Profit E-Magazine Issue 215

big boys of banking make big-bucks,

the yearly salary

the story

are they worth it?” published in the 10th Oct edition of Profit magazine, the yearly salary of Mr. Shoaib Mumtaz, President & CEO, MCB Bank was misstated as Rs. 233.52 million. Mr. Shoaib Mumtaz assumed charge as acting president & CEO of MCB Bank Ltd on 21st December

based on remuneration / severance allowance disbursed to his predecessor.

error is deeply regretted, and has since been corrected in the online version of the story -Editor

Profit

TheOctopusrising

After a historic debut on the PSX, Avanceon-owned subsidiary Octopus Digital acquires Dawood Hercules-owned EmpiricAI

By Taimoor Hasan

After

a historic debut on the Pakistan Stock Exchange (PSX) and a partnership with Micro soft which is expected to bring a multi-million dollar revenue for the company, Octopus Digital Limited (ODL) has made another headway in its business of digitalising industries. This time, it is an acquisition.

On October 6, the Board of Directors of Avanceon Limited approved the acquisition of EmpiricAI (Pvt) Limited, a wholly-owned subsidiary of Dawood Hercules Corporation Lim ited (DHCL), under a share swap agreement. Under the arrangement, the publicly-listed Dawood Hercules Corporation will get a certain percentage of shares in Octopus Digital Limited, currently owned 80% by Avanceon which is also listed on the PSX, and 20% by public shareholders.

Following the transaction, DHCL will get a seat on the board of Octopus that, according to Avanceon, will help the company in capital stewardship and governance of the asset. Bakhtiar Wain, the CEO of Avanceon, confirms that after the transaction, Avanceon would still be the majority shareholder of Octopus Digital.

The synergies created by the acquisition will help Octopus Digital stregthen its capa bilities of digitalising industries and what’s certain with that is Octopus Digital is on

the rise. The company made its debut on the Pakistan Stock Exchange in September 2021 and quickly became one of the the biggest and a heavily subscribed IPO. Through the IPO, the company was able to raise over Rs30 billion against an ask of Rs1.2 billion, making the IPO oversubscribed 27 times.

The company’s share price at the time of the listing was Rs43 and went upwards to reach Rs110 in January this year, in three months. It currently hovers at around Rs72.

On the financial performance side, Octopus Digital has been abe to grow substan tially. The company posted a revenue of Rs277 million in 2020 and a profit after tax of Rs219.7 million. For the year 2021, ODL posted a reve nue of Rs625.1 million, a growth of 125%, and a profit after tax of Rs345.9 million, a growth of 57% over last year.

For the first quarter of 2022, the latest for which financials are available, ODL posted revenue of Rs159.32 million and a profit after tax of Rs104.82 million. The revenue for the same quarter of 2021 was Rs51.6 million, and profit after tax of Rs9.6 million.

For the half year ending on June 30, 2022, Octopus posted a revenue of Rs349.35 million and a profit after tax of Rs240.29 million. In 2021, the revenue of the company was Rs145.29 million and profit after tax was Rs66.3 million. According to ODL’s financial report for 2021, the company claims to have a healthy pipeline for 2022, which means further growth in revenue and profits can be expected.

So what does Octopus Digital really do?

First, some context about the parent company of ODL, Avanceon Limited.

Founded in 1984, Avanceon is the only listed company in Pakistan that offers indus trial automation, electrical design, sterilization, project management, and consulting services, enjoying a near monopoly in this segment. It is the only listed company on the PSX to hold plenty of international affiliations and memberships.

Its niche of automating industries involves a significant software component for that automation, provided by Avanceon. In 2017, Avanceon setup a business called Avanceon Limited to provide value added solutions to its clients it did automation for, by collecting data from that automation and transforming it into actionable information for its customers. This would involve providing its clients in various industries with automat ed reporting and dashboards. It would also include asset management, cyber security and some other value added services.

The arrangement would help Avanceon increase the productivity, maintainability, reliability, profitability and availability of the client’s assets and processes. By enabling technology, Avanceon would provide these value added services via a complete system of life cycle support.

In 2019, this business was rebranded as Octopus Digital and was listed publicly in September 2021. Its share trading started on

October 5 last year. Today as well, Octopus provides those value added services of actionable insights and business intelligence to industrial customers as an independent entity. It also provides digital infrastructure like dashboards, all of which it has been able to turn into a lucrative business. Octopus provides these services through its expertise in data collection, artificial intelligence and machine learning technologies. Its offerings are available to clients on a multi-year subscrip tion basis. The parent company, Avanceon, is itself also a major customer of Octopus’ technology.

EmpiricAI, the company that has been acquired by Octopus Digital under the share swap agreement, also has the expertise in data analytics and artificial intelligence to solve complex industrial problems through software products.

For instance, most industries use boilers in their manufacturing processes. These boilers consume a lot of energy to function and need to be monitored to ensure that they do not break down. There is also a lot of data that

is being produced on for instance how much energy these boilers are consuming. If that data could be analysed correctly, the boiler’s energy consumption can be made efficient and its maintenance can be done on time.

EmpiricAI develops those tools that can decipher data collected in industrial processes to help in decision making and efficiently man age industrial processes. EmpiricAI’s strength also is that since it is owned and run by an in dustrial conglomerate that itself manufactures some products, it understands such processes and what impacts these processes better than anyone else.

“The digital capability coupled with the knowledge of various processes in the industries, which variables are important and how to decipher and manage them and do an analysis on them, that is the strength of EmpiricAI,” Shamoon Chaudhry, the CEO of Dawood Hercules Corporation told Profit.

EmpiricAI was incorporated as a whol ly-owned subsidiary of DHCL with a Rs100 million investment. According to publicly available information on EmpiricAI, the com-

pany aimed to provide globally competitive services in data science, cyber security and software engineering for the full cloud computing stack. The historical financial perfor mance of EmpiricAI is not publicly available.

Through the acquisition, Octopus Digital will be leveraging the expertise of EmpiricAI to create products for Octopus Digital customers. “For Octopus, the acquisition provides an outstanding opportunity to complete its product range,” says Wain.

“ODL product, Omniconnect solves a major problem of manufacturing industry as it allows them to store and contextualize OT real time data in non-proprietary big data solutions on the cloud. EmpiricAI product bridges the gap of providing prescriptive and predictive analytic solutions utilising Omniconnect. The eco-system of this manufacturing optimization solution would not just create value for Avan ceon’s customer but for any system integrator in the world.”

Digital synergies aside, the partnership is of valuable importance for Octopus because of the company that owns EmpiricAI. Dawood Hercules is the parent company of Engro Cor poration which is one of the biggest industrial conglomerates in Pakistan which will give Octopus the opportunity to build use cases pertaining to the digital transformation of big industries. (It would also be of significance to Avanceon because Engro once owned 70% of Avanceon.)

While there are only approvals that have been given yet at board level of both the companies (Avanceon and Dawood Hercules), the completion of the acquisition transaction will be subject to the procurement of all applicable regulatory and further corporate approvals, as they may be required.

“We expect to complete all regulatory approvals within 3 months,” says Bakhtiar Wain. “However that doesn’t stop us from kicking off the exciting business plan which is the basis of this initiative. A working group is already crystallizing a detailed project plan of integrating the technology and intellectual property of both teams.” n

“We expect to complete all regulatory approvals within 3 months. However that doesn’t stop us from kicking off the exciting business plan which is the basis of this initiative. A working group is already crystallising a detailed project plan of integrating the technology and intellectual property of both teams,”

Bahtiar Wain, CEO Avanceon Limited

“The digital capability coupled with the knowledge of various processes in the industries, which variables are important and how to decipher and manage them and do an analysis on them, that is the strength of EmpiricAI,”

Shamoon Chaudry, CEO Dawood Hercules Corporation

By Abdullah Nizi and Shahab Omer

It

is bewildering, really, walking into the headquarters of the Naya Pakistan Housing Development Authority (NAPHDA). Tucked away in a corner of the secretariat, the building is a maze of open-floor plans all around a central courtyard from which one can look all the way up to the top floor. Fit an escalator in the middle and it might as well be a mall. But when

you look around, there is nothing but top-ofthe-line furniture and office decor that could compete with any corporate headquarters in Pakistan. Inside, men bustle about in suits. From outside, though, the place is a veritable fortress. Guests surrender their phones upon entering (all interviews were strictly off the record), protocol officers in shalwar kameez and waistcoats follow on the heels of an army of retired generals that run the place.

