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CONTENTS

9 The Kissan Package may provide temporary relief, but it isn’t an answer 10 Pakistan's most successful designer brand is in trouble. But why?

17 17 Sedative Electricity Reforms Khurram Lalani 20 Hello, can I take your order from 6500 miles away?

20 26 State Bank’s LC approvals cast a shadow on Avanceon’s earnings

Profit

28 Out of the grey list, still in the grey!

Publishing Editor: Babar Nizami - Joint Editor: Yousaf Nizami Senior Editors: Abdullah Niazi I Sabina Qazi - General Manager: Maliha Abidi Chief of Staff & Product Manager: Muhammad Faran Bukhari I Assistant Editor: Momina Ashraf Editor Multimedia: Umar Aziz - Video Editors: Talha Farooqi I Fawad Shakeel Reporters: Ariba Shahid I Taimoor Hassan l Shahab Omer l Ghulam Abbass l Ahmad Ahmadani l Muhammad Raafay Khan Shehzad Paracha l Aziz Buneri | Maliha Abidi | Daniyal Ahmad | Ahtasam Ahmad | Asad Kamran l Shahnawaz Ali Regional Heads of Marketing: Mudassir Alam (Khi) | Zufiqar Butt (Lhe) | Malik Israr (Isb) Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

The Kissan Package may provide temporary relief, but it isn’t an answer

To address the issues that face our agriculture sector, we must look beyond subsidies and change how we think about and approach farming

By Abdullah Niazi

day before Prime Minister Shehbaz Sharif left for a diplomatic visit to China, he announced a Rs1,800 billion subsidy package for farmers affected by this year’s catastrophic flooding. It was a splashy announcement that promised among other things loans, sufficient availability of fertilisers, cheap financing for tractors, and a reduction in electricity tariff to a fixed rate. Yet in the four days between announcing the Kissan Package, going to China, and landing back in Pakistan it will be the farthest thing from his mind. With the political situation in the country balanced on a knife’s edge after the attempted assassination on former prime minister Imran Khan and the incumbent government at its weakest, fixing Pakistan’s agriculture will be the farthest thing from anyone’s mind. The issue is more pressing than most may realise. Floods that wreaked havoc across the country in August and September have left farmers across the country reeling. In an economy majorly reliant on agriculture, climate change and its effects have been a major blow to rural economies. With international agencies estimating losses over the $40 billion mark, there is a dire need for agricultural reforms, without which there could be serious repercussions for Pakistan’s food security. That is partly why the Kissan Package was announced. The details are already public knowledge. Under the package, the government will give Rs10.6 billion loans to small farmers across the country while small farmers of floodhit areas would get loans worth Rs 80 billion. In addition to the interest-free and subsidised

loans, subsidies will also be given on farm imports such as fertilisers, electricity, seeds, and even tractors. If implemented correctly, the package will have a wide-reaching impact in helping farmers affected by this year’s floods back on their feet. But that is as far as it can and should go. The scale of the problem faced by our agricultural sector will not be fixed by any subsidy package. At most, any subsidy will provide temporary relief. For too long the state has allowed the country’s agriculture to suffer and have offered only stop-gap solutions such as subsidy packaged. We have been papering over the cracks for so long that our entire agrarian economy has grown dependent on subsidy packages. So what is the reason? How did Pakistan, a country with vast swathes of rich agricultural land, find itself in a position where its agricultural sector has been on the decline for decades? There are two facets to the problem, The first is that for decades Pakistan has been falling behind on agricultural competitiveness. While the rest of the world has developed through research, mechanization, and technological advancements we have lagged behind. On top of that now our farmers are facing the harsh and unpredictable realities of climate change. Pakistan’s own neighbours like China and India have managed to specialise in certain crops and become the leading producers of those crops in the entire world. Meanwhile Pakistan has lost its edge in the global markets. Simply take a look at our cotton production as an example. Between 2015 and 2020, Pakistan’s production of cotton declined by nearly 35%, from nearly 14 million bales in 2015 to just over 9 million bales in 2020. And while our cotton production and

quality have gone down, countries like Egypt have used the latest genetically modified seeds to get more yield per area with better quality fibres as well. At the same time, they have also industrialised and set-up the processing of these crops domestically. With no focus on value-addition or research, Pakistan’s agriculture is down and out for the count on many fronts. For almost all of our major produce, we have low crop yields, soil infertility, outdated farm practices, and extremely low mechanization. Already dogged by these problems, our beleaguered farmers now face a serious threat from climate change as well. Weather patterns are wild and erratic, going from drought to flood within a matter of months. In May 2022, for example, reports began to emerge that the cotton crop was wilting in Sanghar because of an extreme water shortage. One of the largest cotton producing districts in Sindh with cotton grown on 300,000 acres of agricultural land, less than 200,000 acres were being used to cultivate cotton. And on the 200,000 acres that were being used to grow cotton, crop performance was abysmal. Within a few months Sanghar was submerged in water. The entire district was five-feet under water in some areas, and the entire village of Chak 7 has been displaced and wiped out. If Pakistan is to move forward on the agricultural front, which it must if it wants to maintain food security, we will have to shift our focus from subsidies to actual research and development. Agriculture is still the largest component of our economy, and fixing it will take persistent, daily, dedicated, single-minded focus. It is the need of the hour, and with the effects of climate change knocking on our doors there has never been a more urgent moment in time to try and fix it. n

By Maliha Abidi

way from the glamorous highs you read about on glossy pages and fashion sections, the Pakistani fashion industry is gritty and unforgiving. At stake in this vast jungle of intertwined interests, connections, rivalries, and friendships are billions of rupees. And in the past two decades, perhaps no one has better embodied the intricacies, the ingenuity, and the controversy of this country’s fashion industry than Khadijah Shah. Universally acknowledged as a creative genius, she is admired by some and derided by others. Unabashed, open, and well-spoken, in her time in the fashion industry she has been a part of many successful partnerships, launching successful collection after successful collection making her one of the most sought after names in both retail and high end fashion. One of her greatest achievements, perhaps, was putting the brand Sapphire on the map, and growing it to the heights that it has reached today. Yet more than anything else she is known for Élan — Shah’s own design house that, in her own words, she has imagined and curated as a citadel of style, confidence, and elegance. In short, it is her baby. And that baby, or at least a big part of it, is now up for sale. Well placed sources in the fashion industry have told Profit that half of Élan’s ownership is being sold off for Rs 800 million to Sefam, a manufacturer and retailer of fabrics that owns well-known brands such as Bareeze. Why would Khadijah Shah, who first started developing Élan in 2004 with her mother, want to sell such a big stake in the brand that is known by her name? Mostly because of the Rs 700 million in debt that the company is saddled with. Those close to the negotiation have claimed that Élan started facing serious cash flow issues because of a lavish, high-rolling company culture coupled with an overly ambitious growth strategy. Matters were made worse when Élan went to informal and expensive financing sources, and despite its collections regularly being critically and commercially successful, the brand kept bleeding money. At the end of the day, it is a question of how far Shah is willing to go to save the brand that is synonymous with her own name. Sefam buying shares would inject some serious money into Élan and also absorb its debts. For Bareeze, which has primarily been catering to a more senior clientele, with a bigger focus on chikan fabric, it is an opportunity to piggyback on Élan’s brand positioning to enter younger market segments with lawn and prét wear. Shah will be paid Rs 100 million in cash to hand over half of the equity and full management control in her brand to Sefam. What are the details behind the dizzying zeniths and crushing nadirs of Élan? In an interview with Profit, Khadijah Shah responded vaguely. “Nobody will invest in Élan at a depressed price.

COVER STORY

Nobody would invest in Élan at a depressed price. They will invest in it, or in any brand for that matter, at exactly what its deserved valuation would be. Having said that, I want to clearly state that Élan is now at a stage in its growth trajectory where we are now open to considering external injection of finances to help us grow rapidly Khadijah Shah, owner of Elan

They will invest in it, or in any brand for that matter, at exactly what its deserved valuation would be. Having said that, I want to clearly state that Élan is now at a stage in its growth trajectory where we are now open to considering external injection of finances to help us grow rapidly,” she tells us. In short? She very calmly said that while she cannot confirm anything at this stage, it is definitely on the cards. “We can’t confirm or deny any news or any figures relating to Sefam partnering with us. If and when we do partner with someone, we will announce it officially ourselves.” Profit’s sources, meanwhile, have confirmed that not only is the deal a certainty, but that Sefam will also take over management control given the reputation for poor corporate governance that Élan has developed. She does, however, add that if in the past, had a credible company such as Sefam shown interest in Élan, she might have considered it, because such an established and revered giant is the kind of partner that is worth Élan’s salt. To her credit, despite the crippling debts facing Élan, Shah still stands by and regards highly the value of the brand she has created. And she has a point. While the best business foundations may not have been laid for the company, behind it is a story that captures the boom Pakistan’s fashion industry has seen in the past 20 years. And to understand Élan’s story — to understand Khadijah’s story, we must go back to 2004.

