Profit E-Magazine Issue 154 by Pakistan Today

CONTENTS 16

13 UBL presents better than expected half year results 16 The Fintech Playbook: how startups might change the face of Pakistani finance

22 22 For expat Pakistanis, sending remittances is becoming easier than ever 24 Pakistan’s fertilizer subsidy conundrum 27 Hallmark - no, not that one

29 29 Ferozepur road and the swarm of the housing societies 33 Lucky Cement’s lucky 2021

Profit

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 Chief of Staff & Product Manager: Muhammad Faran Bukhari 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 Complete flop of a story from this cult of a website. Calling other journalists “mouth breathers,” and claiming Pakistan needs to be “very, very lucky” - seriously? They’re flaring gas in the Permian basin, shale gas is going to be sent around the world via LNG terminals that are being built right now. Go look at the HH futures. There will DEFINITELY be a glut of oil, and many long term LNG contracts are oil linked. It will be bad news for those thinking LNG prices will rise dramatically. Pakistan's LNG deal with Qatar is around 10-14% of brent. Apropos: The end of cheap energy? Anonymous, Website Hydro is only good for base load (unless pumped hydro). Gas peakers should still be used as a transitionary sources. Base load is usually more than two-thirds of the need. I think we can agree that's a pretty important part to be served well by hydroelectricity. Absolutely right that there is a big need to be served by hydro. But the variability in hydro output still requires some cover by gas peakers. Along with transitionary requirements during hydro construction. Apropos: The end of cheap energy? @faizan_m2, Twitter Baseless analysis. Any analysis without the numbers is useless and misleading. What was the forward contract for current consumption? At what rate did the govt make a deal and at what rate is the government selling it at? What is causing the exchange rate to go up? I don't know why people just can't criticise or defend with facts. Apropos: Is the government responsible for the hike in fuel prices? Mirza Owais Baig, Facebook Brilliantly explained. Thank you. Doing a fine job, being a research analyst myself, it makes me happy to see such contents now being made to educate our community. Keep up the good work team Profit. Apropos: Is the government responsible for the hike in fuel prices? Muhammad Abeer, Facebook

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

HOW TO CONTACT

Well explained. However taxes, being part of the money bill, are levied or abolished by the National Assembly and not parliament. The Senate has practically no role in the money bill. Apropos: Is the government responsible for the hike in fuel prices? Sultan Mahmood, Facebook The fashion industry's crimes against the environment are finally getting more recognition and attention. As are its financial crimes. This

story by @AribaShahid is worth a read. Apropos: How big is Pakistan’s bridal dress business? And why are wedding dresses so expensive? SameerChishty, Twitter Anyone spending 100k on a bridal dress should automatically be moved to the highest tax bracket. Apropos: How big is Pakistan’s bridal dress business? And why are wedding dresses so expensive? @taha_189, Twitter Adviser to CM Punjab’s relative who is one of the biggest designers only accepts payments in cash. The starting price of a dress is 500k. The advisor is responsible for tax collection in the province. This is from first hand experience. Apropos: How big is Pakistan’s bridal dress business? And why are wedding dresses so expensive? @JawwadAliSyed, Twitter Most huge brands are run out of the residences of the designers, with huge studios built in basements. My sister managed the bridal couture for a major designer, customers below the range of 700K were refused an appointment. Transactions were in cash. No tax or oversight. Salaries paid in cash. Apropos: How big is Pakistan’s bridal dress business? And why are wedding dresses so expensive? @ZuleikhaRob, Twitter There is an informal betting ring on prize bonds. In 2005-06, there was an online official lottery run by the Pakistan Sports Board, called Hero Pakistani. The players could select 6/49 numbers and enter into a weekly draw. The highest volume of the sales came from prize bond markets. Apropos: All you need to know about government prize bonds @sophiahasnain, Twitter The informal market has now literally evaporated. It was used predominantly as a replacement for FEBC. Then the punters made a game of it. They still do. But it was mostly for black to white conversion. SBP's KYC policies have killed that grey market. There were these famous mathematicians from a university in the US, who looked at the previous data and tried to hack it. The problem was, getting the numbers that needed to make it - weren't available. Darn if I can recall the name now. FYI, there are many players who try to hack lottery systems worldwide by understanding the mathematics behind it - almost everyone in maths does this. There is a complete field behind it called lottery mathematics. Apropos: All you need to know about government prize bonds @babuskha99, Twitter

COMMENTS

IN BRIEF Following the government’s decision to provide fast internet services in mountainous regions of the country, the Ministry of Information Technology has issued policy directives to the telecom regulator for the auction of spectrum in AJK and the Gilgit Baltistan (GB) to enhance the quality and outreach of mobile telephony as well as broadband in these areas.

Planning Minister Asad Umar has said the Green Line Bus Rapid Transit System (BRT) service in Karachi would become operational by October this year. Storm water drains, sewage, and roads projects would also be completed this fiscal year.

Expecting a difficult year ahead for real estate, the Federation of Realtor Association Pakistan (FRAP) has expressed concerns over upcoming challenges for the real estate industry in terms of FATF conditionality and rise of construction material cost, and has demanded support from the government. The Asian Development Bank (ADB) has announced the appointment of Yong Ye as its new country director for Pakistan. Ye will lead ADB’s operations in Pakistan and manage its Pakistan Resident Mission in Islamabad. He will also oversee the implementation of ADB’s new country partnership strategy, 2021-2025.

$3 billion:

Pakistan has registered over 80 percent increase in its exports to China in the first six months of 2021 and keeping in view the momentum, the country is all set to achieve a historic milestone of $3 billion at the end of this year.

The Petroleum Division has prepared a final draft of Pakistan Oil Refinery Policy, 2021 which is expected to be tabled in the next ECC meeting. According to sources, a final draft of the policy will be laid before the upcoming ECC meeting which is likely to be held this week.

Rs103.8 billion:

The Privatisation Board on Wednesday allowed raising Rs103.8 billion debt from local banks through competitive bidding to replace the government’s financing before privatisation of much-trumpeted two LNG-fired power plants.

QR code receipts and anti-state aesthetics this week in Pakistan’s business and economics twitterverse

his week was a big one for having egg on your face particularly if you are a QR code printed on a receipt or an ‘Islamic’ point-of-sale machine. But other than some of these gaffes by certain banks, there was a lot else going on. We look at how fintechs are trying to reinvent all the wrong things, how the government should consult McKinesy for their reports on anti-state twitter, and how businesses are expressing their patriotism. All this and more from Profit’s Ariba Shahid.

Sugar daddies

Working women

These sugar daddies are not sweet and are not giving you money. They’re robbing you blind.

Occam’s razor

Nadia Navi points out a sad fact. While women approve of other women working, they feel society doesn’t really approve of it. It is kind of true considering only 57% approve of women working. Not that you should need the approval of someone to work or live your life either way.

Prepaid cards are not a form of disruption. Come on, VCs, save your dad’s money. Your unit costs are not great, your consumer acquisition costs are off the charts. We know this isn’t exactly Occam’s razor, but we do think some things are simple and should stay simple. There’s no point trying to reinvent the wheel, and fintechs should probably stick to, well you know, doing actual innovation.

Tip of the hat

Sharif family extravaganza

Aag lagi basti mein, Junaid safdar apni masti mein. What a time to get married! Your mom’s on bail, your uncles are wanted in the country and your granddad is an absounder. But hey, if there’s anything we learnt during the pandemic, it’s that there can never be a moratorium on weddings. Weddings must go on. Now it is only a matter of time until we find out if this is going to be a big fat wedding or a smaller, classier, affair. If the Downton Abbey style wedding invitation with horses and roses is anything to go by - it will be the former. Got to respect the hustle. Never stop. Door dash delivery today, multimillion crypto startup tomorrow. The hustling attitude is all you need to get far in life. Mad props to this guy. We bow our hats in respect.

Cancel culture

Anti-state aesthetics

While this isn’t exactly business or economic related, we feel the government needs some McKinsey consultants or people of the sort that can at least work on the presentation and aesthetics of a report and make it seem formal even if the content is well… um let’s just leave that up to your imagination. That said, a place like McKinsey would probably als have no moral qualms about sponsoring a government report trying to implicate people on twitter for being ‘anti-state’ - nor would they have issues with implicating pro-state tweeters caught in the landslide just for using certain hashtags.