For a building to simultaneously seem like a shopping mall, a corporate office, and a nuclear facility is some feat, yet that is exactly the overbearing presence it has. Formed in

2018 NAPHDA’s function and purpose is cause for nearly as much cognitive dissonance as the building that houses it. Officially, it is a government owned and run corporation meant to organise the development of real estate projects and manage construction backed by the state. In less official words, it is the bureau cratic conceptualisation of a dream. The dream of five million houses made for, and ready to be occupied by, low-income groups subsidised by the federal government.

This is not a fix for homelessness in Pakistan. It is also not in any way an antidote for the increasing urban sprawl our cities face and the many slums, shanty-towns and other informal settlements that dot our maps. Instead, it strikes at the heart of a much more crucial and molecular desire — apna makan. In Pakistan, building a home is an elusive yet common dream. It is one that most people do not get to enjoy. Whether it is to move out of a congested living space, for social mobility, for peace of mind, or to raise a family-there is a demand (read: desire) for homes.

The brainchild of former prime minister Imran Khan, Naya Pakistan Housing’s end-goal was to provide five million units of ready-built homes that people could buy at a standard rate. To achieve this, NAPHDA set out on an am bitious string of public-private-partnerships, reducing the cost of building by standardising design, cutting down approval times, and most importantly working with private banks as well as the SBP to provide longer-tenure loans at a set, subsidised, interest rate.

It was an ambitious plan. It was a bold plan. It was a wild plan. Progress has been slow — painfully, shockingly, eyebrow-raisingly slow given the promises that had been made, all while NAPHDA as an organisation has been bleeding over a billion rupees every year in salaries and operating costs.

Some of the culprits behind the slowdown have been typical. With large-scale projects of this sort very little ever goes accord ing to plan. But this is also a very complicated story. There are many players in this, from the government, to private real estate develop ers, to the State Bank of Pakistan — all have contributed to the host of problems that have plagued this project. Unforeseen circumstanc es, changing economic realities, and lukewarm reception from the public have all amalgam ated into this project very quickly descending from its eager beginnings to dressing up numbers to try and justify itself.

The NAPHDA model

Thedream has not quite gone according to plan. In the nearly four years that the PTI was in government, a report submitted by NAPHDA to the Senate shows that 172,489 housing units have

either been completed or are under-construc tion. That is 3.4% of the 5 million end-goal. But we must begin at the very beginning. Back when this was simply an idea that was con ceived. Before it took shape.

And that takes us back to a single ques tion: what does the government mean when it says it wants to build five million houses for lower income groups? The government does not have the time nor enough resources to build these houses themselves. It is an attractive and easy thought to want the government to take up the job of building these houses all on its own, but that would be a near impos sible task both because of its scale and the vast inefficiencies that exist in government function.

So what does the government do when they want to provide five million houses but can’t build them itself? The Naya Pakistan Housing Project envisioned the solution to be an umbrella under which different public-private partnerships would be funded, supported, subsidised, and encouraged by the state to develop cheap houses for lower income groups. These houses, known as ‘Low Cost Units’ or LCUs would be built either by development authorities or private developers. Then, the general public would be able to take loans from banks on easy terms and low interest rates to purchase these homes. In short, the government would get the real estate industry to build these homes and then get the banks to provide easy finance to people to buy them.

To build these, NAPHDA has created a few different models under which this public-private partnership would take place. Under these models, NAPHDA would approach development authorities (like LDA or RDA), provincial governments, and private developers.

Under the first two models things are pretty straightforward. Development authorities are already working on projects in their jurisdiction on land owned by the federal or provincial government. All NAPHDA has to do is ask them to register through the Naya Pakistan Housing Program and develop and construct a certain number of LCUs for the project. This would come with many perks for the developers.

Since the cost of building is high, NAPHDA provides a cost subsidy per unit built of Rs 300,000 to eligible applicants registered through “Naya Pakistan Housing Program ‘’ (NPHP). In addition to this, NAPHDA would then also coordinate with provincial governments for the provision of road, water and sanitation infrastructure up to the project site.They would arrange the end buyers and mortgage facilitie from the banks for the low income segment group. A 90% tax rebate on projects approved by NAPHDA would also

be implemented. Since these projects then fall under and perhaps most importantly, the government would ensure that banks provide easy loans for customers to buy the houses that are being built.

Picture it like this. If the Lahore Develop ment Authority (LDA) was creating a housing project the government would ask them through NAPHDA to reserve a certain section of their project for Naya Pakistan houses. So if the LDA project is spread over 1000 kanals of government land, NAPHDA might ask them to reserve 60, or 80 kanals for LCUs. The government doesn’t have time to undertake the construction themselves, so they would ask banks to provide loans to the developers to make these houses which would then be sold to prospective buyers at a set rate.

Why would the development authority want to do this? Because these LCUs would be built along a standard design by the developer with the guarantee that buyers would come. One of the biggest issues in any real estate development project is finding genuine buyers and populating an area. The government through the SBP launched schemes like the ‘Mera Pakistan Mera Ghar’ (MPMG) initiative which gives loans on good terms to people wanting to buy LCU homes. Since the loans are confirmed, the developers know that they will have customers and their society will be populated — meaning the roads will be busy, stores will pop up, and a community will develop.

The story is much the same for private developers. In addition to approaching development authorities and government functionaries, the Naya Pakistan Programme also envisioned that NAPHDA would facilitate builders in development of housing projects on private land subject to that developer meeting requirements such as clear ownership and livability. These are two factors that are always a gamble in private real estate development. Now, it does not always make financial sense for these private developers to build LCUs.

Under the MPMG initiative, housing units of either 5 marlas or less count as LCUs and come at a maximum cost of Rs 3.5 million. This would not always be a profitable equa tion, however, especially with inflation-driven rises in the cost of construction and the fact that most of these private projects take place in urban areas where land is not cheap. With the development authority projects, the government has the advantage of owning the land and only having construction costs.

However, these private projects also get the earlier mentioned subsidy of Rs 300,000 per LCU to each developer for the first 100,000 units built, and something even more import ant: legitimacy. That means if NAPHDA allows a private society to build LCUs as part of the

Naya Pakistan Project they are saying their appraisal of the project is that it is legal and trustworthy. And when the Prime Minister or the Chief Minister show up to inaugurate those projects, further legitimacy and marketing opportunities are created. In addition to all of this, the private developers will be getting all the other perks such as the provision of road, water and sanitation infrastructure up to the project site, and buyers that have been approved for loans under MPMG to liven up the place.

A string of disappointments

n In category B, other than 839 units in Phase I which are under construction, all the other projects are either in planning phase or even earlier. As far as the 839 are concerned, they seem to be more rural than peri-urban.

n In category C, with the exception of 1800 units in Bahria Enclave in ICT and 3000 units in Bahria Greens in Karachi, the rest of the 10,633 are all still in the planning phase or earlier.

agencies, would help them pick up the pace and then private developers would get in on the action. But the private developers never took the bait.

Why didn’t they bite?

Let

us go to Islamabad for a second. Right through Constitution Avenue and to the upper house of the parlia ment of Pakistan. Here, on the 4th of August this year, NAPHDA presented a report to senators updating them on the state of the Naya Pakistan Housing Program. As we mentioned earlier, the figure quoted by NAPHDA was 172,489 houses either fully or partially constructed. Yet even this figure is not strictly speaking true, and NAPHDA seems to have gone to a lot of effort to try and accumulate this.

A simple look at the report to the senate says a lot. In the progress update, NAPHDA has divided its work into five categories:

n Category A: LCUs being built in urban areas in collaboration with development authorities (such as the LDA), the Federal Government Employees Housing Author ity (FGEHA), the Workers Welfare Fund (WWF). NAPHDA claims 53,758 LCUs have either been constructed or are under construc tion.

n Category B: Projects in peri-urban areas built on land owned by the provincial govern ment. The list describes 9,098 such LCUs.

n Category C: Projects on private lands. These projects are built under the Naya Paki stan Housing subsidy scheme, through which the government has budgeted Rs.300,000 per unit to allow builders to build LCUs. The budgetary allocation was Rs.30 billion which means this subsidy can be provided for 100,000 units, unfortunately, it appears that developers have applied for this subsidy to build 10,633 units only.

n Category D: Loans that have been disbursed for the building of housing units, which account for 25,269 housing units.

n Category E: Housing units being built by the charitable foundation Akhuwat which amount to a final tally of 18,499. The reality is even bleaker. In actuality, this is what it looks like:

n In category A, only 17,005 LCUs are under construction or in planning state. And of those, only 3,720 units are for the general public. The rest are for government servants.

n In category D, none of the mortgages have been provided for LCUs. Rs.88 billion has been disbursed for 25,269 housing units. However, these aren’t all for LCUs. As per World Bank document, mortgage loans that have been provided World Bank coverage were for Tier 2 and Tier 3 houses. These loans do count as low-income housing, but they are not within the limits of the LCUs that have been specified by NAPHDA and thus do not count under their tally.