The origin story

his is a Lahori story. Over the past two years the fashion industry in Pakistan, particularly women’s fashion, has boomed. The female labour force participation rate rose from under 16% in 1998 to a peak of 25% in 2015 before declining slightly once again to 22.8% by 2018. The total number of women in Pakistan’s labour force – earning a wage outside the home – rose from just 8.2 million women in 1998 to an estimated 23.7 million by 2020, representing an average increase of 4.9% per year.

This 20-year increase in women’s participation in the workforce has seen a simultaneous growth in the retail fashion industry. Lahore has been at the centre of this boom. An educated guess might have placed Karachi as the fashion capital of the country, and while it has a pretty big role to play, by and large the world of fashion with all its glitz and glamour is based in Lahore. That is where Shah got her start. Coming from an old, well-connected, wealthy family (her maternal grandfather is former Chief of Army Staff General Asif Janjua and her father is former finance minister Salman Shah), Shah was not in Pakistan when this shift in the fashion world took off. She was completing a bachelor’s degree from the London School of Economics, but when she got back to Pakistan she hit the ground running. Shah’s mother was a fashion designer as well, and as a child and young teen, she would help her out. Her mother, Aneela, mostly pursued fashion design as a hobby and was known to her friends as ‘Ela’ — which is where the name and brand Élan came from when it was finally launched in 2004. Élan catered to a niche market segment of luxury couture. For the first few years, Shah took few but high-end clients and made a name for herself. However, she always had a mind that focused on the bigger-picture. Her dream was to revolutionise Pakistan, or at least Lahore’s, fashion landscape. In 2012, she got a chance to spread her wings when she successfully debuted in the lawn market via a collaboration with Hussain Mills Ltd. The venture into lawn was, in Shah’s own words in a 2013 interview, “fantastic for Élan”. In the exhibition held at Palm, Emerald Marquee, Karachi, on March 15, 2012, Shah launched Élan lawn, which was a complete and swift sell-out. She was quickly regarded by her peers and customers alike as one of the country’s most successful creative forces, as she continued working with Hussain Mills until the next year. It sure helped to take Mahira Khan on as Brand Ambassador for the 2013 spring/ summer Élan lawn collection. Élan’s continued

success soon brought it to a point in its journey where it was eminent that it could and should transition from being a niche to becoming a household name. And that is where Sapphire enters the picture.

Glittering Sapphires

little note on the business model here. Pakistan has some pretty big textile mills, and the entire cotton industry from field, to ginning, to mill sets the stage for the fabric that is used in different industries. One of the most in-demand fabrics is lawn, which is why it makes sense for textile mills to partner with and provide fabric to design houses like Élan. And there are no mills bigger in Pakistan than Sapphire Mills. Shah partnered with Sapphire Mills in 2014, in the contractual capacity of creative director, while continuing to work on her own brand. This partnership would help Élan cater to larger markets, while Sapphire would benefit from Shah’s creative impetus. For the time that it lasted, it was big. Within a few years Sapphire was the hot new fashion retail brand on the block, and in another year or so it became one of the biggest. Despite the success, the partnership did not last too long. Shah took Sapphire to heights it hadn’t seen in the past five decades. She not only designed unique products in both the ready-towear and unstitched categories, but also gave the brand a new life. While Sapphire Textile Mills has existed for around 50 years already, it was the addition of Shah as creative director that put them on the map. According to a 2014 interview, it was upon Shah’s suggestion that the brand take on the name of the parent company, Sapphire, after which it became a household name. Add to this mix is the fact that Sapphire Textile Mills being the oldest textile giant of Pakistan producing quality cloth, enabled the brand to take a strong foothold in multiple customer segments. Shah’s position as creative head meant she also came on as a stakeholder, getting a share of the revenue. The entire creative

“There was definitely some settlement of course, but I wouldn’t want to comment on the exact amount of the severance package and all, since it’s a matter that’s not only in the past but also a legal one. But I will say this about Khadijah’s contribution to Sapphire and her parting with us: we respect her a lot, and give her a lot of credit for what she did for Sapphire Nabeeel Abdullah, owner and director Sapphire

department was, in a way, her own company, and according to insider sources, her department’s monthly budget including salaries was a staggering Rs 25 million per month, being paid by Sapphire. While Shah could not confirm this figure, she built the brand from scratch and turned it into a juggernaut. But something went wrong. Despite the huge impact she had in the little time at Sapphire, Shah’s time with the ancient mill lasted all of three years, ending in 2017. She walked away from the association a seasoned veteran of the retail fashion world with a mixed reputation. On the one hand, everyone hailed her for her creative work. On the other hand, she was rumoured to be a big spender. Shah has always liked to go big and spend money to make money. This was possibly not the right fit for the more conservative approach that the management at Sapphire believed in. Shah told Profit very candidly that it was a little painful that the partnership came to an end, as she had begun to treat it like her own brand. “It came as quite the surprise. In the past, Sapphire had been quite vocal about how they would not want me to ever leave, and that is what led me to make a couple of tough but necessary decisions. One of them was to focus all that energy into Élan.” Near the end of the association, one source tells us that Shah tried to extract more than her fair share from the partnership, going as far as to claim that she, Khadijah Shah, was Sapphire, and that Sapphire was nothing without her. Eventually, she was let go, so to speak. But not without a supremely generous package of Rs 351 million. And since she had complete control over the creative department, she took the entire design team with her as well. Sapphire’s owner and director, Nabeel Abdullah, told Profit that while there definitely was a settlement they could not confirm the amount. “There was definitely some settlement of course, but I wouldn’t want to comment on the exact amount of the severance package and all, since it’s a matter that’s not only in the past but also a legal one. But I will say this about Khadijah’s contribution to Sapphire and her

parting with us: we respect her a lot, and give her a lot of credit for what she did for Sapphire; but just like any other business, there was a difference of vision for the brand, due to which our partnership came to its natural end in 2017.”

The spiral

y the time Shah left Sapphire, one would have thought she would be set to put Élan on a rocket ship to the moon. After all, with Rs 351 million in her pocket she could afford to. But things weren’t so simple. Shah openly admits that retaining her team along with marketing efforts at par with the established textile giant cost her more than she could have imagined. On top of this, the rumour mills were churning out gossip that to maintain a certain lifestyle and a brand image, both of which were supposed to feed off each other, she made costly investments. Right after leaving Sapphire, she also started another brand by the name of Zaha. This is where she first began spending beyond her means on her brand. The team that she brought from Sapphire consisted of the hottest young talent and they were paid hefty salaries. However, even a giant like Sapphire had found it difficult to maintain this team and Khadijah Shah found it even more difficult. All of the bills started to pile up and Zaha was not a success. As a result, within the industry Élan earned a reputation of high debts and disturbing financial cycles that preceded their efforts to enlist new investors. All of these are difficult questions. To her credit, Shah answered them all with patience. In the course of this story, most of the sources spoken to were fidgety and reluctant to speak on the record. The only person that presented themselves and stood by their guns with conviction was Shah. “I think all this information is deliberately spread by people who are deeply negative, hateful, and competitive with Élan - I think there’s an attempt to sabotage or foil any potential partnership Élan might enter into. They’re scared like they were back at the time of Sapphire,” she tells us. If there is one thing about Shah, it is that she believes in Élan and the

work she has curated there. “Back when I started out with Élan in 2004, and later during my time with Sapphire, the fashion industry wasn’t as established in Pakistan as it was elsewhere in the world. Retail giants such as Gul Ahmed, Nishat, Khaadi and the like had long been established, but didn’t become as active as they are now until after the Sapphire partnership created a brand in a manner never before experienced by the Pakistani market.” “As an outsider, I shook up an industry that was quite set in its ways, and that rubbed wrong on several people… many of whom we have now built strong relationships with, though it has been a tough and long journey to reach this stage,” Shah adds. It is important to remember here that Shah has been a big kahuna in the fashion world for a while now. Despite the rough landing from the high-flying Sapphire days, Élan made quite the name for itself. Along with her husband Jehanzeb, who comes from a textile family, she managed to create one of the most sought after brands in Pakistan. And other than Élan as well, the name Khadijah Shah has plenty of brand recall. Élan maintained its reputation for a few years since then, with a loyal clientele ready to slurp up her designs year after year, especially the annual lawn collections. Among many other accolades, the most prominent one Shah has to her credit is that Kate Middleton chose to wear an Élan outfit during her November 2019 visit to Pakistan, especially designed for her. But none of this could quite wipe away the stains and pains of debt, and the many controversies that have come her way.