It’s 2021, you can get canceled for nearly anything on the internet. However, never did we think that an app or program would start cancelling us. Turns out they’re very much capable of doing so. Oh well.

SOCIAL MEDIA ROUNDUP

UBL

presents better than expected half year results

Despite having less revenue during this period than in last year, UBL has a spectacular showing By Meiryum Ali

f a bank is one of the largest banks in the country - in fact also one of the oldest banks in the country - then a certain sense of complacency can set it. In fact, it may be hard to do something that really raises eyebrows for a bank with not just such an ancient legacy but also the kind of inertia that comes with grand old institutions. And yet, UBL managed to do just that in its half-year financials, which were released to the Pakistan Stock Exchange on August 6. Analysts dubbed it above expectations: whereas consolidated net profit in the period January

BANKING

to June 2020 had stood at Rs10.7 billion, it increased by 40% year-on-year to Rs15.1 billion for the same period in 2021. The resulting earnings per share shot up from Rs8.9, to Rs12.2. And, it also managed to do this despite having less revenue during this period than in last year (Rs47.9 billion, compared to Rs49.7 billion last year). What happened? It is mostly to do with lower privisionsing expenses - indeed, provisions have been the bane of UBL, dampening otherwise reasonable results. In this case, 2020’s half-year profit before provisions stood at Rs28 billion, compared to 2021’s half-year figure of Rs25 billion. But last year, provisions set aside stood at Rs9.9 billion, whereas this year, the bank recorded a reversal of Rs157 million. This explains the significantly higher

profit for the half-year. According to AKD Securities, the bank was also helped by a higher than expected fee and commission income, at Rs7.1 billion, compared to last year’s Rs6.1 billion. Can this spell be maintained for the remaining half year by Shahzad Dada? The new CEO was appointed in July 2020, after previously having been Standard Chartered Bank’s CEO. He replaced Sima Kamil, who completed her three year term in July 2020, and is now the deputy governor of the State Bank of Pakistan. It is not like the bank has not done well; indeed, it has ever increasing deposits. But in the last few years it has also not done spectacularly well, and perhaps some reversal is needed. First, some context. UBL was founded by Agha Hasan Abedi in 1959, but was nationalized by the government in 1974. Then, in 2002,

the bank was sold to Bestway and the Abu Dhabi Group. The bank continues to be a subsidiary of Bestway (Holdings) Limited, a wholly owned subsidiary of Bestway Group Limited, founded by British-Pakistani Sir Mohammad Anwer Parvez. The man has been the chairman of the board of directors since December 2013. He himself started his career in the food business in 1963, when he opened a convenience store in London, before venturing into wholesale business in 1976, and has been responsible for growing Bestway Group into the 9th largest family business in the UK. In Pakistan, the group has invested in cement (the 2nd largest cement producer in Pakistan), and in banking, with UBL the crown jewel of the group’s investments in Pakistan. As of 2020, the bank operates 1,356 branches inside Pakistan, and 14 branches outside Pakistan. What has the last decade looked like for the bank? First up, the bank’s deposits have been steadily increasing since 2009, when deposits stood at Rs492 billion. In particular, deposits grew 18.5% year-on-year in 2013, and at 17.4% year-on-year in 2015. Deposits crossed the Rs600 billion mark in 2011, and the Rs1,000 billion mark in 2015, and finally, crossed the Rs1,400 billion mark in 2019. If one looks at the deposits as a share of the total deposits in the banking industry, UBL’s share has stayed remarkably consistent. In 2009, the market share stood at 11.4%, the highest share it would ever have; it then fluctuated between the 10% to 11% range for the next decade. Only in 2020, did its market share dip to 9.2% - despite its highest ever deposits in 2020. If one looks at the compounded annual growth rate for deposits for the five year period between 2015 and 2020, for UBL, that figure is at 9.31%, which is much lower than the industry average for the same period, at 13.95%. The bank’s non performing loans have been a definite problem area though to its credit, the bank’s ratio of the non performing loans to gross advances has been either lower than the industry average between 2009 to 2017. Only in 2018 was a discrepancy seen (8.8% compared to the industry’s 8.0%). The bank’s infection ratio rose between 2009 and 2012, peaking at 14%, before falling steadily to 7.8% in 2017. Since then, the ratio has been climbing back to 2012 era rates, at 13.7% in 2020. This would explain the substantial pirivionsing set aside in recent years. Between 2009 and 2014, UBL saw its revenues remain steady, and then jump to a new level in 2015. Net interest

income remained steady in the Rs30 billion ball-park range for most of the early 2010s, before remaining steady ain the Rs50 billion range between 2015 and 2018. Meanwhile, non-interest income has remained consistently in the Rs20 billion range more or less for the last five years. This slow and steady approach has yielded somewhat unexpected profits. Net income steadily rose from Rs9 billion in 2009, to Rs27 billion in 2016. But it fell from there, to Rs25 billion in 2017, to Rs15 billion in 2018 - the lowest it has been since 2011. Net income has

risen form there to Rs20 billion in 2020. Once can see this reflected in the ROE, which is an indication of financial health (basically, how effectively management is using a company’s assets to create profits). The bank’s unusually high ROE hovered around the 25% range, before hurtling downwards to 11.6% in 2018, and just 13.9% in 2020. Can 2021 be the year these figures reverse? Certainly, eyes will be on Dada to make that change possible - as long as provisions don’t loom in the future. n

BANKING

COVER STORY

By Farooq Tirmizi

o have any chance of success in business in Pakistan – especially in a sector dominated by large, powerful, and well-entrenched players – one of the most underrated qualities in a startup founder is an understanding of politics. Not politics as in “who will win the next election”. Politics as in “what do people say they want, what do they actually want, and what can I offer them to get them to do what I want.” Tech investing in Pakistan is having a banner year. Pakistani startups have raised $82 million in just the first half of 2021 according to data from i2i Ventures, a venture capital fund, or only slightly less than the total amount of venture funding for the preceding three years combined. And within that, fintech has a significant share, accounting for approximately $35 million of the total funding raised so far this year. Among those investments is the current record-holder for the largest ever pre-seed fundraising round by a Pakistani startup: the $5.5 million raised by TAG, a neobank. All of that money has been invested on the basis of a simple premise: that Pakistani finance is about to be transformed over the course of the next decade, and that it will be tech startups that serve as the catalyst for that transformation. One hopes for the sake of those investors that the founders of those Pakistani fintech startups have a clear sense of the politics of the industry they have decided to take the leap into. This is not a story about who is building what in Pakistani fintech. That would be the kind of simple survey even Dawn is capable of offering. It is instead a story about one question above all else: can the fintech startups displace the banks as the dominant force in Pakistani finance? If yes, how? If not, why not? Of course, that question is somewhat open-ended, so we can narrow it down somewhat more. In the next ten years, will there be one or two fintech companies that have a valuation that exceeds the market capitalization of at least one of the Big Five banks? Highly probable. In ten years, will one of the fintech companies have a deposit base larger than one of the Big Five banks? Possible, but highly unlikely. We will first examine the scope of the opportunity in fintech. We will then look at the current set of challenges that the financial services industry faces, which parts fintech can help solve, and which ones it cannot. We will then conclude with an assessment of what might be an optimal strategy for startups in this space. One point of clarification: while fintech is a very broad term, this particular story is concerned almost entirely with payments,

neobanking (both deposits and lending), and wealthtech. Left out is any mention of insuretech, APIs and other infrastructure players. The dynamics of those markets are very different from the ones discussed here. (Disclosure: the author of this story is also the founder and CEO of Elphinstone, a wealthtech startup that is registered as a Securities Advisor with the Securities and Exchange Commission of Pakistan.)