• And finally, the 18,499 houses being built under Akhuwat. All of these exist, but Akhu wat provides financing for project where the borrower already owns the land or the unit and Akhuwat provides financing for adding units on the already owned piece of property. Thus this has nothing to do NAPHDA.

In short, the already meagre figure quot ed by NAPHDA of 172,489 is much smaller. According to our calculations, the actual number of housing units finished or under construction that are actually Naya Pakistan Housing Project units comes out to just under 20,000. If we say very liberally that half of the loans provided were somehow for LCUs, and also count all of the Akhuwat houses (that really should not be counted) - even then the total can be rounded up to barely 50,000 houses that have actually been built under NAPHDA.

All any of the senators really that were presented this report had to do was peer through the windows from their chambers and look out at the federal capital, which is supposed to be home to 30,918 of these supposedly complete or under construction housing units. Very briefly, NAPHDA followed a strategy of piggybacking off existing projects to try and prop up its numbers.

For the details of how Profit got to these numbers, there is an accompanying piece with this story that lays out every single project that is under construction with the auspices of NAPHDA written by twitter native DMKM (@2paisay).

Read more: Decoding the progress of Naya Pakistan Housing

Without getting into too much detail (all of which can be found at the link below for those interested) what happened was that the project became a dud. NAPHDA was pinning its hopes on the facts that projects in this first category, the ones taking place with the development authorities and other government

Webegan this article with a single understanding: that there is a desire in people for apna makan. Ther reality is that there is plenty of space for people to build houses if they so want, and plenty of cheap land too. However, most people want to live as close to the urban centre as they possibly can. Now that land is very dear to developers and quite pricey, so why would private developers sell cheap 5-marla houses on the bidding of the government to the general public?

Most developers have very honestly said that it does not make financial sense to be making low-income housing in these urban areas, which is why they would target larger clients. NAPHDA was hoping that the perks they were offering would be more than enough to convince private developers. There are two important aspects to this, and for that we will have to travel to Karachi.

The idea was that projects on private land would be built under the Naya Pakistan Housing subsidy scheme. The Government of Pakistan had budgeted Rs.300,000 per unit to allow builders to build LCUs. The budgetary allocation was Rs.30 billion which means this subsidy could be provided for 100,000 units. Unfortunately, as has been detailed above and in the senate documents, that developers have applied for this subsidy to build just 10,633 units only.

As per the senate list, there are 10,633 LCUs in this project spread out in ICT, Punjab, KP and Sind. As per NAPHDA website, all of these projects are in the planning phase with the exception of 1800 units in Bahria Enclave in ICT and 3000 units in Bahria Greens in Karachi.

In addition to this, however, NAPHDA and the government claimed that the banks would finance not just buyers that wanted to buy these houses, but would also provide loans to developers on easy terms. This is where things went wrong. Take the example of the Bahria Greens project in Karachi.

A couple of years ago, the construction cost of an apartment in Karachi was around Rs 4000 per square foot. In a letter of eligibility from NAPHDA, the apartments that will be built by Bahria Town are almost 700 square feet. Apartments of this size should have been priced around Rs.2,800,000 two years ago. Since then we have had inflation in costs of cement, steel, labour costs, etc. which should take the cost of such apartments to at least Rs.3 million.

As this is Bahria, we will assume that with the negotiating power that Bahria has over contractors and the economies of scale that Bahria can bring to bear on the project, Bahria will be able to construct these apartments at Rs.2,600,000.

If Bahria sells these apartments at cost i.e. Rs.2,600,000, the profit to Bahria will be the subsidy of Rs 300,000 per apartment that it is getting from the government. At Rs.300,000 per apartment, the subsidy ensures a profit margin of 11.5% and, based on our research, is paid in advance. Since the PTI was quite desperate to get this project out of the way, they would have paid it in advance anyway if it believes that Bahria can deliver the project.

Thus, if the project is approved by NAPHDA/GoP, GoP will be providing Rs.900 million (Rs.300,000 x 3,000 apartments) to Bahria Town as a subsidy in advance to con struct these apartments. NAPHDA has issued this eligibility letter to Allied Bank Limited. Assuming the construction cost is Rs.2.6M per unit as mentioned in the letter, the total cost of the project comes to around Rs.7.8 billion. The timely completion of the project hinges on if ABL is providing sufficient financing otherwise the number of units will be reduced.

Moreover, the NAPHDA units are a small part of a private developer’s real estate project. For example, out of the 28500 units that Bahria Enclave is building, only 1800 are LCUs. Private developers are interested in this because the GoP is providing a Rs.300,000 sub sidy. However, unlike the housing units that builders will build for the market, LCU units are for low income groups and low income can only afford these projects if commercial banks provide mortgages to buyers.

Dream or reality?

Wewould love to say that this was a swing and a miss. The reality is, NAPHDA has nothing significant to show for itself four years on. For starters, they have been really unlucky. Many of the projects detailed above have faced unusual delays, and on top of that the cost of construction has risen significantly in the past two years. Products such as cement have been hit by the super-tax imposition. Combined financials for 16 cement companies listed on PSX show the effective tax for FY22 stood at 42 percent compared to 22 percent in FY21. A quick run-down of numbers suggest cost escalation was passed on sufficiently through retention prices.

Private developers have thus shied away from participating, and the partnerships with other government functionaries have been victim to the very bureaucratic hindrances that they were supposed to be free from. In conversations with Profit, officials from NAPHDA

have claimed that the authority was acting simply as a regulator and could not answer for the lack of progress.

“Our job was not to build houses but to make policies. NAPHDA is a corporation, which aims to manage the real estate develop ment schemes and projects of housing,” they said. Interestingly, the authority on its website, while referring to the NAPHDA Act, clearly writes that the objectives of its establishment included both construction and development. “Naya Pakistan Housing & Develop ment Authority (NAPHDA) is a corporation established on 15 January 2020 through an Act of Parliament for the purpose of planning, development, construction and management of real estate development schemes and projects including housing,” the website reads.

However, when the higher-ups of NAPHDA asked that if the authority’s job was not to build houses, then why do the authority try to create an impression in the data presented at various places that these low-cost houses were constructed by NAPHDA? The deputy chairman of the authority replied that when forums like the Senate ask for answers, they ask the authority to arrange all the data.

“We presented the data to the Senate regarding the recent low-cost housing con struction, and we had instructions to collect all the data and make it available,” they said. On further questioning with specific details, they did allude towards how there is a wrong impression that these projects are there. For ex ample, when asked that NAPHDA has claimed

in the reply sent to the Senate that 1467 LCUs have been under construction in FGEHA-G-13 under the Naya Pakistan Housing Scheme but this project has started since 1996 (as detailed in the accompanying piece by @2paisay) the authority said that they did not have any pro visions to take over an already under construc tion project in its domain. “We are giving a cost subsidy for this project so that people can get low cost houses. We are not saying that we have constructed these houses. Likewise, we have made a MoU with WWF that low cost houses can also be provided to the people. The workers who get the houses here live on rent all their life, but under Naya Pakistan Housing Project, they will be able to become the owners of these houses,” he maintained.

The reality is that the senate report is damning, and it is even worse that even those numbers have been made to look better than they are. At the end of the day, in terms of delivery, nothing has been delivered. 172,489 is a useless number. The bottom line is that there isn’t any value addition by NAPHDA as the numbers show. There may be something in the Public private partnership side where NAPHDA has issued letters but all those are in the planning stages. How can NAPHDA claim 170K LCUs when many aren’t LCUs, the SBP one and akhuwat ones have nothing to do with NAPHDA.

This report was contributed to by @2paisay, who also wrote the accompanying piece detailing the project by project break down of NAPHDA’s report to senate. n

Decoding the progress of Naya Pakistan Housing

A project-by-project dive to reveal the real progress of Naya Pakistan Housing

By @2paisay

Itall started with proceedings from the parliament. The Naya Pakistan Housing De velopment Authority (NAPHDA) was asked to provide an update on progress made by them in building 5 million low cost units (LCUs) for lower income groups. In response, a very long tabulation came to the conclusion that in four years all NAPHDA has to show for itself are 172,428 housing units in various projects throughout the country..