The debt problem — why didn’t they go to the banks?

t is a typical debt-trap situation. There are very few businesses that can be bailed out financially without the risk of a debt-repayment loop developing. The textile industry, especially when it comes to the desi lawn sec-

COVER STORY

tor, is not one of them. Several insider sources comment that Shah’s generous severance package should have been invested in something less fickle than (desi) fashion, in a country very susceptible to power outages, political turmoil, and religious holidays. Instead she went ahead and made two crucial mistakes: She did not cut down on her design expenses, and she turned to less formal channels of borrowing. But how did this happen? How did a major business in Pakistan have to turn to other means of financing with 31 banks available in the country? The reason is that banks in Pakistan don’t lend easily to the services sector. They expect collateral for loans in the terms of tangible assets such as machinery and real estate. For a company like Élan, which has a brand that is worth something but does not necessarily have factories to give in exchange for loans. “Banks don’t readily lend to businesses in the absence of collateral. Traditionally, banks all over the world support businesses as long as the business shows promise and potential. But in Pakistan, banks like to be extra risk averse,” she tells Profit. Despite having the means, she also decided that her family’s money and assets would not be used as collateral for her business. “I have never asked my parents for any money for my business,” she says. “This is my business, my work, and I don’t believe in offering as collateral my parents’ property or assets. Sure, I have invested everything I own and earn personally, including whatever inheritance I may have had to part with, but that’s the extent to which I’m willing to go. And that’s my prerogative.” “Élan has never approached loan sharks. Yes it’s true that working on a credit basis is more expensive than working on a cash basis, but any investment we’ve ever had in our projects has always been by people whom we trust and who are already part of our friends and family circles.” Whether loan sharks were involved or not, Shah does agree that perhaps the huge financial hit she took in maintaining her design team was something that could have been done differently had her parting not been so sudden. “It’s not that I took them with me. According to their contract, they could not work with Sapphire for another two or two-and-ahalf years in such a case. And I didn’t want to just let them go and leave them high and dry - I had trained these people, and while we could have worked out some sort of NDA if we were to let them go, I chose to keep them onboard so their training and experience could be utilised for Élan,” Shah said. But with all this going on, Shah continued to take a head on approach and tried to expand. Élan was not a small brand working on 15,00020,000 suits per collection that could continue to work on manageable cycles throughout the

We have had a few talks with Khadijah and Jehanzeb, both family friends of ours, and so that’s pretty much where we are, but we are exploring Zain Aziz, Sefam

pandemic and bounce back once things started settling down. It was also not a very large, established brand that could enjoy cushions during such catastrophic times. Being a medium-sized company with over 50,000-90,000 suits per collection on average, and on its way to expand, Shah acknowledges it was probably too ambitious too soon. Things did not help when several partners that Élan was working with, started switching to advance cash payments from a previously more acceptable credit line basis. This isn’t specific to Élan, or to the textile industry. This is a trend shift across the board, and it hit Élan the hardest. With all its money stuck in production and expansion plans, and production being halted, to the extent that one of their major vendors eventually shut down in 2021, Élan seemed to be stuck in troubled waters. This caused them to fail to deliver orders to their customers on time, or even with minimal delays, as compared to other brands that found it relatively easier to adapt to the new normal of regular lockdowns. Additionally, with credit being squeezed every which way, Élan started struggling to maintain a healthy cash flow, which rendered them unable to swiftly refund customers for orders they were cancelling. Old customers, and a prominent fashion journalist add to this by saying that in true Pakistani jugaar fashion, Shah went to the extent of securing pre-orders and getting customers to finance her operations when textile mills weren’t willing to work with Élan. With no regards to the needs of long-term brand equity, Shah’s actions supposedly hit where it hurts the most. Customers did not hesitate to publicly bash the brand and Shah herself. Several customers, who had placed orders for formal wear for important occasions said they cancelled their orders, but had to wait more than a year for their advance payments to be reimbursed. Some are still waiting. Others received their orders months later, despite having strictly opted for refunds. For customers, it’s a simple matter of placing an order and receiving it, paying upfront or with cash on delivery. For the brands and

businesses working on so many aspects of production, the equation is more quadratic in nature. Clearly, this was not working out. And even before the current scenario, Shah was looking for partners. In the industry, it is very well known that the holding company which partially owns the fashion brand Maria B, amongst others, had financed one of Élan’s collections as a 50% partner on a one-off basis. Later they were in talks to buy Élan, but the deal did not eventually come to fruition.

The partnership equation

he murmurings in the industry right now are that Shah has had to seek out Bareeze for investment because she has no other option. The line she is taking, however, is that this is simply a continued part of her business expansion plans and that Élan is in a place where it could be ready for equity injection. According to her, things are being blown out of proportion. “What people are quick to label as (high) debts, is the normal business practice of maintaining credit lines, or rolling debt, and every brand in the textile industry, or even any other industry, will have a certain credit line they work with. Élan is a unique product, which is also at a very unique point in their journey, which is why their credit lines or credit window is longer than the average lawn business. Whether a brand allows external investment to come in, or continues to run on self-financing basis like Élan, the only time they would want to close credit lines is when they stop working with a certain partner in whatever capacity, be it fabric sellers, printers, embroiderers and the like.” “We have never been banned by anyone. Yes, rolling debt with different partners exists, and some have had to be closed down, but it’s not always due to a negative reason. For example, when we recently shifted from print to embroidery, we had to close the rolling debt or credit lines with our printing vendors, and we now do not have as many print vendors as

TEXTILES

we have embroidery ones. Another time, one had to be closed down because a very large textile mill that we were working with, shut down and went out of business in 2021. Also, it’s important to note that closing a rolling debt line is not an overnight matter. This is Business Finance 101.” Shah further elaborated that while she has not been interested in long-term collaboration with anyone, at this point Élan can allow external injection, if any. “I wouldn’t want to wait like other design and retail brands that spent 30, 40, 50 years to reach where they are now in a gradual fashion. Élan has the product, the experience, and the customer to take on any partnership if at all, especially in this age when businesses don’t operate in silos anymore. Gone are the days when people inherited established businesses and continued to run and milk them until they dried out.” In any case, a partnership would be wise for Élan right now in both the narratives being spun by the industry and by Shah herself. This is especially true since Élan and Shah have at times garnered a reputation for scandal. While there have also been issues such as employing black models in Kenya, the bigger concern has been the liabilities Élan has gained from its treatment of workers. Reports of the brand locking in and torturing workers spread in 2019-20, and Shah gained a reputation of toxic and abusive working conditions at her offices and factories. When she denied these, many came forward with personal experiences (including non-payment of salaries for as long as six months) upon condition of anonymity. As if the brand had not been hurt enough yet, the same year, in July 2020, an ex-employee took to social media with a video that went viral within a few short hours, claiming Shah hadn’t paid around a 100 of her ex-employees their salaries for the previous two months, and was also holding her employees hostage in their warehouse since the past six days. Shah, however, was quick to take to social media herself to debunk these claims, clearing the air with details that the employee in the video was fired for having stolen a product worth Rs 700,000 from her. By evening, the man in the video came out with another statement, claiming that he had made a mistake. The controversy did eventually die down, but amidst doubts as to the truth of the matter. The controversies do not stop here. In January - February 2022, there was uproar from artists taking to social media to oust Shah for non-payments to models, videographers, and ex-employees. Models such as Abeera Riaz, Atika Gardezi, and Mydah Raza claimed that Élan/Zaha hadn’t paid them for three years. Upon this hue and cry, they received some disbursement, but were still not paid fully. All

Seema Aziz and her son Zain Aziz of Sefam of these issues once again pointed back to the serious cash flow issues that Élan has had in recent times, and which can only be solved with the injection of some serious capital.