Electronic money: why the opportunity exists in the first place

ithin fintech, there is a distinction between the tech startups that enable business online (the payments companies) and the startups that engage in the business of providing financial services online (neobanks, wealthtech). The existence of the former is a precondition for the existence of the latter. And on that front, the data is quite promising. While Pakistanis use conventional offline means of payments as their predominant use of money now, the adoption rates towards electronic money are quite rapid. How rapid? Data from the State Bank of Pakistan (SBP) is unambiguous on this point: strip out the internet-based payments system (bank websites, mobile apps, and e-commerce), and the rest of the country’s payment system (mostly cash, ATMs, and branch banking) has grown at just 6.7% per year on an annualized basis, between the third quarter of 2016 and the fourth quarter of 2020. Inflation during that period, by the way, averaged 7.5% per year, meaning the real purchasing power of the non-internet-based payments system went down during that period. What happened to the internet-based payments volume during that period? They went up by an annualized average of 70.1% per year. And, when we say internet-based transactions, we mean bank websites, bank and payment provider mobile apps, and credit and debit card transactions on e-commerce websites (excluding cash-on-delivery transactions). The internet may only account for only about 1.7% of all transactions in Pakistan right now, but there is no question that it is the only form of payments that Pakistanis clearly want to use more of than they are now. Nothing else comes even remotely close. What that means is that there is significant growth opportunity for fintech startups in the payments space. Using State Bank data, Profit estimates that approximately Rs200 trillion worth of transactions take place entirely in cash each, and a significant portion of the remaining Rs580 trillion worth of transactions also involve at least some level of cash usage.

Converting that to electronic means, even if a company only earns mere basis points on each transaction, will be a huge business. And given the fact that this is the precursor layer for the emergence of a robust fintech sector, it stands to reason payments is the one area that has attracted early attention from venture capital investors. All but one fintech company that managed to raise financing in 2021 has or is pursuing either a Payment Services Provider (PSP) license or an Electronic Money Institution (EMI) license, both of which allow companies to provide payment solutions to retail customers. Once this layer of fintech is created and functioning, offering financial services to both individuals and businesses can begin. And that is where the complications begin.

Putting the bank in ‘neobank’

t is a neologism in the fintech world that every fintech company claims to not want to be a bank, but wants to become a bank, whether or not they are willing to admit it to themselves. You can certainly see why this would be the case. Electronic Money Institutions (EMI), for instance, are allowed to not just facilitate money transfers between two parties but also to store money electronically into their user accounts. That sounds a lot like – and functionally, it is – a deposit. Like a bank deposit, that money is available in theory for the EMI to invest for a return. And the EMI can also, in theory, pay out some of those returns to their depositors to encourage more deposits into their system. What I have described above is technologically possible and functionally the same thing as banking, except that it takes place entirely electronically and does not require a physical branch network to function. The problem is that, under current regulations enforced by the State Bank of Pakistan, most of the banking functions I have described are illegal. Paying an interest rate to depositors is outright banned for EMIs. No limits, no capital requirements, nothing. Just plain banned. Investing deposits into government bonds (and only government bonds) is allowed, but only 50% of the previous three months’ balance, which does not sound bad until you consider the fact that EMIs have higher capital requirements than banks, but are allowed to invest far less of their deposits than the banks. Okay, so an EMI cannot use interest to attract deposits, and can only generate limited revenue from investing those deposits, but at least the license theoretically allows one to create a basic payment system that could function as the default financial app for its users if it is able to create a slick enough user interface, right?

Theoretically, sure. In practice, good friggin’ luck. Here is why: not only are you not allowed to pay interest to depositors, and can earn less revenue than a bank on any deposits you are miraculously able to attract, you also face transaction limits on just how much money people can move into their digital wallets. In any given month, a client cannot move more than Rs50,000 into their digital wallet, unless they complete biometric verification, in which case they will be allowed to move up to Rs200,000 per month into their digital wallet. Cash withdrawals are limited to Rs10,000 per day, regardless of the level of verification of the account. By contrast, once you have a biometric verification at a traditional bank, the regulator places virtually no limits on the volume of transactions per month. In short, an EMI is creating a product that competes with basic banking services, but is forced to deliver a product that is functionally inferior in terms of its actual financial services (low transaction limits, no interest on deposits, and no lending) and must rely solely on a narrow subset of customers who are tech-savvy enough to appreciate a slick interface, but poor enough to not need to transact more than Rs10,000 on any given day. The State Bank has created another two levels of licenses – Digital Retail Bank (DRB) and Digital Full Bank (DFB) that remove many of these restrictions – that EMIs are explicitly allowed to grow into. But growing to that level on an EMI license alone is likely to prove difficult. A DRB is allowed to perform all the services of a regular bank, except that it cannot serve corporate clients. A DFB is allowed to

serve all types of clients, but without a physical branch network. If it is not obvious by now, we will say it explicitly: if the only license a fintech startup holds is issued by the State Bank of Pakistan, it is all but doomed to failure. The regulations will force the company to deliver an inferior product and leave it struggling to achieve the scale it needs to keep attracting the capital it needs to grow. We want to make one thing very explicit: this is not due to some malice on the part of the State Bank. Indeed, if you ever speak to line officers at the State Bank in charge of regulatory functions, you will find civil servants who know their subject matter well and appear to be quite dedicated to truly helping citizens and businesses. It is just that the State Bank has several responsibilities and stakeholders and while the most important are depositors, the second-most important ones are the traditional banks. So when a traditional bank comes in to lobby for regulations that claim to be in the interest of keeping the depositors’ money safe, the State Bank is likely to find itself persuaded by such arguments. Transaction limits, limits on paying interest, and limits on where and how much an EMI can invest its deposits do keep depositor money safe. They just do so at the expense of quality services, and offer greater hindrances than the traditional banks are subject to. The State Bank, of course, has a reasonable response: if it allowed EMIs to deliver the same services as the banks, it would functionally be removing the minimum capital requirements it has for the banks, where the minimum paid up capital starts at Rs13 billion. If an EMI

with a minimum paid up capital of Rs200 million is allowed to do all of the same things as a bank with a much higher minimum paid up capital, that would be unfair to the investors of the banks who were asked to risk a lot more money. And the State Bank has created a glide path that allows EMIs to grow into banks. It starts off the EMI license at a minimum paid up capital at Rs200 million, allows a Digital Retail Banking license at Rs1.5 billion, and a Digital Full Bank license at a minimum paid up capital of Rs6.5 billion, still well below the Rs13 billion required for a traditional banking license. Even once you reach the promised land of a Digital Full Banking license, you now find yourself at the mercy of the Prudential Regulations. This is a set of rules that is, in theory, designed to ensure the safety of the banking system, but in practice means that risk management for banks is effectively outsourced to the State Bank itself. There is much to criticize in the Prudential Regulations, but the one part most directly relevant to fintech startups is this: it regulates all banks as general purpose banks, and does not allow much in the way of specialization. So, for example, if a fintech startup wanted to specialize in becoming the go-to deposit and lending source for the retail sector because its founders had expertise there and wanted to offer the best service to clients in that sector, they would not be allowed to do so by the State Bank under the Prudential Regulations, which stipulate strict limits on exposure to specific sectors, effectively banning specialization. The specialization ban, by the way, is why the big banks stay big and the small banks stay small, with very little movement in the

COVER STORY

rankings. No bank – nor any fintech startup – is allowed to achieve high quality of service or economies of scale by focusing its energies on a single sector. By forcing all the banks to compete for the full spectrum of business sectors, the Prudential Regulations give an advantage to the large ones that can afford to have specialists for each sector. So, if you want to become the neobank that provides services to freelancers, for example, you will find yourself afoul of the regulations and will need to develop a more general product. No bank or fintech startup is allowed

niches. Everyone must compete with the Big Five for everything. Of course, some niches slip through the cracks, which is why Meezan Bank’s Islamic niche has allowed it to become the largest bank in Pakistan by market capitalization and why Oraan, which wants to become a neobank for women, has a good chance of success. But for most others, it is an uphill battle in a market that is heavily tilted in favour of the incumbents, even with a regulator that has moved significantly in the direction of allowing innovative companies room to operate.