Except even that number is a huge stretch.

It is not the number of housing units completed or under-construction. Let’s go

section by section and then we will re-assess the performance of NAPHDA which costs the taxpayer Rs.1 billion in salaries and operating expenses per year. The projects presented to the senate are also mentioned on NAPHDA website as Progress on NAPHDA projects which as we shall find out below is a very mis leading title by NAPHDA. In this post, I will focus on section A presented in to the Senate, which comprises low cost units in urban areas. As per the list, 53,758 LCUs are to be delivered in urban areas. We will go region by region as has been detailed in the list.

Islamabad

The first section is Islamabad with 30,918 housing units. Only the 4,000 units of CDA Ali Pur Farash genuinely belong to the Naya Pakistan Housing Project. The rest of the projects are either rebranding existing projects or exist only on paper. The 12,500 housing units as resettlement of Katchi Abadis don’t even exist on paper. The FGEHA (Federal Government Employees Housing Authority) projects are rebranding and have nothing to do with Naya Pakistan Housing. These are simply housing

PC-I approved at that time, the maintenance work of the said sector was to be carried out by CDA. Later on, in March 2015, in compliance with Wafaqi Mohtasib findings, all Infra structure development work and maintenance work was carried out by the HA. Total No. of plots are 6695.”

Clearly they have been working on this site since 1996. This is not the first project in this location. Earlier, FGEHA (it was FGEHF then) also launched Lifestyle Residency in G-13 which is under construction.

two types of units A & B.

Apparently, category A apartments which are for Grade 20 to Grade 22 officers are for Rs.1 crore and Category B apartments targeted at Grade 16 to Grade 19 officers are for Rs.90 lakhs. Two observations: one, at this price, these won’t classify this as low cost units and two, Grade 20 to Grade 22 officers aren’t the ones in need of housing.

units that would have been built for govern ment employees anyways, and are not for the general public — which was the main objec tive of the Naya Pakistan Project.

Let’s take FGEHA G-13. On their website, with respect to this project, FGEHA mentions “The Housing Scheme Phase-III of the Housing Authority was launched in 1996 in sector G-13, G-14/4 Islamabad. The sector was acquired through Land Acquisition Collector (LAC) under LAC act 1894. Initial develop ment was awarded by CDA to FWO. As per

The point I am trying to make here is that while NAPHDA and the government like to celebrate FGEHA projects as an achievement of Naya Pakistan Housing, the reality is these have nothing to do with Naya Pakistan Housing. FGEHA is a housing development arm (one of many) of the federal government and such projects would have been coming online without NAPHDA. That is not all. Both NAPHDA and Rana Sanaulla in parliament mention that the apartments in this project are low cost units (LCUs). The project comprises

If we look at another FGEHA project, the Skyline Apartment, at least this one has C type units which are targeted at low income employees. The thing to note here is that Grade 18- Grade 22 officers have booked almost all the A type units (see last column - POL is sued). Similarly, 80% of B type units have been booked. However, the units that are targeted at the low income employees, only one third of them have been booked. As there are separate blocks for each type of units, it is likely that the block for grade 18-22 officers will be built with all amenities while the block for the low income government employees may get delayed by years.

Outside of the FGEHA, the list presented in senate mentions the Workers Welfare Fund (WWF) project, whose coattails NAPH DA has tried to ride. This is the one and only completed project in Islamabad. Even though the project has nothing to do with Naya Pakistan Housing, Imran Khan,Zulfi Bukhari and Gen Anwar Ali Hadar showed up and cut some ribbons to make it seem like it was.

I don’t know who was advising the PM and what were Zulfi Bukhari and General Anwar taking credit for. As per WWF, over the years, they have delivered 33,844 housing units. Another 1,508 units isn’t such a big deal for WWF as was being made here with the ceremony.

But consider this. Under law these units cannot be owned by the workers and are only there for them to rent at a nominal amount while they work in the surrounding industries. An official of the Workers Welfare Board said on condition of anonymity that wherever hous es and flats are being constructed by WWF, they have nothing to do with the Naya Paki

stan Housing Scheme and the prime minister may have been kept unaware of legal matters.

As per law, the units cannot be alloted for sale but we have the whole charade orches trated most likely with the connivance of Zulfi Bukhari and Gen Anwar Ali Hyder of making a fool of the PM.

The only project which appears to have conceptualized under Naya Pakistan Housing in Islamabad really is the CDA Frash Town where 4000 units of CDA (Ali Pur Farash) are under construction. As many as 4400 apartments are being built under the housing project at Farash Town Islamabad. The project is being executed by NAPHDA in collabora tion with FWO and CDA. Out of the 4,400 apartments, 2,000 will be allotted to members registered with NAPHDA. Out of the remain ing apartments, 2000 will be sold out in the open market, while 400 will be allocated for the residents of ‘kachi abadis’.

However a few months ago, the CDA revised PC-I and scope of Farash Town apart ments scheme launched last year for the low income group and renamed it ‘Nilore Heights’ with high-end proposed apartments. It is diffi cult to know of what exactly happened here.

Is the CDA keeping 2000 units as low cost units or is it canceling them and con verting all the units to luxury units? The reason cited by CDA for this appears to be that NAPHDA has not deposited the initial amount with CDA. However, something might have gotten lost when the government changed. Let’s assume that had the government remained, the entire 2,400 units as envisaged would have been delivered as LCUs.

And all of this has just been going on in Islamabad, in the very city where parliament

presented this report. Thus, out of the 30,918 units announced by former PM Imran Khan and even carried out a balloting in one case, the only genuinely Naya Pakistan Housing project was the 2,400 units in CDA Farash Town and we can’t be sure of even those units being delivered as NAPHDA hasn’t paid dues to CDA. Just 8% of the units are LCUs under Naya Pakistan Housing.

Lets be generous. We can assume that C type units in FGEHA SKYLINE will be built, and they will be for less than Rs.3.5 million (LCU threshold as per SBP and NAPHDA) and that those wouldn’t have been built if not pushed by NAPHDA. There are 1,701 C type units in this project. We can also assume that all 5,198 housing units in FGEHA SKYGARDEN are LCUs and same assumption as SKYLINE about pricing and NAPHDA being instrumental. There are no LCUs in FGEHA G-13. And it is fair to say that despite Zulfi Bukhari milking it to the max and even getting the PM to carry out balloting, there are zero LCUs being delivered to workers under ownership in WWF Zone V project. This is how the final result appears.

NAPHDA claimed 30,918 LCUs. Despite being extremely generous with our assumptions, the real number of LCUs being delivered is 9,299, of which 75% are under FGEHA and usually reserved for federal government employees.

Punjab

The

next section in Senate list is Punjab urban area The first major project was supposed to be with the LDA, and took off with beating drums and festivals. The plan was to build as many as 35,000 residential apartments for its and other government employees under the umbrella of the Prime Minister’s Naya Pakistan Housing Programme.

The problem is the same one as before: Whether it’s 35,000 units or 4,000 units, the LDA is building it for its own employees or other government employees. Calling it Naya Pakistan Housing was just to provide a PR opportunity to CM Buzdar and PM Imran Khan at the time.

The LDA had a fixed price of Rs 2.7 million for every apartment which will be taken in easy instalments. At Rs.2.7 million, they would qualify as LCUs. The only question is if these houses will get built at that price.

Projects under the Sargodha and Faisal abad Development authorities meanwhile are still having their modalities finalised — which

means no work has begun at all.

Based on the price listson FGEHA website, only 2000 and 386 units will qualify as LCUs for FGEHA Chaklala Heights and FGEHA Lifestyle Residency respectively. No details are available on RUDA LCUs.

Despite NAPHDA claiming 18,150 low cost housing units in Punjab, the above table shows that only 6,386 LCUs are under construction and that too, all for government employees.

KP and Balochistan

Jalozai

is a relatively straightforward one since 1,320 is a small amount. We don’t need to nitpick over it. Moreover, it is PTI’s home province so we can safely assume that those 1,320 are LCUs and will be built. As per the brief description of the project, it predates Naya Pakistan Housing, but since it is under PTI that it was initiated, we can count it as such.