Whatever anyone might say, Élan is here to stay

nd that, in nutshell, is why Élan will survive and possibly even grow bigger. Despite the debts, the high-spending, and all of the controversy, Shah has built a fashion brand with a truly unique style. That is something that cannot be taught and cannot be replicated, and makes it worth some serious money. It is also why a brand like Sefam/Bareeze would be justified in taking keen interest in the opportunity. Sefam has not been able to manage to penetrate some markets on their own, and Élan and Shah could give them just the boost that they need. And it has been on the cards for a while, so it does not seem like Shah is selling quickly or in desperation either. Profit dug deeper into the mystery that eludes most in the business circles. Apparently, this was not a sudden move on either party’s end. Zain Aziz, Business Development Manager at Sefam Pvt. Ltd. (Bareeze), son of Seema Aziz, (Owner, Sefam), told Profit that while he is, at this stage, in no position to comment, what he can tell us is this. “We’ve been discussing with Élan, nothing’s concluded so I can’t give any more details, but we have been exploring the possibility of this, and I think it’s one of Pakistan’s great brands. Sure, they’ve seen some hard times, and with COVID, what business

hasn’t, COVID has been tough on everyone, but Khadijah Shah has worked very hard. We have had a few talks with Khadijah and Jehanzeb, both family friends of ours, and so that’s pretty much where we are, but we are exploring.” It’s not fair to label a brand a “troubled horse” or a “lucky mule” so offhandedly, especially not with a lioness of a business woman such as Shah pulling the brand up every time it seems to stumble. It is extremely difficult to bounce back from a tarnished reputation - the bigger the brand name, the longer it will take to clear allegations. And when it comes to a brand, dwindling brand equity based in factually corroborated business mishandlings is sure to put an end to securing future investments to sustain the brand. Shah does have a simple point to highlight for all those willing to believe the worst of her brand though: any potential partnership between Élan and someone as credible as Sefam speaks volumes about the former. That said, the deal must also be taken with a grain of salt by Élan. Yes, Sefam is about to take over their debt and the Élan name will remain, on top of which Khadijah Shah will continue to have the platform for her designs. However, she is going to be giving over management control to a company that also has several other brands to manage. Some of these brands could even be considered Élan’s competitors. How Seema Aziz and her sons, who are managing Sefam at this point, decide to run Elan along with the rest of their portfolio is for anyone to guess. Their management style, as per industry observers, is much more meek than the way Khadijah Shah has been running Élan. How they deal with and manage their portfolio now will determine whether or not Élan will diminish as a brand presence or increase.n

COVER STORY

OPINION

Khurram Lalani

Sedative Electricity Reforms

he current electricity strategy pursued by the Government under the garb of reforms is not in the best interest of the sector. With rising electricity tariffs, which are almost unstoppable now, the entire sector is neither consumer friendly nor investment attractive for the next phase of the power sector – transmission and distribution. The reform process is in a sedative mode. It continues to suppress symptomatic pain (by suppressing circular debt here and there) without addressing the actual disease. The structure of the electricity industry in Pakistan started with WAPDA. Under WAPDA were ten distribution companies, a transmission company and four generation companies, with an aim to privatize them later. This seemingly happy model did not last long and quickly became a subsidy driven model instead, thanks to the mismanagement, politicization and the lack of focus on the operational parameters of electricity generation and distribution. When the world switched to smart metering and energy efficient labeling, Pakistan treaded the path of AT&C losses of well-above 40%. The alternative was continuation of deeply sedative reforms which targeted both financial and organization restructuring. In the realm of financial reforms, for instance, circular debt took priority. A rigorous circular debt capping plan exercise was undertaken. Excel models were made and published and detailed reports focusing on tariffs and regulatory scenarios were created. Through rigorous planning, it was believed that circular debt will be brought under control. The results, however, show a completely stark picture altogether. Since the beginning of 2014 when the first circular debt capping plan was published, the circular debt itself has grown by five times, reaching an improbable two and a half trillion mark in the matter of a few years. The pace of circular debt accumulation has never stopped, and it continues to rise by Rs. 20 billion per month. So much so for all the circular debt capping exercises. On the institutional front, none of the reforms really brought any efficiencies. Starting from the early 2000’s, entities such as the PPIB and AEDB were created. Seemingly one-stop shops, their purpose was to facilitate investors through a single-window framework, easing investors' entry into Pakistan’s power sector business. Investors were given comfort that all they produce will be sold to a single buyer – essentially to the Government of Pakistan. To make the scheme attractive, investors were awarded high returns

The writer heads a development consulting firm Resources Future and is an energy and climate finance expert

COMMENT

on equity, pegged by dollarized returns and sovereign guarantees. For the time being, investments flew in, and the mirage of reforms worked well, albeit only to haunt the end consumers in the long run with steep tariff increases. Today no new power sector investments are in the pipeline. Investors who bought the Pakistan power sector story are looking to repatriate profits – only to be told by the State Bank of Pakistan, that they can’t repatriate all their dollars at once. Today, liquidity issues remain at the forefront and transition to a clean, renewable based future remains elusive.

The Curse of a Single Buyer Model

he only real reform in the sector is the correction of an obsolete and outmoded single buyer model, which prospers on corruption, evasive deal making, and inefficiencies. It starts where all generating companies (Gencos) are required to sell their produce to CPPA. This implies that even if Gencos are willing to enter into spot markets, or enter into short-term contracts through wheeling, they generally can’t because of this market structure. Their only choice is to sell their entire produce to the CPPA alone. Gencos don’t bear the market risk and instead rely on long-term power purchase agreements (PPAs). Since Gencos must sell all their produce to CPPA, the DISCOs, in turn, must also buy all the power from the CPPA alone. Consequently, the one who suffers the most is the consumer as it must source all its requirements from DISCO of his area. No matter how inefficient the DISCO is and how poorly it runs and manages its operations, consumers have little choice to shop around for alternate suppliers. Thus, the industry structure continues to be in a typical command-and-control mode, unencumbered by competition and consumer choice. In this chain of gothic monopolies, public as well as IPPs, all prices are typically determined on a ‘cost plus’ basis either through negotiations (such as in the aftermath of the IPP Commission report) or through NEPRA proceedings. This constitutes a perfect recipe for delivering high-cost power to the consumer, year in and year out. Will tariffs ever go down? The simple answer is no. There are no competing forces that can ever deliver lower tariffs. No innovation to propel the costs downwards and no incentives to deliver operational efficiencies. In this entire scenario, the circular debt is only a symptom. At the distribution level, the prevailing tariff structure coupled with the high transmission and distribution losses do not permit adequate cost recovery by DISCOs who persistently default on their payment obligations to CPPA. The use of CPPA acts as a free banker for DISCOs, and continues to carry large unpaid bills (circular debt) on their behalf. Essentially, the ten distribution companies are virtually bankrupt entities that allow only to accumulate unsustainable losses year after year without any clear road map as to when and by whom all these losses will be wiped out. This after all is the only real reform waiting to happen. At best, the Pakistani power market is in a debt trap. The Government, one after the another, has accumulated overdue payables of more than Rs 2,500 billion that continue to mount steadily, besides a large contingent liability burden of state backed guarantees. The debt trap can only be addressed through either steep tariff increases (a relatively easier decision), massive improvements in operational efficiencies (in reducing T&D losses and improving recoveries) or through decisions to privatize and open the market to multi-buyer and multi-seller models. Evidently, the sector needs real reform, one that goes beyond a typical lip service. The time for giving sedatives is receding fast. n

Hello, can I take your order

from 6500 miles away? Percy is looking to outsource cashier services to developing countries and tap into the very prevalent labour arbitrage By Taimoor Hassan

ou’d think it was a call-centre at first sight. Rows of cubicles occupied by a small army of young men and women wearing noise-cancelling headphones speaking to customers on the other side of the globe. Yet at this neatly placed little office in phase 5 of Lahore’s DHA, things work a little differently. Because these men and women are not on the phone as customer-care or telemarketers. No. They are taking orders from customers visiting restaurants nearly 6500 miles away. This is the boiler-room for the up-andcoming Canadian tech- startup Percy, which describes itself as a ‘virtual cashier startup’ — the first of its kind in the world. The concept is simple. Labour is expensive in the developed world, and in a country like Canada the minimum wage is CAD $15 an hour. Restaurants consistently face an issue of a workforce with a very high turnover rate that they have to pay minimum wage to. So what is the solution Percy is suggesting? Instead of hiring a person to do the job behind a counter, just slap a tablet with a stable internet connection onto the counter, outsource the job to a developing country like Pakistan, and have a virtual cashier at your service for as low as $3.75 an hour. The startup

has wowed many by putting a person, sitting in another country, taking orders for the walk-in customers of a restaurant at a fraction of what it would cost to hire someone to do the work in-person. Launched only 10 months ago, Percy has garnered plenty of negative press over labour-rights issues in Canada. Union leaders have been outraged by the tech-driven outsourcing and in its short existence the startup has sparked fierce debates in the country’s retail sector. At the core of it, however, is a no-nonsense business model that has allowed them to make inroads into an industry that has developed cracks since the pandemic. The food-service industry has been reeling from a growing labour shortage in North America, and restaurateurs are unable to find workers even if they are offered salaries above the minimum wage. In Canada alone, the restaurant industry is facing a shortage of about 200,000 workers by December 2021, according to Statistics Canada, the Government of Canada commissioned agency to produce national statistics. This shortage is expected to continue through 2022 and 2023. The idea Percy is pitching is innovative, tech-driven, relevant, and most importantly timely. Yet as flashy and innovative as it may be, it is grounded in a very in-your-face model of capitalism. How did it come to be? The startup

has three founders, but the idea began with a young Pakistani that went to college in Canada.