The politics of fintech

o, what can a fintech startup do? Well, the answer to that question starts by understanding who has power in Pakistani finance now, what they value, and then figuring out a way to get what you need from them without expecting them to give up on any of their core interests. The answers to all of those questions are obvious. This is a bank-centric financial system so it is the big banks that have power, and they value one thing above all else: their complete

TEXTILES

dominance of deposit-taking ability. If your startup intends to compete with their ability to take deposits, do not expect cooperation from the banks, and do not expect the State Bank to be particularly friendly to your lobbying, because the big banks have better lobbyists than you and can rely on very reasonable-sounding arguments that all purport to be in the interest of protecting the depositor. If you are small, expecting better technology to drive users to you and away from the banks is going to be hard, if not impossible. Why? Because the banks control the on- and off-ramps to the financial system and have no incentive to cooperate with you. What does that mean? Where will a person’s initial deposit into an EMI wallet come from? Probably a bank account, and the banks can – and do – set arbitrary limits on how much they will allow to be transferred into EMI wallets. Yes, these limits are lower than the ones already written into the State Bank’s EMI regulations. The ability to move money into the EMI wallet is the onramp, controlled mostly by the banks. Then there is the ability to withdraw money, which is the off-ramp. EMIs can and are issuing debit cards that customers can use to withdraw money from ATMs, but the ATMs are run by the banks, and they are unlikely to offer discounts on ATM transactions to the EMIs, meaning an EMI customer will always have to pay ATM fees. This is best illustrated with an example. My brother has both an HBL account and a SadaPay account and debit cards from both. HBL has 2,157 ATMs where he can withdraw money without paying a fee. SadaPay has zero ATMs, which means he has to pay a Rs18 per transaction fee whenever he wants cash.

According to the State Bank, the average ATM withdrawal is Rs3,000, which means the average ATM transaction fee would represent a 0.6% transaction charge. Right now, my brother does not want to pay that fee, so he puts very little money into his SadaPay account. And it makes no sense for SadaPay to try to absorb the 0.6% transaction fees because it would need to make that amount back in interest on the deposits, which would be very difficult to do. SadaPay would need government bonds to yield 14.4% per year (0.6% multiplied by 12 months and divided by the 50% investment-to-deposit limit) to break even on monthly withdrawals of average size, which is simply not possible. By comparison, the path of fintech startups that are focused on lending is somewhat easier. Abhi, for example, is focused on salary advances, a market the banks are currently happy to leave unserved, meaning Abhi has the market almost entirely to itself and is unlikely to encounter resistance. And Finja’s small business lending business also does not compete against anything the banks actually want to do. Indeed, the banks are so willing to let fintech startups take that market that Habib Bank Ltd has provided $10 million in debt capital to Finja to fund that small business lending program. If either Finja or Abhi tried lending to, for example, Engro, they would find resistance from the banks very quickly. Do not touch their corporate clients, and do not try to compete for deposits, and the banks are more than happy to collaborate with you on any business that would involve you paying them either interest or fees of any kind. That leaves a tremendous amount of the financial services spectrum open. Most

non-government lending is wide open to fintech startups, provided they can get around the Prudential Regulations by seeking either waivers or other licensing arrangements. It requires startups to rely on non-deposit funding sources, such as bonds or commercial paper, which is more expensive, but given the ostensibly lower operating costs of tech-first financial services companies, may not be prohibitively so.

So, what will fintech achieve?

he value of Pakistani fintech will be in covering the vast majority of services that the banks currently do not offer and simply have no interest in offering either. That leaves a tremendous amount of economic value open to fintech startups and it is entirely conceivable that there will be not one, but several fintech companies worth more than the banks. That is not as difficult as one might imagine. The market capitalization of the most valuable bank in Pakistan – Meezan Bank – is just over $1.2 billion. Even as that number will rise over the next decade, it is easy to conceive of more than a few fintech unicorns with their $1 billion+ valuations being higher than those of the mid-tier banks. Will the fintech knight slay the banking dragon? No, but it also does not need to. In their laziness, the banks have left so much open that there is room to grow without confrontation. The financial services sector in Pakistan will offer more services, with a greater diversity of players, as a result of the rise of fintech players. That is likely to result in profitable growth, with arguably little disruption needed. n

COVER STORY

For expat Pakistanis, sending remittances is becoming easier than ever Another boon for Pakistanis not living in Pakistan is in the hopes that remittances stay up as they have been in recent times

By Ariba Shahid

t’s been a good year for remittances in Pakistan. The amount sent home by overseas Pakistanis throughout the fiscal year 2020-21 marked the fastest pace of growth in 19 years reaching an all-time high since FY 2003 to reach $29.4 billion on a cumulative basis. This means remittances grew by 27% over the previous year. It is strange, however, that Pakistan was able to not only maintain but ramp up remittances during a pandemic withstanding a manpower export slump. The reasons

behind this rise in remittances has been done to death. Many publications, including this one, have spent some time writing about the reasons for the rise. To sum it up briefly, some Pakistanis lost their jobs and were sending back money so they could relocate to Pakistan and some sent more money to support their families that were facing tough financial circumstances during the pandemic. In addition to that, hawala hundi wasn’t as convenient an option as it was in the past due to stricter controls and a reduction in international traveling. Moreover, the State Bank of Pakistan timely stepped up and allowed remittances to be sent through Roshan Digital Accounts.

Why did remittances rise?

lobally, there are 270 million people that work away from their home countries and send money back to the motherland. For a lot of developing countries, remittances have become a vital source of financing for many developing countries. And as a recent NPR report has shown, the sums of money are huge. In fact, the amount of money sent in remittances is greater than the sum of all investments made by foreign companies in developing countries com-

bined. And it is more than triple the amount of aid that governments provide those countries. Here’s how remittances work. Migrants working abroad send money to their families in their countries of birth. It sounds simple enough, and nearly a very micro-economic, domestic activity. But with 270 million migrants sending remittances globally, according to the earlier mentioned NPR report, in 2019, remittances hit an all-time high of over $550 billion. Essentially, countries where people immigrate to were doing better and the countries they immigrate from not so much, causing this uptick. Then, came the pandemic, which instead of bringing remittances down, shot them up. When the coronavirus pandemic hit and triggered a global recession, it was being dubbed as the worst economic downturn since The Great Depression of 1929. With such bleak prospects, unemployment on a massive rise, industry coming to a halt, and general uncertainty, the World Bank predicted that global remittances would shrink by more than 20%. But that hasn’t happened. Recent data shows that remittances have held steady and in some cases, even gone up. One of those cases has been Pakistan. In the July-September quarter of the financial year 2018-19, the total remittances coming into Pakistan were $5.54 billion. The following year, in the July-September quarter of 2019-20, the total remittances were $5.45 billion, indicating a slight fall in this quarter even though overall remittances increased by nearly $2 billion for the year, as mentioned earlier. However, the July-September quarter for the current financial year of 2020-21 has risen significantly to $7.15 billion. Initially, this increase confused analysts, and most chalked it up to the upcoming Eidul-Adha holidays. However, they continued to rise. But generally, when things are bad at home, that is when migrants send back the most money, and corona has definitely hit the home countries badly economically, including Pakistan. This is the sort of explanation that the federal government would want to give.

Will it keep up?

any analysts have commented on this being a one-time thing or the pace of growth to decelerate at some point. However, it seems

Well this is kind of underwhelming because you don’t have the same kind of catalogue you do with bank cards. Instead you can get PIA tickets, pay for extra baggage on your international flights, pay for taxes applicable on bringing mobile phones to Pakistan, and pay your vehicle taxes which include tax while buying a local car or duties while importing a car like the government and the State Bank of Pakistan are doing everything they possibly can to ramp up remittances and inflows of precious foreign currency. If you’ve been a reader of this magazine this is probably not the first time you’ve read a story where we’ve pointed out the benefits non-resident Pakistanis get. We’re back again with a new story about another scheme that helps non-resident Pakistanis. Earlier this week, the Economic Coordination Committee of the cabinet approved the National Remittance Loyalty Programme (NRLP) in order to incentivize the inflows of remittances. The scheme is simple. You are now incentivized and rewarded based on how much you send back home to Pakistan. Think of this like a credit card where you get points based on how much you spend. Sometimes individuals choose to buy on their credit cards specifically for the points. Through the NRLP, what the SBP Is trying to do is encourage individuals to send money back to Pakistan through the right channels and be rewarded for doing so. Points will accumulate. If you send $10,000 in a year your reward will be 1%. On the next $30,000 per annum, the reward is 1.25% and 1.5% on the next $30,000. One reward point is equal to Rs 1. In addition to this, banks have spent money on developing a mobile application run and developed by 1-Link. The app will be in English and Urdu and will be for both android and ios. The NLRP also provides other features. You could be classified as Green, Gold and Platinum based on your usage of the facility. A virtual Loyalty card will also be provided in the app. Moreover, you can have supplementary user cards too. Any money sent home through formal channels is eligible for the loyalty

The scheme is simple. You are now incentivized and rewarded based on how much you send back home to Pakistan. Think of this like a credit card where you get points based on how much you spend. Sometimes individuals choose to buy on their credit cards specifically for the points

program, this includes funds received through RDA and spent in Pakistan. This means if you’re using RDA for schemes such as Roshan Apni car, you’re not only getting a cheaper deal than locals but you’re also going to be getting loyalty points for it. The estimated financial impact that has been budgeted is based on the assumption that remitters equivalent to 25% of the remittances as of FY 21 will register for NRLP, is Rs. 13.107 billion for FY22.