However, the Worker Welfare Board suffers from the same problem as the WWF project in Islamabad i.e., as per SC decision, it is only for residence of industrial workers on nominal rents and not for sale and purchase. That means those 2056 completed LCUs cannot realistically be counted as Naya Pakistan Housing units.

In Balochistan, meanwhile, the NAPHDA website mentions only Saryab colony but

states modalities are still being finalised. What is surprising about this is that there is no men tion either in senate list or NAPHDA website of the projects announced by the PM and

reported by Business Recorder in Balochistan. This is the picture of the PM inaugurating/ ground breaking 110,000 units in Quetta. Just count the number of plates on the wall.

So the whole coterie flying to Quetta, holding a huge ceremony, spending money on panaflex, plaques, etc., and announcing 110,000 housing units, was all for naught. Afterwards PM never bothered to ask his advisors what happened to all that development that was supposed to happen in Balochistan with such fanfare. Bottom line: Zero LCUs in Balochistan.

Conclusion

WhileNAPHDA may report to the Senate and on its website that 53,758 LCUs are under construction or in planning stage in urban areas, the fact of the matter is only 17,005 LCUs are under construction or in planning state. And of those, only 3,720 units are for the general public. The rest are for government servants.

The appearance of NAPHDA appears unsatisfactory considering that senior leadership appears to have extensive operational experience (if not exactly in real estate or regulatory matters) and are being compensated very generously (see the additional allowances section for people working on secondment/ deputation). n

The writer is a citizen journalist that tweets at @2pai say and writes about the SBP, real estate, and other subjects at https://dmkm.substack.com/.

Ammar H. Khan

Dollar Doom Loop and Pakistan

on importing energy and food in key US$ terms, resulting in both energy and food inflation in local currencies. This triggered monetary tightening across all non-energy exporting markets, as economies scampered to avoid any major deprecia tion that could push them into an inflationary spiral.

The

era of cheap money is over. The global financial crisis of 2008 led to an explosive growth in money supply with close-to-zero interest rates in US$ and other major currencies, triggering a demand for increasingly risky assets. Further increase in money supply post pandemic further flushed the world with excess liquidity, resulting in too much money chasing too few goods. When such a scenario materialises, that results in inflation, as prices of goods and services are bid up given excess availability of liquidity.

The monetary phenomenon driving demand pull inflation was further compounded by supply constraints during the last eighteen months. Initially due to disruptions in the supply chain due to the pandemic, and then due to the Russian invasion of Ukraine which sent shockwaves through the energy markets, eventually resulting in cost push inflation.

To rein in inflation, the US Federal Reserves has adopted a hawkish stance and has been increasing interest rates. As interest rates for US$ started increasing, there was an accelerated shift away from risky assets towards the US$, signifying a flight to quality. The US$ has appreciated by more than 15% against major currencies since the beginning of 2022. The US Federal Reserves continues to maintain a hawkish stance to bring inflation back within its target range.

As the US$ increased in value against all major developed and emerging currencies, US$ driven inflation fed into inflationary cycles across emerging markets, as they remain largely dependent

Similarly, many emerging markets have issued US$ based sovereign debt. As interest rates remained close-to-zero for more than a decade, many sovereigns were able to borrow at considerably low rates to fund consumption, and their trade deficits. As the interest rates increase in US$ terms, and the value of US$ increases in local currency terms, there will be a double whammy effect. Sovereigns that would not be able to service higher interest expense, resulting in increasing deficits, and eventually spending cuts on social and welfare front, resulting in a high human cost. Sri Lanka, Zambia, and Ghana are some examples of sovereigns that are looking to restructure, or reprofile their sovereign debt. More countries may emerge as the cost of servicing the debt increases resulting in adverse developmental effects.

In view of a dollar doom loop rolling out globally, the most obscene policy a sovereign can adopt is trying to go against the flow and maintain an overvalued currency, particularly when it doesn’t have any foreign exchange reserves to maintain an overvalued currency. Such a sovereign is Pakistan, which through political machinations is trying to maintain an overvalued currency despite suffering through a balance of payments crisis, as well as a natural disaster which has displaced more than 30 million people.

The sheer disregard to ensure sustainable economic growth, and to ensure ability to wade through a potential global recessions over the next few quarters is appalling. The short-term goal of maintaining an overvalued PKR would result in a heavy price that the country and its inhabitants would have to pay in the times to come. Restructuring of debt may provide some cushion, but if the opportunity is wasted by subsidising luxury consumption, and not for building back better following floods – the macroeconomic scenario would even be much worse.

The writer is an independent macroeconomist and energy analyst.

The dollar doom loop is in motion. We can either prepare for the same through policy measures that conserve foreign exchange reserves and bolster export proceeds through a competitive currency, or we can pretend that the world isn’t inching towards a recession, and that someone somewhere will bail us out. We have had bailouts every few years now. The music has stopped. The punch bowl has been removed. Meanwhile, we continue to pretend that the party continues, much to our own detriment.

Basit Ghauri

Stocktaking of power sector challenges in NEPRA State of Industry Report

NEPRA released its State of Industry Report 2022 (SIR) on 30th September, 2022. This year’s addition is particularly significant due to multiple key events that took place in FY 2022, including launch of CTBCM, revised IGCEP, and exorbitant increase in consumer end tariff of electricity. Even though global fuel prices have been the main driver of these excessive increases in cost of electricity, it is ulti mately sub-standard and inconsistent planning along with other convoluted issues that lead to a financially stressed power sector. One must applaud the NEPRA for its transparency in highlight ing most of the critical challenges that have led to the current abysmal performance of the power sector. This piece is an effort to take stock of all the major issues included in the report. Following are the key major issues highlighted in the report that have led to an adverse impact on the power sector:

Violation of Economic Merit Order (EMO)

The electricity dispatch in the centralised national grid of Pakistan is based on the Economic Merit Order (EMO) – a key document that ranks the cheapest power plants to run on a daily basis.

Several deviations were witnessed in actual dispatch compared to EMO in the past year due to several reasons including i) Shortage of fuel for RLNG plants, ii) System constraints, and iii) Underuti lization/non-utilisation of efficient power plants. The combined impact of these violations resulted in an impact of Rs 23.26 bi llion in FY 2022.

Operation of power plants are partial load

Thermal power plants operating at partial load have lower efficiencies. In Pakistan, the PPAs with IPPs are negotiated as such, that the power purchaser i.e CPPA is liable to pay Part Load Adjustment Charges (PLAC) if the power plant is operated at partial load due to non-evacuation of electricity. Total amount accrued to date in terms of PLAC i s Rs 41.74 billion, out of which Rs 23.03 billion were accrued in FY 2022 only.

Operation of Combined Cycle Power Plants (CCPP) in open cycle mode

Combined cycle power plants (plants operating on gas as well as steam turbines) have higher efficiencies than conventional power plants. However, the tariff is 50% higher, if it is operated in open cycle mode i.e only the gas turbine is operational. In FY 2022, the operation of TPS Gu ddu (old and 747 MW) in open cycle mode led to a financial impact of more than Rs 55 billion.

Capacity Payments

The writer is a senior associate at ‘Resources Future’ - a private sector energy consultancy

Most of our thermal power plants are based on ‘Take or Pay’ contract – meaning that the electricity sale is accompanied by a Capacity Payment component, even if the plants remain un-operational for the whole year. The total capacity payments in FY 2022 reached a s taggering amount of Rs 721 billion. Key reasons for high capacity payments in FY 2022 include: i) low utilisation factor of thermal power plants i.e. 46% (per unit capacity payment go as high as Rs/kWh 18.94 for Hub Power), ii) low utilisation factor of WAPDA hydro power plants i.e. 39% (hydrol ogical risk is mostly borne by power purchaser)

Non-Project Missed Volume

ability of low-cost power, ii) CPPA-G usually compromise on LDs claims due to high accrued payable to corresponding IPPs.

Losses in distribution system

Paying

for non-utilisation of power plants is not only the characteristics of thermal power plants. Instead, renewable power plants are also liable to pay Non-Project Missed Volume (NPMV) i.e., payment in case of non-evacuation of available power. This is due to the ‘Must run’ status of renewable energy power plants. Although these are charged to DISCOs and NTDC (not passed through to consumers), the ultimate price is paid by the public due to its contribu tion to DISCO losses leading to circular debt. In FY 2022, payments on account of NPMV claimed was Rs 1.17 billion.