Enter Ali Aqueel

s far as education goes, Ali Aqueel has had a pretty privileged run at things. Born and raised in Lahore, he attended Aitchison College before going to McGill University in Canada. After graduating from there with 16-years of education, Ali had a straight-cut path ahead of him. He had a degree in finance, the opportunity to work in Canada, and if needed go back home where he had the right connections and pedigree to live a cushy life with a job in banking and finance. But life led him down a different path. During his post-graduation job hunt, Ali delved deep into the different options he had. “Cold calling, messages and meeting different people at cafeterias of different companies to get a job, I have been through all of it and that has worked,” he tells us in an interview. During the course of this process, he realised that the future was in tech not finance. “I connected with a director of Citibank over LinkedIn and met her for coffee. She told me there were two openings at the bank for finance graduates but 85 positions were open in tech roles. The conversation quickly turned into a realisation that tech was the future and my direction changed.” Soon, he landed his first job at a big-data

We chose Percy because we share the same mission, delivering the wow factor in the hospitality industry. In our case, it starts with the order taking. Percy has helped us fill that gap as the labour pool is shrinking here in the United States Mehdi Zarhloul, CEO Crazy Pita Restaurant Group

startup in Montreal that hired him as a product analyst. As a product analyst, he claims he quickly realised that the job description of a product analyst was not much different from a software developer: both could google stuff and carry on with work like that but software developers get paid more. This moment of realisation also quickly turned into searching for a different role in tech and that is when Ali approached Deloitte for a role in software development. Since Deloitte, Ali has been a tech and AI consultant. With the necessary skills to qualify as a technologist, he delved into the world of making software for clients. And that was when the world changed. The covid-19 pandemic changed the way everything in the world worked. One of the worst hit industries was food service. It was during this time that Ali got a job offer from the Canadian restaurant franchise Freshii. He had established a relationship with the chain’s vice president back when he was cold calling executives for jobs, which led him to join the team that was meant to turn Freshii digital first amid the pandemic. And that is where it all started.

The labour problem

ercy was born in the kitchen of a Freshii franchise. One of the first things Ali was charged with after joining the chain’s digital-first effort was to digitise and build an app for order taking to minimise the requirement for labour intensive roles. This was at a time when a global supply chain crisis was exacerbating the labour crisis. And since this was also at the peak of the pandemic, video-con-

ferencing was at its peak. “There was an opportunity there. I thought, that is how we plug the crisis through the new changes post pandemic that brought a greater acceptance of technology. The problem and how it could be solved with the change that had come post-pandemic, that is when I started looking into what eventually became Percy,” explains Ali. Ali decided that automation could come at the front of house role; the person who greets and takes the order. That is one role that other people in the world could do. All it required was a software, a tablet and someone who could greet and take the orders. “When I took the first order in this arrangement while sitting in the kitchen [of Freshii], I could see that for customers, it was like no change in the order experience,” says Ali. The realisation that this solution could be implemented at a much bigger scale couldn’t have come quicker. And it helped that Freshii’s CEO was immediately impressed. Matthew Corrin saw that the concept could help overcome any challenges that could have come because of labour shortage, and could be implemented to solve labour shortage problems for the entire restaurant industry. And since the idea was not going to be restricted to a particular restaurant and its franchises, Aqueel, Corrin and another Freshii official, vice president Angela Argo, co-founded the first ever virtual cashier startup Percy. Along the way, another partner in business, Hamza Ansar, who was already running a tech firm called CSA in Lahore that took projects from clients abroad, also joined. Hamza, the CEO of CSA and now general manager operations for Percy,

says he has transformed CSA into a workplace that only now works as a centre for Percy agents. The potential was realised by all. North American countries have for long been having historic labour shortages because of the pandemic induced fall in immigration, supply chain disruptions, layoffs and people turning towards self employment. Canada, where Percy is based out of, has one of the highest minimum wages, paid at the rate of about CAD $15 per hour (approximately US $11). And despite being offered higher than minimum wage rates, are not willing to come work at restaurants. On the one hand, this creates the issue of restaurants not finding enough workers to run their operations. On the other hand, the already understaffed restaurants get bogged down by a high turnover rate of employees, and call outs affecting operations, all of it creating unpredictability in the business. “Restaurant owners continue to struggle finding workers coupled with high employee turnover,” says Ali Aqueel. “Having a consistent pool of well trained workers in the restaurant space pre and post-pandemic has never been a restaurant owner’s reality. To put this into perspective, 7shifts conducted a study on employee turnover within the quick service restaurant space and found that the average tenure of an employee is 26 days. Said differently, restaurant employees leave their employers at a rate that’s 27 times more frequent than the rest of working Americans!” “For big restaurants, what is important is predictability of the workforce. That they have cashiers on the job when needed. If that

Having a consistent pool of well trained workers in the restaurant space pre and post-pandemic has never been a restaurant owner’s reality. It’s arguably the first time a restaurant owner can go to bed at night knowing that Percy will be there Ali Aqueel, co-founder at Percy

STARTUPS

For big restaurants, what is important is predictability of the workforce. That they have cashiers on the job when needed. If that predictability is there, that is one less group of people the business needs to worry about Salim Shermohammed, Managing Director, National Brand Development of Africa

predictability is there, that is one less group of people the business needs to worry about,” says Salim Shermohammed, a South Africa-based Pakistani entrepreneur and investor who has owned and operated a quick service restaurant Chicken Stop and a casual dining restaurant, Mike’s Kitchen, in South Africa under National Brand Development of Africa (NBDoA). Salim is the managing director of NBDoA. So if in a labour shortage a business has to find a workforce for jobs that can be done remotely, it is best to recruit resources from where that labour is cheap. This opportunity for labour arbitrage is one of the main selling points for a service like Percy. If it is getting difficult to find labour for cashier roles, Percy will replace that for you with a resource in a country like Pakistan where there is abundance of resources that can be trained to do such sort of work. And because countries like Pakistan have such labour available at cheap rates, it can help beef up the bottomline of the restaurant. Percy solves labour shortage issues by never missing a shift, never calling in sick and never taking a day off. In a normal restaurant setting, if one of your cashiers is sick and calls out, someone else on the staff would have to take over his functions affecting productivity overall. In the case of Percy, if one of the Percies calls out, they’d have another one take over to ensure that the restaurant’s productivity does not suffer. “It’s arguably the first time a restaurant owner can go to bed at night knowing that Percy will be there,” says Ali.