So how can you redeem points?

ell this is kind of underwhelming because you don’t have the same kind of catalogue you do with bank cards. Instead you can get PIA tickets, pay for extra baggage on your international flights, pay for taxes applicable on bringing mobile phones to Pakistan, and pay your vehicle taxes which include tax while buying a local car or duties while importing a car. You could also use your accumulated points to pay for your CNIC/ NICOP or passport renewal. School fees, utility store purchases, and insurance premiums can also be paid through these.

What does this all mean?

n July remittances increased by 0.7% compared to June 2021, however declined by 2.1% on a yearly basis because of seasonal variation and Eid holidays and fewer working days. Despite that, what is abundantly clear by the SBP’s steps as of the past year and a half- the government is looking towards remittances to keep the rupee stable and manage its reserves. The government and SBP have been coming up with schemes to promote more money coming into the country from expats through investment and consumption. Through this loyalty program, it’s incentivizing just about all money pouring in. The question is, whether this remittance craze is fair on the locals considering their taxes pay for interest payments made to NPCs and of course these loyalty points. n

FOREIGN EXCHANGE

By Ariba Shahid

ne of the most annoying moments in the field of business journalism is when different industries whinge to journalists about everything that is wrong and how the government needs to help them. The whiny, entitled, nature of these industrialists demanding that the government bail out their sector whether it is leather, or fabrics, or metal, or chemicals is so predictable yet so nauseasting that it is stranger when a subsidy, or a package, or some form or relief does not come up in an interview. This is not, of course, to say that subsidies are always bad. While most businesses need to stop complaining and start taking more responsibility, there are classes of people who desperately need and deserve subsidies

from the government. We are speaking here specifically of farmers. Most of the times, when subsidies are looked at critically, the opposition to them is that tax payer money is being used to provide relief to some sectors or organizations. This money could be used elsewhere such as poverty elimination programs, development expenditure, or any place else by the government. One subsidy that always is in the news cycles is fertilizers - more specifically urea. The subsidy on urea is provided in different ways. The government, for example, provides subsidised gas to fertilizer companies so that they can produce cheap urea and provide it to farmers. Now, this subsidy is being provided to fertilizer manufacturers, but eventually it affects farmers that end up buying cheaper urea from these fertilizer manufacturers. However, there are different ways in which this subsidy can be provided that more directly benefits the farmers rather than the fertilizer companies -

which should be the government’s target. There are gains associated with the subsidies in the fertilizer sector, making subsidies in the sector a public policy tool. In the past, governments have subsidized production, import, and distribution; and have also withdrawn the support only to revert back when prices rose. In short, one could say that this policy tool also works as a political tool to garner support from the farming population (which also happens to employ a significant proportion of Pakistanis), but also helps ensure food security.

The size of the agricultural sector

akistan is an agrarian economy. This little factoid is drilled into our heads from our earliest school days. It is plastered front and center in social studies books, and is most likely the first thing you learn about

Pakistan’s economy and topography. This agrarian bent, along with an inexplicable pride in being rich in natural resources (as if that sets Pakistan apart from the rest of the world), goes to the core of how we try to portray ourselves as a country. That is exactly what fertilizer companies try to play on as well. Just think of television and radio adverts for fertilizers. One farmer tells another of how his crops have done magically well thanks to this new fertilizer. The other is shocked but intrigued, prompting the former to explain the details of how the magic of urea has changed his life and fortunes, and the latter scurries off to buy said fertilizer. For good measure, we sometimes even get a shot of farmers dancing off into golden hour as they spread the fertilizer in their fields to the beat of flute music. The reality is a little different. The people benefiting most from these subsidies are not small time farmers, they are major landowners that control most of the country’s agricultural land. Agriculture is a sector in which Pakistan’s wealth gap is most palpable. According to the Pakistan Bureau of Statistics (PBS), a mere 10% of zamindars hold 52% of the agricultural land in Pakistan. Currently, we employ an acrossthe-board subsidy on Urea imports that is costing tens of billions of rupees, and hurting both the country’s balance of payments and fiscal deficit. It also means that the richest farmers with the largest land holdings reap most of the rewards from these billions that the government

is pouring in. Meanwhile, the actual hard working farmers that these ads fail to mention make up a large portion of Pakistan’s workforce. However, access to fertilizers can often be a life changing factor in the lives of farmers, especially those working on a small scale. As such, there is no surprise that fertilizer is one of the most subsidised products in the country, and for good reason. A staggering 39% of our labour workforce is employed in the agriculture sector, 66% of the population depends on the agriculture sector for its livelihood, it makes up 19% of our GDP, and makes up 20% of our exports, not including the input it provides for the textile industry, which makes up for 60% of the country’s exports.

The history of fertilizers in Pakistan

anufactured fertilizers were first introduced to farmers in the 1950s and were imported from abroad. Nitrogenous chemical fertilizers came in 1952, phosphorus in 1959, and potassium in 1967. The use of fertilizers particularly picked up steam during the Ayub era five year plans, and as farmers got used to the higher yields that these fertilizers brought, and with Pakistan having natural gas reserves, Pakistan began to produce its own fertilizers. This was an import substitution policy that was carried out through strategic man-

ufacturing investments to push the fertilizer industry in Pakistan. Investment came in the form of joint ventures such as the Pak-American Fertilizers (now Agritech) in 1958 and Pakarab Fertilizers in 1973. Domestic investment came in from Fauji Fertilizer Company much later in 1978.However, in 1973, Pakistan went through a nationalization wave, and all fertilizer companies were now undertaken by the National Fertilizer Company. The industry was able to grow because of the abundant gas supply that enabled the companies to increase their output. This helped Pakistan save out on foreign currency that would be used to import fertilizer. Another boost to this industry was when farmers started using more fertilizer in 1970 as they adopted high-yielding modern wheat and rice varieties that were also supported through subsidies and research support by the government. The growth of the domestic fertilizer sector has been consistently higher than the growth of consumption for all nutrients since 1971. As a result of this, imports have laid low.

Industry dynamics

he industry is now dominated by 5 companies that make up 95% market share. Four of these are listed on the PSX. The sector contributes 4.4% to the LSM sector and 0.9% to the overall GDP. The sector posted revenue of Rs 381 billion in

AGRICULTURE

CY2020. 62% of the sales were made in Urea, whereas 22% in DAP. The annual fertilizer uptake in CY20 is 9.7 million tons. Urea makes up 75% of the country’s fertilizer production and DAP accounts for 8-10% of the country’s fertilizer production. FFBL is the only DAP producer, the rest are involved in the import. Urea makes up 61% of fertilizer offtake and DAP makes up 24%. The demand for urea stays range bound between 6-6.1 million tons annually and isn’t as price sensitive as DAP. Local urea prices are cheaper than international urea prices. The difference between the prices was as high as 41% in CY 18 and 46% in CY19 as a result of a tightened global supply and increase in in-house capacity. The price of urea in Pakistan depends on gas price fluctuations, GIDC impact, and sales tax allowance. While there has been a rise in prices across all other sectors, urea prices have increased by 1.6% over the past 8 years which shows a slow growth rate. The price of a bag of urea was Rs 1690 in 2012 and Rs 1718 in 2021. As per an analysis by Engro Fertilizers, farmers spend 34% towards inputs. 6.7% of the money spent on inputs is for purchasing fertilizers. Urea makes up 2.8% of the money spent by farmers, making it a small component.

