchisee O Donuts, Lahore

“The first time we tried O Donuts was in Karachi, and the first thing we noticed was how much like Krispy Kreme the experience was” says Haroon Sheikh, the owner of the O Donuts franchises coming to Lahore. Along with his partner, Salman Akram, he is planning to launch O Donuts in Lahore and then expand it all over Punjab and in Islamabad. “We have been having Krispy Kreme for a while. That is a standard for us. Since it wasn’t there in Pakistan, we were surprised

But in the past two decades since Dunkin Donuts has opened, it has not seen the kind of success that KFC and McDonalds have seen. KFC currently has more than 92 outlets all over Pakistan, and McDonalds has nearly 80 outlets. Dunkin Donuts only has 22

to see something like O Donuts and how good they were. We immediately thought it would be a good idea to approach the owners since Lahore is a vacant market and the response in Karachi was so overwhelming. The decision was a big one, particularly since it is a strange business to switch to for the partners, who for more than three decades have been in the high pressure die casting business, in which they manufacture spare parts and products for clients like Honda Atlas. “It is a big shift, but the environment is more favourable to something like the food business these days. We had some friends in Karachi who knew the parent company of O Donuts, so after trying them, we got in touch with the owners and they were also excited by the prospect of spreading their brand to Lahore,” says Sheikh. The prospect happened to be a good one. There was nothing mainstream in Lahore like

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O Donuts, and the popularity of Dunkin Donuts has been on the decline in the city. While there are options like Gustosos and places like Kyle’s Coffee that offer artisan donuts, there really is a lot of space to grow something like O Donuts. And generally, food places that come to Lahore with a Karachi approved tag tend to do well.

How it might shake things up

urrently, O Donuts in Lahore does not have any branches. You can go to their instagram page and message them to inquire about an order, or you can call them on their helpline and place an order that will be delivered to you the next day. And that is only for now, already work has started on two branches, one on MM Alam road and the other in Y block defense - both the most likely spots to attract customers for this kind of product. However, as the owners explain, the response has not just been impressive, it has been diverse. “We wouldn’t say it was a challenge because we made sure we were ready before launching, but with things like this, you can never foresee volume. It was a lot more than we expected, but we had the capacity to deal with it. The most heartening thing was the fact that we were getting these orders not just from Gulberg, Model Town, and DHA, but also all the way in Bahria Town, Shahdara, Shalimar, and other locations. We have very high hopes because of this, and this response is exactly what has encouraged us to go ahead and open these two branches so soon,” says Sheikh. The most important thing here, of course, will be quality control. This is the hallmark of any good franchise agreement, which is the deal Sheikh and Salman struck with the owners of O Donuts in Karachi. The franchise agreement they have is such that they are the ‘master franchise’ for Punjab and Islamabad. This means that while they own the franchises they are opening and will pay royalties to O Donuts in Karachi, anyone else that wants to

open a franchise in Lahore or Islamabad has to come to them instead of going to Karachi. This means that Haroon Sheikh and Salman Akram can either give out franchises in this region to other people or choose to control the scale and map of the brand’s expansion completely. It also means that where they have to comply with the standards established by the original owners in Karachi, they will also have to learn how to monitor that standards are being maintained. “Our staff trained with the staff from Karachi, and our focus is on making sure that you get the same product in Lahore that you would in Karachi,” explains Sheikh. “We have set-up

The prospect happened to be a good one. There was nothing mainstream in Lahore like O Donuts, and the popularity of Dunkin Donuts has been on the decline in the city. While there are options like Gustosos and places like Kyle’s Coffee that offer artisan donuts, there really is a lot of space to grow something like O Donuts. And generally, food places that come to Lahore with a Karachi approved tag tend to do well 34

our own production plant here since the freshness of the donuts is important. Everything is the same. We use the same ingredients. This is a brand so quality is essential.” With the sort of response that they have gotten, Haroon Sheikh and Salman Akram do believe wholeheartedly that this will take off in Lahore. “There are two factors to this. The first is that it is a Pakistani brand and people want to support local businesses. Then there is the innovation. We are not following the set patterns that international franchises follow. We are a local business which is why we make more efforts to reach out to people and to try and understand what it is that our customers want and need from us. What their preferences are and how we will get them through the door and keep them coming back for more. This is a completely different product from what is available in the market right now,” they say. “And our plan is to keep innovating and to keep everyone on their toes. We welcome competition, and we want there to be healthy competition so we can keep improving, but the reality is that right now there is no other company like ours in Lahore, and while our core product will remain the same, we are also going to move into diversifying and bringing out products like ice cream, sandwiches, breakfast menus, cookies, and coffee”. n

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