The scary part

et us take a moment to acknowledge that something about this entire concept does feel mildly dystopian. Almost as if it is straight out of the Jetsons. Imagine walking into a McDonalds, for example, and instead of a person at the counter being encountered by a small tablet with a person on the screen talking to you from thousands of miles away. It takes away a certain essential humanness from the process. Yet this is nothing new. The history of outsourcing dates back to when US companies in the industrial sector started to source out certain parts of their operations. Outsourcing first took shape during the

18th-century Industrial Revolution, when the new age transformed the way factories operated and sourced labour and raw materials. During the 1990s, with labour rates increasing in the developed world and telecommunication technology improving remarkably, the world’s first outsourced call-centres also came to life. With the pandemic making video conferencing normal, it is not surprising that this is happening. And even though it can’t quite be the same thing, Percy wants their ‘Percies’ (what they call each of their agents) to not just be order takers, but to be sellers. The vision is for them to upsell for restaurants and have personalities capable of great human interaction. Pakistan is currently the biggest centre for Percy, something that was easy and natural for the startup to do because of its Pakistani founders. However, they also have similar centres in countries like Bolivia and Nicaragua. “You need people that are confident, expressive and who know how to speak because order taking is really 1% of their job. Most of our agents have chats with customers for minutes and that is besides the order taking,” says Ali. “You can train people to take orders but after a certain time, their personality takes over. That’s the sort of people we hire; that are confident and expressive in their personality,” Ali tells Profit. Percy claims their agents are trained to provide better customer experience than restaurant’s own cashiers that can take orders as well as process payments, and bring cost savings for restaurants already facing a shortage of workers. In turn, Percy is able to charge restaurants less than the minimum wage in that country, take a cut for themselves and still be able to pay a handsome salary for a virtual cashier in Pakistan. Ali says that Percy is a self-funded startup, is a growth company which is investing in technology and other aspects of business, and follows a profitable business model. Percy claims that it is growing and it is growing well, with 40-50 clients already in Canada and the US, and expansion into the UK, Australia and Spain. Ali Aqueel shared the name of one restaurant that works with them besides Freshii, and said that they were in pilot mode with some of the restaurants and could not name them to maintain confidentiality. But while it is growing, there are

sceptics that think mass adoption of this system would be difficult because of how the restaurant industry works. Essentially, the Percy model is outsourcing jobs for a very particular kind of role: the cashier, which if it is a real cashier instead of a virtual one, multitasks and serves orders to customers as well, which means that the need for manual labour to be present at the spot to hand over orders to customers, and handle issues with the orders, is still there. In North American restaurants, orders can be picked up at a retail restaurant at pickup lanes, without the need for a person to hand orders over. This phenomenon picked up during the pandemic to encourage contactless transactions to control the spread of Coronavirus but has issues of its own. Multiple orders collected at a pickup station have led to order misplacement and outright theft of food orders, leading to a bad customer experience. “This sort of arrangement has a better chance of success in the McDonald-style fast food business and not fine dining. YCombinator-backed E La Carte tried deploying tablets at restaurant tables for ordering food and they failed badly,” says Kash Rehman, a US-based Pakistani entrepreneur with 22 years of experience in the food services industry. Rehman has owned and operated restaurants in the US, runs a food distribution company, has founded a food-tech startup in the US and is an angel investor with an investment in Pakistan-based Lettuce Kitchens, a cloud kitchen startup. “In the fast food business, workers are multitasking. So if someone is replacing a cashier, physical presence of someone to deal with issues would need to be ensured for a better experience for customers.” “What’s also real is that customer demographic is such that they get irritated easily on the smallest of things. What if your internet is lagging? What if nearby customers, and these are very real scenarios, that they get irritated by someone communicating via a speaker phone? Smallest of things can spook customers off but the biggest problem of them all is that there will always be a need for someone to physically handle all orders,” says Ali Mohtishim, a California-based Pakistani expat who has worked in the food services industry for 8 years.

This sort of arrangement has a better chance of success in the McDonald-style fast food business and not fine dining. YCombinator-backed E La Carte tried deploying tablets at restaurant tables for ordering food and they failed badly Kash Rehman, US-based Pakistani entrepreneur and CEO of Food Service Contracting

Will it work?

echnically, this means that if a restaurant still needs someone for the physical interaction with customers, Percy should become irrelevant, which restricts the total number of workers that Percy can replace as virtual cashiers. This also puts into question the total market of such jobs where Percy can be a potential replacement. Ali claims that they are targeting the entirety of the restaurant industry, which is about 1.3 million establishments in Canada and the US based on data compiled from Bizo Food Metrics that he cited, there is considerable ambiguity on how this can implemented in casual dining restaurants where customers like to be pampered by waiters coming to take orders on the dining table. Realistically, this should be a solution for fast food restaurants. For instance at the quick service restaurants at the airports where going through security is a nightmare for the staff and Percy helps them cut down some staff. But Ali also claims that Percy is not looking to replace the cashiers and just providing an alternative to the restaurant that if they are not able to find workers, Percy would have them covered. The reality however is different where Percy would eventually replace the cashiers present on site and Percy would remain very relevant. According to Salim Shermohammed, the bifurcation of cashier functions has happened at various restaurants in various ways. “At some quick service restaurants, the cashier only takes orders and the person at the collection counter hands over the order. At others, cashiers have also dispatched orders. It can all be worked around and virtual cashiers can provide more convenience.” It can all be worked around in the sense that Ali also gave us during our interview with him. “This technology leap is the way to go for the restaurant industry, even a notch above Kiosks which could be complicated for some customers but this involves humans helping customers,” says Salim. “ There is a potential to disrupt the entire industry by actually replacing cashiers by Percies. Think of it this way: if a restaurant has three cashiers that are paid a minimum wage of

US $11 per hour, they can be replaced by virtual cashiers paid at say US $3.45 per hour ($3.45 is the rate at which Percy is believed to be paying its agents in Nicaragua). All three of these virtual cashiers are collectively paid less than the per hour wage of one minimum wage cashier. The savings that come from this arrangement can be spent on arranging just one coordinator to deal with issues that require physical interaction with customers such as dealing with cash payments and issues with orders. Even without the coordinator, back of the house staff can be calibrated to handle other functions of cashiers and in fact, the staff at restaurants are trained to multitask. This helps deal with unpredictability of labour since Percy promises that they would be able to provide service all the time. In fact, Salim says that savings are a priority for smaller restaurants and not the bigger ones for whom predictability matters more. If there is predictability, savings would come automatically. With Percy, predictability comes along with extra savings in form of low labour costs: an arrangement that would be appealing for restaurants even when there is no shortage. It is very well a case where the labour shortage just provided the stimulus to come up with a disruptive solution like Percy. This can potentially make sense even for a small restaurant that has a single cashier. In that case, dispatching orders can be tasked to the back of the office staff of restaurants where even managers are trained to multitask. So if Canadian restaurant industry has a labour shortage of 200,000 people, and out of the total number 20,000 are cashiers in the fast food industry, these are the jobs that can potentially be outsourced to countries like Pakistan where even a comparatively lesser per hour wage rate of US $3.45 translates into over Rs180,000 a month for 8 hours of work daily. Besides, the existing cashiers can also be replaced in this arrangement. Even if Percies are paid Rs 70,000-80,000 for the month, the bracket the call centre representatives are believed to be making, they are making perhaps a lot more than a cashier at say KFC in Pakistan. All of that work will work well if Percy is able to maintain a good customer experience. Ali claims that the customer experience they provide is better than even that of the

restaurant. For now, Ali claims that the startup has been able to grow, that they have now moved out of implementing this system in Freshii to having signed up 40-50 new clients to serve their restaurants further, with 100 Percies serving as virtual cashiers at these restaurants. From healthy food to coffee only, Percy claims to have a presence in most types of fast food restaurants, and has a happy customer as well. “Percy has been very beneficial since we started with service back in July. The labour force behind it has been nothing but professional. We chose Percy because we share the same mission, delivering the wow factor in the hospitality industry. In our case, it starts with the order taking. Percy has helped us fill that gap as the labour pool is shrinking here in the United States. The service is so simple to use that I really don’t see anything challenging from the technology behind it is here to enhance and and improve our services so we can continue focusing on our guest and offer the best personal experience,” Mehdi Zarhloul, founder and CEO of US-based Crazy Pita Restaurant Group told Profit. This could really be a step in the right direction that can bring more jobs to Pakistan which will also lead to good skills building of employees here because they will be having face-to-face interactions with someone in the US while being able to see them. This would also be a valuable skill that would be different from the other contact centres where agents are on audio calls reading a script rather than having an interactive conversation. In fact, Hamza says that their focus is to take Percy forward in such a way that virtual cashier becomes a recognised skill in the Pakistani job market. As for all the brouhaha around jobs being stolen, these are jobs being gained in other countries. Companies have been outsourcing for a while. Some of the biggest companies in the world have outsourced their business functions to workers abroad for instance to India, Bangladesh and Philippines. An increase in outsourcing and automation may prove to be one of the COVID-19 pandemic’s economic legacies. It is there to be cashed in on. Now it is time to tell whether Percy will be able to capitalise on their early mover advantage. n