The Fertilizer Policy

he fertilizer policy of 2001 primarily focuses on the provision of a gas subsidy to fertilizer manufacturers. “It is the intent of this policy to provide investors in new fertilizer plants in Pakistan a gas price that enables them to compete in the domestic market with fertilizer exporters of the Middle East so that indigenous production is able to support the agricultural sector’s requirement by fulfilling fertilizer demand,” says the policy. The policy is a clear example of import substation whereby the country meets its de-

mand for a product through indigenous sources. Due to the policy, plants were provided differential and low rates. This was to encourage more investment in the industry. Engro and Fatima Fertilizer are beneficiaries. A downside of the policy is that it does not focus on the distribution, demand and utilization of fertilizers. The policy resulted in a dual price system where one price exists for fuel stock for general use and one for the fertilizer industry that gets a price closer to the Middle East price. This subsidy is for all urea producers. In addition to this subsidy, there is a subsidy for the import and distribution of fertilizers to ensure reasonable price levels domestically. What it does is that it buys higher priced fertilizer and sells it at local rates.

Does this subsidy make sense?

efore the 1980s, Pakistan used to import more than 50% of its fertilizer to meet domestic demand. Despite an expansion in the industry, imports

grew between 1989 and 2001 due to an increase in demand. In order to incentivize investment, subsidies were given out to encourage new players. This is why the Fertilizer Policy 2001 came into being. The policy resulted in more than Rs 162 billion investment from local players and translated into an increase of 1.9 million tons per annum capacity. The subsidy meant that Pakistan no longer remained a net importer of urea. Instead there is now an export opportunity whereby up to 1 million tons of urea can be sold internationally. Potentially earning 400 million. This is using current capacity and infrastructure. Keeping in mind the fact that urea prices still lay close to 2012 levels shows that urea prices have declined in real terms. This also means that the food inflation we’re witnessing right now would be worse if there had been no subsidy. When it comes to subsidies, there is never really a right answer on whether it is worth it or not. Why? Because while you can quantify the impact, the decision to go forward with a subsidy or withdraw it remains a value judgment that depends on factors beyond computation. However, if this subsidy is withdrawn one can expect the price of urea to be somewhat similar to the international prices, which is approximately Rs 3000/bag higher. This means that fertilizer companies may reduce their supply keeping in mind the rising cost of production, and the market will meet its demand through imports. The demand for fertilizer will also shrink considerably and will result in a reduction in crop yields. Urea Fertilizer plants are more efficient with their gas utilization in comparison to other usages such as household utilization and gas turbines. With the incumbent government focusing on agriculture through the launch of Rabi Package, Kharif Package, and the Kamyab Kisan Package, it is evident that this subsidy is going nowhere, especially in light of the current levels of inflation. n

AGRICULTURE

Hallmark no, not that one

From insurance company to IT services - it has not been a smooth journey

f I say the word Hallmark, what do you think of? Readers familiar with US companies will remember the giant card company, founded over a century ago, and now with upwards of $5 billion in revenue. Most importantly, Hallmark ingrained itself in US culture: a Hallmark card is synonymous with a short, sweet, sometimes even corny card for special occasions. Sadly, the Pakistani company Hallmark has not had the same luck, nor has it had the same focus in what it has wanted to do with itself. For a while they tried to be synonymous with insurance - that failed miserably. Then it tried to pivot to IT related services, with

INSURANCE

somewhat better luck. In fact, what’s remarkable is not that Hallmark failed to market its brand, but that it managed to have a brand at all - for a good chunk of this decade, the company barely existed. These days, it is busy gearing up for a potential buy-out. On August 6, the company told the Pakistan Stock Exchange (PSX) that an offer letter had been received by Muhammad Munir Muhammad Ahmed Khanani Securities Limited (or the manager to the offer) on behalf of Irtaza Zafar Sheikh and GAZPAK (Private) Limited to acquire 82,890 shares and control of Hallmark Company. It would represent the most interesting thing that has happened to this company in years - that is,

apart from almost falling apart. So, first some history. Hallmark Company Limited (formerly “Hallmark Insurance Company Limited”) was incorporated as a Public Limited Company on 31 October 1981 under the repealed Companies Act, 1913, (thereafter the Companies Ordinance, 1984 and now the Companies Act, 2017) and subsequently registered as an insurance company under the Insurance Act, 1938, (now the Insurance Ordinance, 2000) as an insurer. Now, that date of the Insurance Act is key. Most of Pakistan’s financial laws, regulations, and streamlining of business sectors happened in the 1990s and early 2000s (part of the general awakening of the country, years

after independence, that it is, in fact, part of a global financial system). And so, that 1938 act was examined and reissued as the Insurance Ordinance, 2000. There was only one problem. With the promulgation of the Insurance Ordinance 2000, the requirement of minimum paid up capital for an insurer was increased, to Rs300 million. Unfortunately Hallmark was not able to increase its paid up capital to the required minimum level. In fact, it ceased to underwrite insurance business, starting January 01, 2003. The situation remained like that for the next thirteen years. The earliest available annual report from 2013 gives some clues as to what happened. Essentially, the management decided that it was simply unable to procure those Rs300 million over the course of a decade, and in its annual report, confusingly blamed the deteriorating ‘bad law and order situation’ in Karachi as one of the reasons it could not meet the minimum requirement (is that the situation was so bad that not one investor wanted to spend Rs300 million on an insurance company?) Instead, the company had an investment property of Rs800,000, which gave a return

For a while they tried to be synonymous with insurance - that failed miserably. Then it tried to pivot to IT related services, with somewhat better luck of Rs25,000 a month, in rent. It also sold some assets for Rs51,000. Basically, a former insurance company was now acting as a basic landlord. And even that investment property was questionable: as an auditors report from 2014 stated, there were no title documents or valuation of the land, nor could the income generated from the land be verified. Obviously, this situation was untenable. But rather than fade away into a renting business, the company finally woke up in 2017. That was when the members of the company resolved that they were not interested in injecting the required minimum paid up capital (this decision took them 14 years to make). Instead, the company pivoted into information technology, a wise move considering Pakistan was now entering the digital age, and 4G services had launched in 2014. Today, the company says it offers devices for datacenter, end user computing and identity and security

portfolio. It also deals in pre and post sale support services. Most importantly, it finally saw that magical figure: revenue. In 2018, its revenue was Rs14 million; in 2019 it hit Rs18 million, and in 2020 it stood at Rs15 million. The year 2021 was not as great: the company’s annual report blamed reduced business during the Covid-19 pandemic. Still, the company is now being eyed with interest by others. Gazpak, a company incorporated only in March 2021, along with an individual Irtaza Zafar Shaikh, submitted a public announcement of intention in June 2021. Previously in March, Gazpak had acquired more than 51% stake in the Landmark Spinning Industries Limited, along with the management control. Little else is known about Gazpak, except that it is owned by a man named Salim Chamdia, and a woman named Zainab, who live in Karachi.n

INSURANCE

Ferozepur road and the swarm of the housing societies The story is a familiar one but with a twist By Shahab Omar

he business of real estate in Pakistan is big, and the fraud surrounding it is even bigger and more rampant than over. Real estate developers all over the country use the same tricks of the trade to get money out of people quickly in the name of developing land, and then leave projects hanging for decades. And with big bucks involved, even the smallest frauds in the sector are worth tens of millions of rupees.

REAL ESTATE

Normally, and we have discussed this time and time again, what these housing schemes do is a classic case of having the cart before the horse. Any real estate developed should first acquire the land, get permission from the authorities, and then start marketing and selling the project. However, they market first, collect the money second, and then try to get permission from the authorities. Over the past decade, there have been some changes in the real estate market. There are some reliable societies that are more expensive precisely because they come with a guarantee of not being held up in court for

decades. However, there is a general impression that during the PML-N era, Punjab, especially Lahore, was ruled by land grabbers and many real estate projects were started which committed fraud on a large scale from the people. This impression is somewhat correct as the governments of the past, including the present, have always made claims but have never taken any significant steps to curb fraud in this sector. Normally these fraud’s are familiar in the way they are structured and people continue to fall for them. Lahore’s real estate industry is rife with incidents of fraud and fooling the public, but the Ferozepur City

Housing Scheme was a project whose style of fooling the public was new and the level of fraud was historic.