Liquidated Damages

Thegovernment procures new power projects to replace the current expen sive fleet of power generators with low-cost power projects. However, delay in commissioning of these plants or their unavailability can result in imposition of Liquidated Damages on generators by the power purchaser. Two issues exist in this regard: i) Current LDs are not rationalised to reflect the true cost of the financial impact due to unavail

Delays in Distributive energy projects

Several

distributive energy projects could lower the cost of CPPA basket by pro curing energy at lower tariff from distributive energy power plants like solar and bagasse based power generators. However, due to delay tactics adopted by DISCOs, the opportunity loss of procuring electricity from these distributive sources added up to Rs 1.8 billion in the past two years.

Losses in transmission system

Losses

in the transmission system of electricity directly impact the end consumer tariff. Losses by NTDC in FY 2022 stands at 2.63% which is higher than the allowable limit of 2.5%. The additional 3,696 units that had to be produced due to higher than allowable losses, resulted in a financial loss of Rs 72 billion.

Like

transmission, the distribution network losses also exceed the allow able limit by NEPRA. In FY 2022, the average distribution losses for DISCOs were 17.13% as compared to allowable limit of 13.41%. This resulted in a financial impact of Rs 113 billion. Additionally, NEPRA in its determi nations assumes the 100% recoveries by DIS COs against the billed amount to consumers. In reality, the recoveries by DISCOs are lower. In FY 2022, DISCOs were able to recover 90.51% against the billed amount, hence incurring a loss of Rs 230 billion. Both of these technical losses over allowable limits and low recoveries lead to circular debt. As on 30th June 2022, total receivables of all DISCOs stood at Rs 1,498 billion The report highlights several other issues including; i) Low pressure gas supply to cheaper power plants, ii) Lack of optimisation between the CPPA and KE system, ii) issues related to fuel supply management and pro curement, iii) Increase in imported fuel prices, iv) Front loaded debt in IPP’s tariff, v) Right of Way issues for power projects and more. These can be read about in detail from SIR 2022, uploaded on the NEPRA website. n

Asif Saad

The only constant is change

The old adage, “the only constant is change” is truer today than perhaps ever before. Businesses are grappling with inflation, economic instability, political volatility, natural disasters – all thrown together with a global recession unlike anything we have seen in the near past. Not the times for the faint hearted for sure. However, in these gloomy days and amidst all these new challenges, the resilience required in finding new ways of doing things has taken on a new meaning. Identifying and implementing different approaches to protect market shares and margins must be at the top of local business agendas.

Two functions which have a direct bearing on business outcomes are marketing and supply chains and it is these areas, in particular, which need to rise to the occasion. Our business leaders can panic when unable to maintain sales at a profitable price and live in the fear of margins being wiped out. What follows in this piece is how leaders need to guide these functions and make them work together seamlessly.

Let’s start with marketing, which for this piece includes sales and any other activities related to the customer. Many companies are unable to hold sales volumes required for sustainable operations, especially in the current environment. The simplest reaction from the marketing team is to drop prices to maintain sales while the leadership would like to maintain margins as well as volumes in passing on the cost increases. This dialogue eventually settles at one end or the other but without deeper analysis one is likely to lose in either direction. Customers can react differently to price increases, depending on how price sensitive they are. But the challenge is to move customer interaction beyond price. Marketing teams need to consider the following;

n

Do we understand customer pain points besides price? If so, can we lever age some of these – payment terms, delivery dates, logistics cost etc.

marketing skills of any kind, a simplistic price increase or reduction will most likely mean leaving margin on the table. Understanding the customer in deeper ways not only allows the business to price intelligently but also helps foster new bonds.

Procurement and supply chain functions are the other major contributors to business profitability. They play a critical role in en hancing resilience by serving as a bridge between the business and its suppliers. As in the case of marketing, too many supply chain functions apply simplistic models in their relationships with the outside world. Buying or not buying cannot be a function of price alone since a broader set of levers are required to create real value. Supply chain managers and leaders ought to consider the following;

n Is Supply chain a CEO priority?

n Have we considered areas such as service levels, inventory, product quality and flexibility? In addition to price?

n Are there ways to benchmark buying KPIs with like-to-like industry/competitors?

n Can we improve demand/supply forecasting, which has a fundamental relationship with supply chain efficiency?

n

Is there room to improve / change service levels?

n Can we segment the market so that prices on all products are not in creased or dropped in one broad brush?

n Can the product be reengineered? Are there opportunities to save on materials, production processes, labour?

Unless you are in a commodity business, which really does not require

The writer is a strategy consultant who has previously worked at various C-level positions for national and multi national corporations

Finally, with the best of marketing and supply chain ca pabilities, the elephant in the room is bringing it all together and creating functional collaboration like it was never before. There is no better way to fight external uncertainties than forging a team which backs each other. Of particular importance is the leadership’s role in creating cross-functional collaboration. Breaking down silos and improving visibility across functions is how the organisation gains true resilience. Failing to coordinate across functions can be expensive. A manufacturing supply chain head of a large domestic company thought he was doing a great job when he procured an essential raw material in advance looking at the impending price increase. Unfortunately, this was never tied up with the marketing manager who was losing customers for products based on that particular material due to an environmental issue. The business ended up with a massive inventory of a material which could not be used, together with a bleeding balance sheet! This is a typical end result of an organisation working in silos. Other instances may not be so drastic but deeper analysis will reveal either money lost directly or in terms of opportunity cost.

To avoid such mistakes, organisations should build collab oration platforms which enable rapid decisions and execution. The usual monthly business meetings cannot be enough to act in a fast-changing situation. Some sort of steering committees where decisions can be taken promptly may be the best way to go.

Businesses need to harness information technology as a core enabler across many functions with the marketing and supply chain being at the front end of using data and analytics. This will require new talent and capabil ities together with significant changes in mindsets. Many of our businesses are unfortunately still operating in traditional information technology mindsets and even struggling with basic ERP implementations. It is, therefore, going to be a long journey to using sophisticated analytics, but they need to get started with a sense of urgency.

The opportunities in a crisis-like situation which we have today must stem from improvements in the quality of management thinking, planning and execution. The lessons learned from across the globe need to be understood and applied in Pakistan to not just survive but also prosper. This is not the first or the last time we will see an uncertain landscape. Management teams cannot stay in the past and those which do, will pay a big price. n

Pakistan’s Microfinance Sector: Another year, another calamity

By Ahtasam Ahmad

Pakistan’s microfinance sector has been the cornerstone of the country’s financial inclusion drive. The sector, in its true sense, offers retail financial services that commercial banks lay a claim to. As per the world bank development update for Pakistan, issued in April 2022, “ The sector caters to the financing needs of a significantly larger number of individuals/households and

micro and small enterprises (8.1 million bor rowers vs 3.8 million by banks). The microfi nance sector, as such, plays a significant role in enhancing access to finance in Pakistan, both for households and small enterprises.”

The multiplier effect of channelling financing to this segment should, theoretically, be higher compared to the upper-class clientele of commercial banks. The rationale behind this is that the lowest economic strata of the coun try have a greater propensity to consume local goods compared to those that are financially

better off and have a higher consumption of imported goods (Cars, phones and the like).

However, the microfinance sector of late, has been challenged by systematic issues that have brought it to the verge of crisis. (Read more about it in Profit’s article: Microfinance Banks on the verge of crisis?)

While the bleak liquidity condition of major players in the industry was exposed by the pandemic, the devastation caused by recent flash floods will have a far greater impact and can push many in the sector to go down.

There could be multiple reasons for a decline in the number of active accounts. One of them being the dormancy factor. A lot

people have mobile wallets, however, some

Mudassar Aqil, Chief Executive Officer at Telenor Microfinance Bank and Easypaisa

Financial Results

Recently, Pakistan Credit Rating Agency (PACRA) and Pakistan Microfinance Network (PMN) published the financial performance of the sector for the first half of the year. (The impact of floods is not yet accounted for in the results).

As per PACRA, the gross loan portfolio of the sector clocked around Rs 449 billion growing by 14% from December 2021. How ever, the credit quality deteriorated further with Non Performing Loans (NPL) surging to 6% from around 5% by the end of last year. Three-quarters of the lending portfolio was attributed to the Microfinance Banks (MFBs) while the NPLs for this segment were also above the industry average.

MFBs, the only deposit-taking entities in the sector, saw a 10% growth in the total number of accounts which reached 87 million by the end of June. Further, the value of total deposits grew by 6% to a total of 447 billion. The growth can be attributed to the rise in interest rates which has enabled MFBs to attract institutional investors.