STARTUPS

State Bank’s LC approvals cast a shadow on Avanceon’s earnings

The publicly listed company’s PKR revenues grow to Rs4.6bn for 9-months of 2022 from Rs3.5 billion last year, but on the back of massive exchange rate gain of Rs1.64bn By Taimoor Hasan

vanceon Limited, listed on the Pakistan Stock Exchange (PSX) with the symbol AVN, has posted a revenue of Rs4.6 billion for the nine months of 2022, up from Rs3.5 billion for the corresponding period of last year. The company posted a massive exchange rate gain of Rs1.64 billion because of rapid devaluation of rupee against the dollar, which increased the earnings in rupees but in dollar terms, the growth took a hit. Exchange rate gain last year was only Rs297.26 million. According to the company, revenue remained on the lower side in US dollars because the State Bank of Pakistan (SBP) had not granted LC approvals in last two quarters on foreign vendors which impacted Avanceon’s Pakistan business badly during the reported period. Meanwhile profit-after-tax (PAT) was Rs1.9 billion. Against last year, profit after tax was up from Rs751 million - an increase of 152.9 per cent. The last quarter of the year has mostly brought the highest amount of revenue for Avanceon. The company expects a $6 million (approximately Rs1.3 billion) shortfall in forecasted revenues for this financial year. However, profit after tax targets will likely be achieved with the help of exchange gain as a major contributor. The company expects to be entering fiscal year 2023 with $71 million backlog, the highest ever in Avanceon’s history, and claims to be on track to achieve its “Road to 100” plan. In its new business plan last year, Avanceon announced “The Road to 100” which is aimed at achieving target of $100 million core business revenues by fiscal year 2025. The board assigned $40 million as a revenue target to be collected from Saudi Arabia business, $40 million from the UAE segment and $20 million from Pakistan. Avanceon is the only listed company in Pakistan that offers industrial 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. It is also one of the few companies that when they set a target actually go ahead and achieve it.

In 2013, the company set out an ambitious five year plan to reach its revenue target of $50 million, called ‘Highway-50’. By 2018, the company had recorded a backlog of orders worth $56 million. Despite the pandemic, Avanceon’s business was not affected given a confirmed order backlog of $59 million for 2020, in which $55 million backlog is confirmed from business in the Middle East and $4 million from business in Pakistan. With such a track record, if the company is claiming that it will hit $100 million in revenue by 2025, it most likely will achieve that target. It is already expecting to enter 2023 with a $71 million order backlog. Avanceon’s competitive advantage is also that it has a presence in a diversified collection of segments, including oil and gas, FMCGs, Power, Chemical and Pharma. Clients include Saudi Aramco, Unilever, Nestle, Engro Fertilizers, Bayer, and Akzo Nobel. Even if one sector or client crumbles, Avanceon will be well protected. As for the dip in current performance, it is because of external factors beyond Avanceon’s control but should be picking up soon. “Going forward, as global interest rates peak, uncertainty around the macroeconomic environment is likely to settle and the Avanceon business should pick up,” says.Adnan Sami Sheikh, assistant vice president at Pak Kuwait Investment Company. “On the domestic front, easing in restrictions of LCs should bode well for revenue recognition,” he says. “Furthermore, since Avanceon has good business in Qatar, the football world cup in the final quarter can lead to bumper earnings as related projects would likely be completed.” According to Avanceon, its Qatar business segment performed exceptionally well during the nine months of 2022, which compensated group level revenue targets very well. On the bourse, Avanceon share price during the last nine months hovered between Rs96.36 in the beginning of January and Rs74.4 in the end of September, and reached a peak of Rs112.37 in February. The trading closed at Rs76.86 yesterday.

Octopus Digital

n the other hand, Octopus Digital Limited (ODL), an Avanceon-owned subsidiary, posted a revenue of Rs575 million for the nine month period, up

marginally from Rs524.4 million for the same period last year. Octopus’ PAT for the period was Rs501.5 million, up 43% compared to the same period last year. Octopus Digital, which recently announced a merger with Dawood Hercules owned EmpiricAI which will be completed after regulatory approvals, is confident of achieving its set targets for the ongoing financial year. The companies, both Octopus Digital and EmpiricAI, are in the business of providing insights and business intelligence to industrial customers. After the completion of what should be called a merger, Dawood Hercules will get a certain percentage of shares in Octopus which is currently 80% owned by Avanceon and 20% is public shareholding. 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. Since its IPO, publicly available financials show Octopus Digital has been abe to grow substantially though its revenues are still comparatively small. 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 revenue 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, 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. 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 closed on Friday at Rs68.77. n

AUTOMATION

Out of the grey list,

still in the grey!

By Shahnawaz Ali

f you have tried to receive money from a foreign country or tried sending some money abroad, you might be familiar with the bureaucratic obstacle course that the banks make you do. Why do they do that? Why are big investment and commercial banks afraid to come to Pakistan? Is Pakistan not a big enough market for them? Does Pakistan not have enough potential for business from these countries and companies? While the answers to this “why” may be debatable, one of the biggest reasons that Pakistanis have to hula hoop through the procedural steps of enhanced due diligence, and that Pakistan doesn’t get the due amount of foreign investment is attributed to Pakistan’s placement on the FATF grey list. If you know what the FATF is, and what they go about doing around the world, feel free to skip the next two headings. If you don’t? Hang in there!

What is FATF?

he year was 1989; Drug cartels from the south were ready to cash in on the “American Dream”, all guns (literally) blazing. The issue of money laundering was bigger than ever and becoming increasingly difficult to monitor, specifically in the case of nation states. It was then that the G7 summit decided to convene a watchdog. An institution that would devise a cohesive policy against money laundering. In 1990, FATF pub-

lished a set of 40 recommendations that were intended as a comprehensive plan to fight the said money laundering. Eleven years later, after 9/11, the FATF added eight special recommendations and in 2004 it added another one. To cut the confusion, in 2012, FATF went back to its standard 40 recommendations model which incorporated the essence all its Anti-Money laundering (AML) and Combatting the Financing of Terrorism (CFT) protocols. So, what started off as a one-year task force, has now become a Global watchdog. Its recommendations are now a global standard against AML and CFT, and more than 200 countries are committed to abide by these standards. FATF has 39 members which include countries and jurisdictions. All major Financial Institutions and countries are either members or observers of its plenaries and keep a keen eye on its assessment of every country. It has 9 associate members, which act as its regional bodies and make the enactment of the FATF recommendations in their requisite regions of the world, possible. The bottom line is that the FATF stops good money from being used for bad purposes, and stops the money earned through bad sources from entering the pool of money that is legitimately earned.

What does FATF do?

ATF, through its regional bodies, assesses the compliance of all the countries on its recommendations. This is essentially a marksheet that

has four possible grades for your country on every one of the 40 recommendations. A C (Compliant), an LC (Largely Compliant), a PC (Partially Compliant) and an NC (Non-Compliant). The grade is given after a country is put under review and assessed on each of the 40 recommendations, regarding its compliance and the effectiveness of that compliance. Based on these grades, the country is given a report card, which decides whether it will be placed on a white list, a grey list, or a black list. White list is rather self-explanatory (and white), but the grey list or officially, the list of jurisdictions under increased monitoring, is a list of countries that need to work on their AML and CFT laws and infrastructure, if they want to be on the white list, otherwise, they’ll be placed on the black list. Black list is a list of confirmed bad boys, a placement on it, comes with a number of sanctions. One would think that if you are a “C” or “LC ‘’ on majority of the recommendations, you are out of the blue (read; black or grey). But that is where it gets tricky, because the report card i.e., the placement of your country on a list, is not entirely dependent upon just the grades (Extracurricular activities matter!). As standardised as the procedure may seem, the evaluation methodology reveals that some recommendations are more “critical” to “global peace” and “financial security” than the others. Pakistan, who became a member of APG (Asia Pacific Group) in 2000, has since been placed three times on the FATF grey list.

On the list, off the list. Why?

n the last 15 years Pakistan has been on and off the list for a total of three times. Once in 2008, once in 2012 and once in 2018. It’s almost as if FATF has been trying the age-old hack of “Tried turning it off and on again?” with Pakistan. Logic would suggest that if a country is found significantly compliant to the 40 recommendations, and has met the legal and policy-based requirements to be in the white list, the country is in the clear, at least for the next few years. Then how does Pakistan manage to find itself back on the list every time? That too within three years of getting off? This means that something has got to be wrong with either Pakistan or FATF. Turns out that this stands true for both, the former and the latter. As voluminous as the answer to the “what” and “where” questions can be, there is definitely a national consensus on the fact that there is something wrong with Pakistan. What is wrong with FATF though, is a convoluted set of global politics that finds its way to the plenaries in the form of biases. FATF has 39 member states, and only a member has a standpoint in the plenary. As the global politics pan out, the members have a say in which countries are to be put under review and which aren’t. If the said country doesn’t fulfill the scrutiny of the review process, they are met with a bad report. These political biases can be deemed as one of the reasons why many countries like Kenya, Tajikistan, Panama,India and even the United States are on the white list, despite having less compliance to the 40 recommendations compared to countries like Pakistan. Pakistan has mainly been put under review for the violation of recommendations that

concern DNFBP’s (Designated Non-Financial Businesses and Professions). That is just a fancy way of saying terror and fraudulent organisations. The war on terror rendered Pakistan a beehive of terrorist organisations and at that time, Pakistan, seemed infrastructurally fragile in that fight. Come 2022, Pakistan’s stance on these terrorist organizations is still under scrutiny.