What was the project?

icture this. It is 2008, and Pervez Musharraf is finally on his way out. The near decade-long reign of Pakistan’s last military ruler is coming close to an end, and the democratic process is close to being as free as it has ever been in the country. And with this ushering in of democracy, an end is also coming to the PML-Q - the breakaway political party of the PML-N that became the King’s party under Musharraf’s presidency. Desperate to maintain some political goodwill among the electorate, the PML-Q government in Punjab under Chauhdry Pervez Elahi was quick to complete all the projects that had been started in his tenure but had been delayed due to some problem or the other. One of these projects was the extension of Ferozepur Road from Chongi Amr Sadhu to Kahna. A historic road of epic proportions, Ferozepur Road gets its name because it literally leads to Ferozepur in India all the way from Mozzand. Today, it is a relatively fast and convenient road which despite heavy Lahori traffic manages to get the job done, and is a single highway from which most of the city can be accessed at different points. Within Lahore (from Mozang Chungi to Gajjumata) it is referred to as Ferozepur Road and from Gajjumata to Kasur it is referred to as Lahore-Kasur Road. Good for traffic, although a little troublesome for luxury vehicles and bikers. Back in 2008, the road from Mozang to Kalma Chowk and Model Town was beautiful and wide, but as soon as the Chungi Amrsadhu bridge came down as part of the PML-Q’s hastily planned expansion, the road changed its view. Dust, dirt, rush, and the pollution of heavy vehicles made travel on this road difficult. Despite all of the rush, the centrality of Ferozepur Road was paramount and nobody could challenge it. Which is why even back in 2008 housing schemes were popping up in and around the road, all boasting their proximity to the location. According to the document available from the Lahore Development Authority (LDA), many schemes were illegal. Later, when the PML-N came to power and from 2008 to 2018, not only was the road improved to Kasur, but the metro bus service was also started here and the intersection of Ring Road near Kahna was started. Due to this, the movement of people here had also increased. During all this time, Ferozepur Road had become an attractive area for real

It was also claimed that national and international consultants were being enlisted for the development work on the project site. However, such claims are made by almost every developer for their project. To get the public’s attention, the project owners and developers claimed that a grand mosque would be built for the community in the housing scheme estate and people had started investing here in droves. Now the situation is such that Ferozepur is being considered as the economic lifeline of Lahore and people associated with real estate are considering it as a suitable place from the point of view of investment. This was why the Ferozepur City Housing Scheme project was introduced in the market at the end of 2017. The project was widely discussed in the market and it was claimed that it would be a project with residential, commercial plots as well as land for farmhouses and luxury apartments. The developers claimed that the project was designed keeping in mind the luxury lifestyle and modern age. It was also claimed that national and international consultants were being enlisted for the development work on the project site. However, such claims are made by almost every developer for their project. To get the public’s attention, the project owners and developers claimed that a grand mosque would be built for the community in the housing scheme. Similarly, an education city, a hospital, wide roads, uninterrupted power supply, security, sports complex, zoo, disaster management system, multiplex cinemas, and a Bulleh Shah Library would also be set up here. As far as this goes, it all sounds very familiar. These are exactly the kind of promises that these developers make and that work. To the eyes and the ears, the project was fascinating and it was marketed in a way that many people from Ferozepur Road, Kasur and the city were eager to invest and buy plots here. The project was owned by three owners, two brothers named Naeem Ahmed and Nadeem Ahmed and the third partner named Nazar Mohammad.

Method of fraud

he first thing that the project did was to get planning permission from the LDA and then publish advertisements in leading Urdu and English newspapers. They claimed that the LDA had given its approval and they were now taking investments and even selling plots or certificates. However, the problem here was that they had only gotten permis-

sion from the LDA to begin planning, and not to actually take money or start developing. The marketing, however, portrayed it as if they had actually started development work. Planning permission means that only planning work can be started on the proposed site while an NOC from the LDA is required to place advertisements on newspapers and TV channels but the owners of the scheme suppressed the matter by bribing LDA officials. After that, the services of real estate agents of Ferozepur Road were hired to sell the project and advertisements were placed in the newspapers by them. Interestingly, in the advertisements given regarding the agents, the importance was first mentioned by the agents from the investment point of view on Ferozepur Road and all the agents told elaborate success stories in advertisements in the form of interviews. The purpose of doing so was to convey the message to the common man that Ferozpur Road is the best place for investment and big projects have started here, and that this one was a reliable project. The second purpose was to introduce the real estate agents through whom the project was to be sold, to name the success stories and to circulate the names of these agents in terms of customer service. It was a new method and all such real estate associates and agents were advertised. Disappointingly, all this activity was not noticed by the LDA. For the first time, the society was not just marketing itself but also agents that they had hired to promote their project. The next stage of fraud by developers was the sale of files. It is pertinent to mention here that such illegal housing schemes never sell plots but always sell files which have no legal status. Profit has repeatedly raised the point before that the sale of a plot is possible only if the land in the record is transferred to the name of the seller by going to the Patwari and only those who are selling their personal land can do so. When the land record is transferred in the name of the buyer, the buyer can not only get the land demarcation by the Patwari but also can establish his possession while selling files is just a way to commit fraud. However, all the real estate

agents who had already advertised in the newspapers were selected to sell the files. Mian Amjad, a property dealer on Ferozepur Road, informed Profit that three years ago, the sale of files under the scheme was at its peak. “The owners of Ferozepur City Housing Scheme hired as many real estate agents as they could and each agent received an attractive commission on the sale of the files and they were looting the people with both hands. Files of five marla, ten marla, one kanal and two kanal plots were being sold in the scheme and every investor investing in this area wanted to get three to four files of this scheme,” he explains. “I did not deal with the files of this housing scheme. Our job is to buy and sell plots, for which as soon as we get the Fard (Land Document) from the Patwari, we know whether there is any dispute or court case over the plot we are trying to buy or sell. I saw with my own eyes that the LDA field staff visited the said scheme, drank tea, took bribes and got on with it. The scheme was so popular that people from other cities also wanted to invest here,” he revealed. Profit’s investigation further revealed that the third tactic of the scheme owners to commit fraud was extremely attractive and that was that the prices of plots were highly unrealistic and despite the unrealistic prices, these plots were also available on installments. The scheme owners had fixed the price of the five-Marla plot at Rs 2.09 million while the plot was also available on easy three-year installments. For booking of this plot, a down payment of Rs 395,000 was to be deposited and the remaining amount was to be paid to the scheme owners in three year installments. Similarly, the price of a ten marla plot was Rs 3.7 million for which a down payment of Rs 595,000 while a one-kanal plot was available at Rs 6.9 million on three-year installments plan and a two-kanal plot was available at Rs 12 million. Overall, the scheme owners were selling plots at Rs 400,000 to 300,000 per Marla, while commercial plots were also offered by the society. According to Profit’s investigation, three years ago, the price of a clear plot on Ferozepur Road in the Gajumata area was nearly Rs 800,000 to 1,000,000 per Marla, so this unrealistic price was also one of the reasons for the attraction in this society. The second thing to consider was that the Ferozepur City housing scheme consisted of 25 acre (or 200 kanal or 4,000 marlas) of land. The developer and owner advertises to sell plots of 3, 5, 10 Marla and 1 and 2 Kanal. If the hypothetical situation is considered where they had all of this land developed, even then there would be at most 800 files

After displaying their skills at fraud with great aplomb, Nazar, Nadeem and Naeem had amassed more than Rs 2 billion. During this time people started demanding plots and development and when the demands of investors gained momentum, the owners of the society had nothing but to give a lollipop to the investors. That is when the National Accountability Bureau stepped in of 5 Marla plots. But the scheme ended up selling not just more than 800 files, but a whopping 5154 such files. And this was if they were only selling files of 5 marla plots the 5154 files sold include plots of 10 marlas, 1 kanal, and even 2 kanal - naturally more expensive depending on the size of the plot for which the file was. Thus, the project has already sold more land than it has by a huge amount. This is not even considering that within the 4000 marlas that they actually have, the project is also supposed to build the promised mosque, community, roads, and all the other trapping were to be built including parks and sports complexes. All the sales were illegal with the involvement of LDA officials and the owners of the society were telling bare faced lies and collecting money in exchange for pieces of paper. However, after displaying their skills at fraud with great aplomb, Nazar, Nadeem and Naeem had amassed more than Rs 2 billion. During this time people started demanding plots and development and when the demands of investors gained momentum, the owners of the society had nothing but to give a lollipop to the investors. That is when the National Accountability Bureau stepped in.