As per PACRA, “The share of current accounts remains low, despite having a sig nificant mix of branchless/M-wallet deposit accounts. Interestingly, M-wallets account for 80% of the MFBs’ deposit holders but only 13% of the deposit value. This mismatch is justified based on the very low-ticket size of M-wallet deposit accounts.”

Therefore, the industry heavily relies on institutional investors for liquidity and has a volatile retail deposit base. Further, the

SBP Branchless Banking (BB) Statistics for June, 2022 revealed that the number of active M-wallet users has decreased compared to the same period last year.

“It is important to understand that the branchless banking industry is very different from the typical commercial banks because branchless banking services are purely digital and there are nearly zero barriers to churn. There could be multiple reasons for a decline in the number of active accounts. One of them being the dormancy factor. A lot of people have mobile wallets, however, some of them don’t really feel the need to conduct frequent transactions because of which their accounts become dormant over time,” Mudassar Aqil Chief Executive Officer at Telenor Microfinance Bank and Easypaisa, told Profit.

Microfinance Industry overview by Pakistan Microfinance Network

On

the other side, the MFBs continue to beef up investment in the gov ernment’s risk-free securities with almost a threefold increase in the value of total investments over the past three years. By the end of June 2022, the investments for the banks stood at Rs 133 billion. The trend can be attributed to a hedging strategy against the increased risk of consumer lending.

“Conventional microfinance lending is an extremely risky business, and coupled with an aggressive growth strategy of expanding branch operations, we needed to hedge the risk. That is primarily what drove the investing spree,” Kabeer Naqvi, CEO of Ubank, told Profit in an interview.

However, the bottom line for the sector remained negative for the third consecutive year. Telenor Microfinance Bank was the primary contributor to negative results, but the sector in general suffered from high adminis trative costs due to the surge in inflation and an increased cost of funds as a result of the recent interest rate hikes.

them don’t really feel the need to conduct frequent transactions because of which their accounts become dormant over time

Accounting treatment for the rescheduled portfolio due to the moratoria tends to inflate the profits of MFPs by adding back the suspended income. However, the reality is that a major portion of rescheduled portfolio falling under the ambit of regulatory relief is not recoverable, therefore, income pertaining to it should not be booked

Impediments to growth

Thesector, which has historically experienced high growth rates is now at crossroads as two major calamities have induced severe distress on its asset quality in the past three years. Currently, serving around 41% of the potential market as per PMN, Microfinance Providers (MFP) are restrained by some impediments that are inherent to the industry.

“The cost of finance is a significant impediment to the growth of microfinance. In terest rates for some products offered by MFPs can be as high as 50%. The lack of collateral remains another significant challenge. Demand for finance, even when economic agents are financially literate and are not deterred by religious or cost-related reasons, has remained subdued due to the lack of collateral required by most institutions in the financial sector,” according to the World Bank’s Pakistan Development Update April 2022.

The primary form of collateralisation

allowed to the MFBs is by securing loans against gold and to add to the problem, there is also a cap of 35% of the total portfolio on such collateralisation.

Moreover, the rapid growth in branch networks of MFBs has meant that the loan staff is managing credit portfolios far beyond their capacity. This goes against a sound risk management practice and leaves these institutions susceptible to credit risk due to control weaknesses and fraud. A lesson that Telenor Microfinance Bank learnt the hard way (Read More about it in Profit’s article: Losses contin ue for Telenor Microfinance Bank).

As per the World Bank’s development update for October 2022, “Financial institu tions in Pakistan find it difficult to assess the repayment capacity and creditworthiness of potential borrowers in the presence of significant informational asymmetries owing to limited and underdeveloped credit infrastruc ture.” Therefore, MFPs are left with no options but to employ primitive credit risk assessment techniques like forecasted cash-flow analysis prepared by the loan staff.

However, government-owned data sets like those of Nadra and Benazir Income Sup port Program (BISP) can offer a solution to this problem. BISP has a more sophisticated scoring model that was also used for risk assessment in the disbursement of microloans under the Kamyab Pakistan Program (KPP). (Read more about it in Profit’s article).

The way forward

The

matter of immediate concern for the sector is the flood devastation. As per PACRA, 60% loan of the sector’s portfolio consists of Agri and Livestock lending. A senior microfinance banker, on the condition of anonymity, told Profit that approximately 50% of the portfolio would be affected as the magnitude of the crisis is unprecedented.

Therefore, it is likely that the State Bank of Pakistan (SBP) would again provide some regulatory relief in the form of a moratorium similar to the one allowed during the pandemic.

Havaris Arshad, Ex Audit Manager at PwC and Quality Assurance Inspector at the Audit Oversight Board

Unlike the last time (during the pandeic), regulatory relief in the form of a moratorium should be on a case-to-case basis. Further, where the primary source of income for the borrower, like livestock, is destroyed, the chances of any recovery are bleak and a straight write-off would be a more appropriate measure

Ammar Habib Khan, Independent Analyst and Senior Economist

However, there needs to be some serious deliberation around the framework for rescheduling loans this time around as the portfolio pertaining to the last moratorium is still outstanding.

"Unlike the last time (during the pan demic), regulatory relief in the form of a moratorium should be on a case-to-case basis. Fur thermore, where the primary source of income for the borrower, like livestock, is destroyed, the chances of any recovery are bleak and a straight write-off would be a more appropriate measure," Ammar Habib Khan, Independent Analyst and Senior Economist told Profit.

Also, the accounting of regulatory relief doesn’t provide an adequate representation of the reality and leads to the investors drawing false comfort.

As per the regulatory flexibility pol icy brief issued by the Center for Financial Inclusion in March 2021, “One aspect of the prudential flexibility measures that have not been widely addressed yet is the accounting treatment of the measures on Financial Service Providers (FSP). Policymakers did not expect the pandemic to last as long as it has, and year-end reporting has exposed challenges that should have been foreseen.”

“Historical experience shows that credit losses remain elevated for several years after recessions end. Accounting and legal processes tend to delay recognition of losses, and policy

measures in response to the current situation will result in even slower loss recognition than usual. The result can be FSPs having to report incomes that are at least partially fictitious, and pay income taxes on them,” the regulatory policy brief added.

In order to acknowledge the issue, we need to first understand customary accounting treatment for NPLs. As per the MFB prudential regulations, After 30 days, overdue advances are classified as non-performing and recogni tion of unpaid service charges/income ceases. Further, accrued markup on non-performing advances is reversed (from the profits) and credited to a suspense account (a holding account on the balance sheet. Think of it as an escrow account).

However, during the pandemic, SBP allowed the MFBs to recognise such income. Suspended income was realised upon reverting of NPLs to normal classification.

“Accounting treatment for the resched uled portfolio due to the moratoria tends to inflate the profits of MFPs by adding back the suspended income. However, the reality is that a major portion of rescheduled portfolio falling under the ambit of regulatory relief is not recoverable, therefore, income pertaining to it should not be booked," said Havaris Arshad, Ex Audit Manager at PwC and Quality Assurance Inspector at the Audit Oversight Board.

Furthermore, there are calls from in-

side the industry for the regulator to directly provide liquidity support through access to credit discount windows in order to safeguard the 8.5 million customers of the sector. How ever, some analysts are of the opinion that such relief is not the responsibility of the regulator as the majority of players in the sector are profit-seeking and the institutional investors that hold large deposits with MFBs were, in the first place, attracted by the high yields. Therefore, they need to embrace the undoing of their own decision-making.

Though the magnitude of the crisis is yet to unfold, it is evident that MFPs would need to rethink their strategy if they are to ensure sustainability going forward. One such shift can be towards high-value productive lending (housing, tractors and so on.). Point in case, HBL MFB’s half-yearly results for 2022 show negligible movement in provisioning compared to year-end 2021. However, the loan portfolio grew from Rs 56 billion to 72 billion in six months. And the number of outstanding loans decreased indicating a strategic shift towards high-value lending.

Therefore, a change in the lending portfolio mix can help address the structural problems in the long run. Yet, seeking another bailout from the regulators and investors looks like the only option to tackle the impending crisis in the short run. n

If

By Asad Ullah Kamran

you thought previous winter gas woes were bad in Pakistan, this year could make you reconsider what ‘bad’ really means.

If that sounds dramatic, it’s because it is meant to be.

The country’s annual winter gas shortages are all set to be exacerbated with the global economy still in the vice-like grip of an ener gy crisis emanating from the Russia-Ukraine war. Although Pakistan has two reliable long term deals in place with Qatar for the supply of Regasified Liquified Natural Gas (RLNG), it won’t be enough to cover spiking demand by a longshot, according to most local projections.