Why does Pakistan need increased monitoring again and again?

n its first Mutual Evaluation Report MER in 2009, Pakistan was deemed Partially compliant (PC) on 23 and Non Compliant (NC) on 12 out of the, then 49 recommendations. The state officials were accused of having a “basic understanding” of AML and CFT laws. Pakistan itself was taken aback by the magnitude of “terrorist” financing loopholes that existed in its system post the Musharraf era. In a number of amendments, Pakistan was able to pass a permanent money laundering law and was hence taken off the list in June 2010 with a 10-point action plan. The progress that was getting praise from FATF up until 2011, somehow got Pakistan back on the list, first thing in 2012, for not “doing enough”. Following the assassination of Osama Bin Laden within Pakistan, it was deemed that Pakistan’s capacity to combat against DNFBPs had been overestimated and its effectiveness needed a second assessment, this time on the revised 40 recommendations. Compliance levels were overlooked by the FATF and identification of DNFBPs became central to Pakistan’s exit

from the grey list. In 2015, Pakistan’s delegation at the FATF plenary was able to present a strong case of the progress it had achieved, getting Pakistan off the list without a Mutual Evaluation Report. The third time that Pakistan was placed on the list was not as expected as the first two. Under the FATF review, the Mutual Evaluation Report of Pakistan, which was published in 2019, revealed that Pakistan was found Partially-Compliant (PC) on 26 of the 40 recommendations and Non-Compliant (NC) on 4. This time, Pakistan was given a 27 point action plan which suggested major changes in its legal and financial systems. According to the Pakistan government, by the mid of 2021, Pakistan was able to make progress on 26 out of the 27 action plan items. However, the FATF wanted Pakistan to do more before it was let off the hook. During this time, Pakistan reportedly amended 15 laws and passed 30 new regulations in lieu of the FATF action plan. Finally, a Mutual Evaluation Report, published in June 2022, deemed Pakistan Partially Compliant (PC) on only two and Non compliant (NC) on zero recommendations. As Pakistan was found either Largely Compliant (LC) or Fully Compliant (C) on most of the recommendations, Pakistan was expected to be off the hook in the next plenary. Among all the three times that Pakistan has been on the list, the last one has fared for the longest period. The notion that Pakistan would have been off the list had FATF not been politically motivated by its members, against some strategic decisions that Pakistan took, runs rampant through the ranks of the ousted PTI government. Politically motivated or not, Did Pakistan face any empirical consequences by being on the grey list?

What are the consequences of being in the grey?

he consequences that a country is said to face when placed on the increased monitoring list are manifold. From decrease in foreign investment, to difficulty in doing business with the rest of the world, the FATF basically increases the risk coefficient of all the financial transactions that are supposed to happen involving that country. To see if Pakistan faced the said impacts of being on the grey list, one can look at the major indicators that can be affected due to this placement. In 2008-09, the world was still recovering from the shocks of the great economic crisis, Pakistan being no stranger to these shocks also underwent serious catastrophes in its economy, not to mention the newfound war on terror that had the country by a storm.It is almost impossible to arbitrarily calculate the amount of loss that Pakistan incurred by being on the FATF grey

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list, in that time period. Especially because any of it is hard to attribute to FATF alone. Come 2012, when Pakistan once again found itself on the list, the impacts can be seen across the economy. In June 2012, when Pakistan was placed on the list, an immediate drop in the FDI numbers was seen. From 106 million in June, FDI went to 7 million in the month of August. Pakistan closed that year on a high but it is important to acknowledge that the CPEC investments had come through by October, owing to the first phase of the program. The stock market saw little to no impact of the greylisting in that year. A 500-point drop in the KSE100 index on the day of announcement in June was followed by a historic appreciation that went on for the next 3 years. Pakistan’s real GDP growth in the consequent years also saw stagnation at 4% up until Pakistan got out of the list in 2015. 2018 was the time when the Tehreek e Insaaf government came into power. The rupee saw a massive depreciation in the subsequent months. The 2018 greylisting inevitably had the biggest impact on Pakistan’s economy. That coupled with the rupee depreciation and the balance of payment crisis, Pakistan had a full blown disaster headed their way. The stock market saw a decrease of 15000 points over the course of the next 10 months. For the first time in a few years, a negative earning per share across the stock market was reported at the year end. The foreign direct investment figures for Pakistan went from a 244 million USD in June to a negative 390 million by the end of October in a constant downward trend. The GDP growth rate for 2019, dropped by 3.5% in comparison to 2018. Bilateral loans became difficult to secure and Pakistan found itself at the gates of IMF yet again. According to an empirical study by Dr. Naafey Sardar, Pakistan lost upto 38 Billion US Dollars in potential GDP, owing to its greylisting over the years. The study uses synthetic control methods to project Pakistan’s macroeconomic indicators, had Pakistan not been placed on the grey list. If it is to be believed, the cost of going on the grey list may have been the sole factor in bringing Pakistan, where it is today.

However, The limitations in the model suggest that to attribute all these macroeconomic changes to the FATF grey listing is a stretch. The current level Foreign Direct Investments and their lack thereof, do paint a picture of mistrust in the Pakistani market. That also coincides with the crippling economic conditions, and currency which was all around the FATF grey listing. An investor is far less likely to invest in a country that poses a question mark on his ability to liquify. Ease of doing business ranking of Pakistan also dropped between 2015 to 2018. Most of Pakistan’s loans have been dependent on the FATF results. Doesn’t matter if its a commercial loan or a bail out. The commercial loan’s rate tightens with the risk coefficient and the bailout’s prior conditions. Most importantly in the case of Pakistan, the FATF grey listing hinders our ability to get loans, something that we seem to be needing more and more of every day.

Will things improve?

s of October 24th, 2022, Pakistan has been removed from the FATF grey list. The news of Pakistan getting off the grey list comes with many self-proclaimed architects of getting Pakistan off. But to gauge Pakistan’s economic conditions, it is rather ironic that the seekers of the credit for this feat, are simultaneously seeking dollar credit from International Financial Institutions. Pakistan is

nowhere near out of hot waters when it comes to its economic woes. First week off the grey list, the KSE 100 index has actually dropped by more than a thousand points. The reserve has gone lower than last month due to debt repayments. One positive in this regard has been the FDI. Although none of it, in this brief time, has come through commercial or private sources. There is still a long way to go for regulators and fiscal policy makers, to bring Pakistan to a level where it actualizes the impacts of getting off the grey list. It is very important to realise that being on the FATF white list doesn’t necessarily mean that investment is going to come in. The counterfactual, however, about it not coming in if Pakistan is on the grey list, is true. For a foreign investor to invest in a country, Pakistan must tick many boxes. A country that has foreign exchange control in place, has massive political instability, has a plethora of bureaucratic red tapes surrounding investment, is knees deep in debt, and is constantly looking for more doesn’t exactly scream “investor friendly”. The FATF grey listing has had terrible impacts on the economy of Pakistan, but the idea that once Pakistan gets off the grey list, these effects will be reversed is a typical fallacy. Pakistan currently stands at the brink of a default. With the foreign reserve figures at 7.4 billion, Pakistan has been downgraded by most of the credit rating agencies like Moody’s and Fitch. Money laundering or no money laundering, Pakistan’s very ability to pay back its debts is surrounded by ambiguity right now. While Pakistan has made progress in the legislative process that surrounds the AML and CFT, the implementation of these laws, as any other law in Pakistan, remains a huge question mark. A big example is that despite getting off the list, Pakistan’s Credit Default Swap is trading at a 13-year historic high of 52%. What that says about the country’s default risk is no more open to political interpretations. If it were open to bets, the majority would bet against Pakistan in the case of default. All this aside, Pakistan’s exit sends a positive message about the future of cooperation with International lenders. Whether Pakistan’s internal politics let it maintain the same course? Only time will tell. n

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