How did the NAB intervene?

hen Profit discussed the scheme with National Accountability Bureau (NAB) officials, they believed it was one of the major frauds that had taken place in the history of real estate in Lahore, and that the NAB had already made a major breakthrough in this scam. A NAB spokesperson informed Profit that NAB was receiving many complaints regarding the scheme and NAB officials headed by the Director General Lahore decided to investigate the case. “It has been alleged that the management of ‘M/s Ferozepur city Housing Scheme’ including the accused Nazar Muhammad, Naeem Ahmed and Nadeem Ahmed under the garb of said illegal housing scheme received huge amounts from the pub-

lic at large through inducement and luring them by issuing files of the said illegal housing scheme. Accused Naeem and Nadeem also alleged that for getting NOC/Approvals they have given a bribe of RS 115,500,000 to accused Muhammad Shahzad who was the Director Headquarter LDA and Malik Liaqat who was the PA of DG LDA,” the spokesperson revealed. The spokesperson further informed that on the above said allegations five accused persons were arrested in this case whereas three of them were from the management of Ferozpur City Housing Scheme and two of them were from LDA. “Claims against the management of the scheme were invited from the general public and for this purpose, advertisements were placed in the same paper where the housing scheme had advertised itself. As per our records, 6195 plot files were affected in this case. As claims were still pouring in so the total liability was calculated on the basis of actual record recovered from the accused persons which include the liability of those claims which were still to be filed with NAB and total liability against the 6195 plots was of RS 2,222,358,727 (2.2bn approx.). To date claims of approximately 5600 plot files were submitted with NAB and for remaining claims fresh publication is also being published in leading newspapers on all over Pakistan basis,” he added. The spokesperson further informed Profit that meanwhile the three accused of Ferozepur City Housing Scheme had also applied to NAB for plea bargain (PB). “Plea Bargain application of three accused persons of the said housing scheme for an amount of RS 2,222,358,727 were accepted by the Regional Board Meeting (RBM) and the same was approved from the Accountability Court, Lahore. However, reference against two LDA officials [Rana Muhammad Shahzad and Malik Liaqat] has also been filed in Accountability Court, Lahore,” they informed. When asked about the present status of the case, the spokesperson replied that investigation has been completed and work was being done for verification of the claims and disbursements to the affectees. n

REAL ESTATE

Lucky Cement’s

lucky 2021

What is to credit for this growth? Government factors, and their new plant which became operational in December 2019

hat an excellent year Lucky Cement has had. The company announced its financial results on August 7 - and profit nearly quadrupled. In fact, all numbers have been frankly astonishing. On an unconsolidated basis, gross revenue shot up 41.8% from Rs63 billion, to Rs 88 billion, while net revenue shot up 50.3% to Rs62 billion. But perhaps the greatest increase was witnessed in the net income, which rose an astonishing 320.8% from Rs3.3 billion, to Rs14 billion. The same can be seen in the consolidated numbers as well: the company’s consolidated net profit rose by 273% from Rs6.1 billion to Rs22.9 billion. This begs the question: what happened in 2021? That, however, would be the wrong way to view these numbers. The better question is: what happened in 2020? It is that outlier year that stands out in a decade of otherwise extraordinarily high income and returns. It is also what explains the high growth rates - after all, the base year for which we are

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measuring is so low. First, some context on the company. Lucky Cement is part of the Yunus Brothers Group, which is behind such companies as Gadoon Textile Mills, Yunus Textiles, Tabba Heart Institute, Tabba Kidney Institute, and perhaps most famously, the LuckyOne Mall in Karachi, which is the largest mall in Pakistan. Lucky Cement in turn owns 55% of ICI Pakistan, and 71.55% of Kia Lucky Motors, among others. Members of the Tabba family sit on the board of directors, while Muhammad Ali Tabba is the CEO. The company was incorporated in 1993, and listed on the then Karachi Stock Exchange in 1994. It commenced commercial operations in 1996., and by 2005, had become Pakistan’s largest cement producer, and by 2006, had become Pakistan largest cement exporter. Lucky Cement signed a joint venture to set up a cement plant in the Democratic Republic of Congo in 2011, and another joint venture to set up a cement grinding plant in Iraq in 2012. Interestingly, the company bagged some local recognition: the CEO was awarded the Sitara-i-Imtiaz in 2018, while the chairman

was awarded the Sitara-i-Imtiaz in 2019. The registered office of the Company is located at Pezu, District Lakki Marwat in Khyber Pakhtunkhwa, and the head office is situated at Muhammad Ali Housing Society, in Karachi. The company has two production facilities: at Pezu, District Lakki Marwat, and at Main Super Highway in Karachi. In 2008, the company’s net revenue stood at Rs16 billion, before steadily climbing, and crossing the Rs40 billion mark in 2014. It then stayed above this threshold for the next six years. In 2014, the company’s net turnover stood at Rs 44.8 billion, climbing to its peak of Rs 48 billion in 2019. Net income also mirrored this pattern, mostly; it rose to a peak of Rs13.7 billion in 2016, and then fell to Rs10.49 billion in 2019. And then 2020 happened. That year, net income fell to Rs3.34 billion - the lowest it had been since 2010. According to the company’s annual report ending June 2020, “As a result of Covid-19 lockdowns locally and internationally during fourth quarter 2020, both local and export sales were adversely affected.”

That was only a blip, however. In the company’s financial results for 2021, it notes that the phenomenal growth in sales volume was due to that very pent up demand because of the Covid-19 lockdowns. It also mentioned several government policies, meant to spur growth in the housing and construction sector. One of those policies was the mandate by the State Bank of Pakistan for the banking sector to increase lending towards construction and real estate to equal 5% of their total private sector lending. Then in July of this year, the Prime Minister announced major construction projects and provided a subsidy of Rs30 billion for the Naya Pakistan Housing Project so that people could build their dream house at an affordable cost. The many projects of the China-Pakistan Economic Corridor (CPEC) are also still ongoing, pandemic or no pandemic. In fact, another Rs69 billion was allocated for dams. This led to a rapid increase in the cement industry: which grew 20.1% to 57.45 million tons during the year ending June 2021. Local sales volume grew by 20.4% to 48.13 million tons, while export sales grew by 18.7% to 9.31 million tons.

In 2008, the company’s net revenue stood at Rs16 billion, before steadily climbing, and crossing the Rs40 billion mark in 2014. It then stayed above this threshold for the next six years. In 2014, the company’s net turnover stood at Rs 44.8 billion, climbing to its peak of Rs 48 billion in 2019. Net income also mirrored this pattern, mostly; it rose to a peak of Rs13.7 billion in 2016, and then fell to Rs10.49 billion in 2019 And this was bound to have a spillover effect on Lucky Cement. The company’s sales volumes grew 30.7% to 9.96 million tons, of which local sales volumes grew by 38.3% to 7.56 million tons, while export sales grew by 11.3% to 2.41 million tons. What’s to credit for this growth? According to Lucky Cement, it is the government factors, and also their new plant which became operational in December 2019. It also attributed its high export sales to the fact that it is the only company with a mechanised

facility to export loose cement at the Karachi port. This explains why it has a 25.8% share of the cement export market (Its other figures are not too bad either: it has 15.7% share of the local sales market, and bags a 17.3% share of the overall cement market). And the company is not stopping anytime soon. It is increasing its cement production capacity at the Pezu Plant by 3.15 million tons per annum, and is going to invest in a lignite coal based power plant, which should start commercial operation in October 2021. n

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