In the past, Pakistan has had to supplement the long term RLNG supplies by tapping the spot market for additional cargoes. However, the spot market is in chaos at the moment given the extremely high rates being demanded in the face of a global shortage – particularly in energy-hungry and rich Europe, which usually bought from Russia.

Globally the biggest producers of oil and gas have been sanctioned by the US namely, Venezuela, Iran and, more recently, Russia, for its inva sion of Ukraine, which has led to a yawning gap between demand and supply.

With the Russia supply down to 20% of the levels it was at this point last year, according to the International Monetary Fund’s latest World Eco nomic Outlook report, the larger Western econo mies are likely to eat into supply sources of the rest of the world, and will be willing to pay a lot more for it. And that’s bad news for economies such as Pakistan, which has already been unable to buy affordable LNG on the international market. It will get tougher still in coming months with developing countries using their financial muscle to make it to the front of a very long line come this winter.

Winter is coming

The demand for gas generally rises during winter where it is used for both energy as well as heating across the world. The situation is the same in Pakistan, where the challenge is two fold: one, gas is used for heat ing across the country; two, gas becomes a bigger source of electricity generation with hydel coming all the way down due to lack of rains and the freez ing conditions up north affecting river flows (and hence electricity production at the dams).

Pakistan has its least precipitation during the winter months from December to February. During this period, hydel production dips leading to a greater reliance on thermal power plants. In the current scenario electricity coming from fuel oil, high speed diesel, coal and gas would have to pick up the slack.

Looking at LNG import data from the Oil and Gas Regulatory Authority (OGRA), the num ber of cargoes Pakistan has been able to procure is already on a downward trend.

Now factor in Pakistan’s current financial situation. Though gas may be available in the market, the price will be high enough to com

With the world in the midst of an energy crisis, the upcoming winter is going to be challenging for a number of reasons, especially with regards to Regasified Liquefied Natural Gas

pletely drain the foreign exchange reserves of Pakistan which are currently at a three year low, standing at around $7.5 billion according to the central bank, and falling fast. This barely covers a month’s worth of the country’s import needs, according to most analyses.

No money and a market full of rich buyers. Not looking pretty for the country at the moment. But to stress just how bad the situation is, let’s dive into some basic numbers about Pakistan and its dependence on gas.

Gasbinadilmera nahilagda…

year we had 12 cargoes. Three cargoes may not sound much, but it is 300mmcfd (million cubic feet per day). That’s a lot of gas to make up for.

Pakistan has multiple long-term supply deals, but the two signed with Qatar are the ones which can be said to be the only reliable ones these days. That said, no one can be sure if Qatar would fulfil its obligations to Pakistan based on the fact that they are getting a more profitable deal from European countries like Germany.

market. They say it’s not their fault, and shrug and pay a fine. Yes, they have to pay Pakistan a significant penalty, but that penalty is not much compared to the cost of gas and the effect of the non-supply on Pakistan. And most observers believe the higher prices they can get from more developed countries means they can more than make up the penalty amount.

A long winter

The

worst part of all of this is that there’s no end in sight to the crisis. In fact, on the face of things, it seems things will only get worse.

LNG

is an absolutely indispensable part of Pakistan’s overall energy mix. If you were to look at the figures provided by NEPRA, on average, RLNG has accounted for 17.16% in our energy mix over the course of the past year.

According to the numbers published in the Economic Survey for 2021-2022, the installed capacity of RLNG has contributed 23.8% from July 2021 to April 2022.

Some more numbers: About 373 million MMBTU of RLNG, worth about $3.4 billion, was imported in FY2021 according to the Eco nomic Survey. Imported gas accounts for about 30% of the nation’s total gas consumption. And with Pakistan’s local gas supplies – which are exponentially cheaper – running out at a fast pace, reliance on imported LNG is only rising every year as highlighted in the economic survey of the current year as well.

On the supply side, a simple comparison of the cargoes imported this year versus the last year shows a somewhat grim outlook. In September 2022 Pakistan was able to procure nine cargoes, while for the same period last

In February 2016, Pakistan and Qatar signed a 15-year LNG agreement at a price of 13.37% of Brent with a reopening provision after 11 years. Then, on February 26, 2021, it agreed to a 10-year LNG contract with Qatar at a price of 10.2% of Brent with a five-year re opening provision. Currently, Pakistan receives six cargoes per month from Qatar under the first deal and two under the second deal.

One long term deal is with the Italian company ENI for around one cargo per month at a price of 12.14% of Brent. At the Pakistan Gas Port Consortium Limited facility moored at Karachi’s Port Qasim, ENI is required to provide 180 cargoes in total over a period of 15 years to the Pakistan LNG Limited (PLL), which acts as the government’s buyer in the international market. Additionally, PLL and GUNVOR had agreed to a five-year contract in 2017 at a price of 11.62% of Brent, which expired last year.

The problem with the two non-Qatar deals is that both ENI and GUNVOR have reneged on their supply commitments – particularly during last winter which significantly disrupted the energy sector and other indus tries like textiles as well. The two invoked the ‘force majeure’ clause to cancel shipments, saying global conditions meant they were unable to procure the necessary LNG from the

“The geopolitical re-alignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent. Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse. Fiscal authorities in the region need to plan and coordinate according ly. The “price signals are essential to help curb demand and stimulate supply,” read the forward to the IMF’s World Economic Outlook report released days ago.

Basically that means the richer countries of the world may be singing “Peechay Hutt” to poorer economies like Pakistan for the foreseeable future in the global energy market. Because they will charge more, to curb demand, so they can effectively pay more. And even if they don’t charge more, they can afford to subsidise if needed.

Pakistan, on its part, is trying to increase the role of domestic coal being excavated from Thar along with an ambitious plan to add 10,000MW of solar energy by the summer of 2023 according to the Prime Minister Sheh baz Sharif. Furthermore, the government has announced that there will be massive gas load

shedding as well, during which the plan is to provide two to three hours of stable gas during meal times, that is breakfast, lunch and dinner.

However, according to Samiullah Tariq head of research at Pakistan Kuwait Invest ment company in a TV interview he said that, even though the government has promised stable supply three times a day it would still be very difficult to manage the very limited resources.

The current government has also shown interest in working on the Iran-Pakistan gas pipeline project which has the potential to be a game changer if it goes through. The pipeline has been in the works for a while, the Iranian side of the pipeline is complete up to our bor der in Balochistan, however due to sanctions on Iran and international pressure, Pakistan has yet to start work on its side.

It would also need to create awareness and provide viable solutions for the masses as well as encourage conservation to reduce the impending suffering in the winter. The government needs to emphasise the fact that the upcoming winter will be difficult with regards to gas supplies to the public.

And this is not too difficult either, the Oil Companies Advisory Council had conduct ed a similar campaign to promote carpooling and rationing measures that the people should take to reduce the overall imports of oil and petroleum products. At the time the government was also struggling with the balance of payments.

A similar campaign being conducted by the government or PLL can possibly go a long way in creating awareness, as well as keeping the masses informed regarding the overall situation.

Consumers in Pakistan

The

government will do what the government will do. But citizens will need to brace and take effective steps to mitigate their hardships.

If you’re a person that lives in an extremely cold area and likes to stay warm, an alternative to gas heaters would be electric heaters. Although possibly there will be a shortfall in the electricity supply as well, yet the electric heaters would be a more viable solution as compared to a gas based heater.

Similarly, it might be time to consider electric stoves as well given the dismal gas situation. Most of us currently use gas stoves and too often during winter they either don’t work at all or there’s a very low flame which isn’t suitable for cooking. Lots of people, even in the poshest areas of the country, are using gas canisters. But these are dangerous and availability

and pricing will still be a problem. Yes, electric stoves would need significant expenditure –but the net effect, financially and in terms of convenience, may just be positive.

Perhaps, the government can launch schemes for electric stoves and heaters. In centivise local production. Of course this is an option if the government can keep the lights on with power production cuts.

Additionally another key issue is heating water especially in the early morning and evening hours of the day. For this there are two possible solutions: the green solution, which is solar water geysers, or electric water geysers. The former would be more expensive, but the latter would mean inflated electricity bills even in the winter months that are meant to provide a respite in this department. .

The measures mentioned above seem “half” measures at best, regardless the coming winter is going to be challenging for us as individuals as well for the whole economy. n