Profit E-Magazine Issue 223

Hascol’s scheme of arrangement: Having your cake and eating it too

By Ariba Shahid

On Thursday, Hascol Petroleum Ltd announced a meeting of creditors to be held on December 22 to seek approval for its plan to revive the company through “restructuring/ rescheduling settlement and repayment” of its financial obligations.

The cash-strapped company and also the country’s biggest private sector default has filed a “scheme of arrangement” with the Sindh High Court. In its scheme of the arrangement, the company has outlined various options, the creditors (in this case, the financial institutions) have to recover their dues.

Hascol’s current woes have been quite publicised. The OMC had accrued a debt of more than a whopping Rs 54 billion, with clear signs of foul play on the OMC’s part. Assets

overvalued, profit numbers exaggerated, some domestic LC facilities misused, all to get more loans than the company would on merit qualify for. Apparently all of this is not too uncommon in the corporate and commercial banking scene in Pakistan. To cut a long story short, since the collateral, it now transpired, was much less than what the books suggested, some banks were keen to cut their losses and look into some sort of settlement.

Hascol has provided three options to its creditors. And those three options are starting to look an awful lot like the options a deadbeat spouse offers their divorcing partner. Which option will Hascol’s creditors go for? It is a question of philosophy. Are they going to push back and try to come back for all of it or follow the old maxim from English common law that a bird in the hand is worth two in the bush? Or will they mix and match the options on offer and go for some combination of the three?

Option A: Long-Term Restructuring Option

(Divorce and alimony over 12 years)

Outstanding liabilities shall be converted or rescheduled into a term loan payable for a period of 12 years from the completion date. The repayment of the loan will be made in 10 equal annual instalments, with a grace period of 2 years from the completion date. The collective repayment/ payment instalment amounts per year for all the creditors that choose option A shall not exceed Rs 2 billion.

The outstanding term loan will not bear any markup, profit, interest, or return of any nature. Hascol also adds that no additional costs, fees, or any other amounts may be charged to them. Once a creditor chooses option A all other liabilities to stand irrevocably waived.

The loan will be secured against specific fixed assets with a margin of 10%. Any creditor that selects Option A and has already taken charge over current/ moveable assets of the company will be required to discharge all such encumbrances.

Option B: Working Capital Restructuring Option (marrying your abuser)

Liabilities owing to creditors, both short or long-term will be converted or rescheduled into new short-term working capital lines for the company equivalent to the full portion of the outstanding liabilities. These working capital lines will be utilised by the company for the procurement of petroleum products and for managing the day-to-day affairs

of the company.

The company will make payments in a rundown manner over a period of 60 days horizon to open letters of credit for its business has a 60 day usance period.

“The same will be carried out in a phased manner such that the full amount of the Working Capital Lines are activated against which regular payments are made on the respective due dates,” read the document.

The working capital lines will be structured as one or more running finance or LC facilities. Creditors that choose option B agree and commit that the working capital lines will be renewed or rolled over annually for a minimum period of 10 years from the date of execution. Upon the completion of 10 years, Hascol claims that it will settle the entire outstanding working capital lines if required by the creditors.

Hascol asks that the working capital lines be made available through a minimum of 60 days import usance LC with zero margins. The lines will be secured by the hypothecation of stocks and a ranking charge over all fixed assets with a 10% margin. The maximum outstanding liability available to be restructured under this option is limited to Rs 21 billion, with cash outflow for down payment limited to Rs 10.5 billion. This shall be decided on a first come first serve basis.

C: Settlement

Creditors choosing this option will be paid up to 30% of their respective portion of outstanding liabilities as a settlement amount. This will be the full and final settlement. The company only has Rs 4.3 billion to offer under this option. If the outstanding liabilities of all creditors choosing option C exceeds this amount, Hascol will distribute the available cash at pro-rata to all creditors. This means a lower percentage of outstanding liabilities will be paid, which will still be considered their full and final settlement.

Hascol claims to make payments for this before the long stop date based on the settlement agreements made. Once paid, creditors will need to release, vacate and discharge all security interests of the company. All other liabilities will be waived off.

What does this mean for the banking sector?

Option A essentially means being patient and waiting to get back the entire amount. Option B essentially means getting into business with Hascol to keep it a going concern and hoping

the company operates successfully. Option C, however, is ridding yourself of the company and leaving.

“Hascol clearly has the upper hand in this, this is exactly why it was able to offer a 70% haircut to banks,” says an investment banker on the condition of anonymity.

“Pakistan’s ranking in the global judicial system is low, so it makes sense to settle with a big defaulter today at whatever discount is offered or to negotiate and move on with your life than years of unending litigation,” he adds.

If all banks choose to take option C, it will result in Rs 49 billion right off for the sector as Hascol is only willing to pay Rs 4.3

billion under this option. The table below shows the amounts available if all banks choose this option.

However, if only the smaller financial institutions take this option equivalent to or less than Rs 4.3 billion, the write-off for the sector will be Rs 9.636 billion. The chart below gives an example of this.

Hascol has been in hot water since 2018. Its net consolidated loss amounts to Rs 9.4 billion in the first three quarters of 2022, growing from Rs 4.3 billion a year ago. Things however seem to be looking up with the company posting Rs 1.3bn in earnings before interest, taxes, depreciation, and amortisation. n

Option

Option (severing all ties and leaving with what you can get)

By @2paisay and Abdullah Niazi

Buckle up, this one is complicated, and we’re going to get right to it.

On the 3rd of December this year, Shahid Habib of Arif Habib Limited announced that the Globe Residency REIT (GRR) was being listed on the Pakistan Stock Exchange (PSX).

In the world of Pakistani real estate, this is historic. It is the first development REIT to be listed on the PSX. But what does any of this mean? The GRR is a real estate project launched in November 2021 which is building nine apartment complexes within the bounds of the Naya Nazimabad housing project — an ambitious undertaking by the Javedan corporation to build a “city within a city” in Karachi.

To anyone not keyed in to the specifics of and terminology being used, the above information is French. Essentially, a very brief summary of the entire matter is that Arif Habib Limited have launched this nine tower project by establishing a ‘Real Estate Investment Trust (REIT)’, which is a special category of real estate project that brings public money into real estate projects through the stock market. The reason for establishing this REIT could be the tax-breaks that are offered by the government, but largely it seems that with dwindling trust in real estate the Arif Habib group may be going this route to boost investor confidence.

And that, more than anything, points towards our thesis: a major shift is happening in Pakistan’s real estate market where property

is no longer considered the hedge against inflation it once was. With investors also wary of the many scams and the lawless landscape of real estate in the country, developers are now looking for better ways to make real estate more liquid and transparent.

There is still a lot to unpack here. To get to the bottom of the entire matter, there are a few critical questions that need to be answered:

1. What is a REIT, and why has Arif Habib decided to operate this one project building nine towers under this category of real estate development?

2. How exactly is public money involved in this project, and what are the benefits that it provides to the owners of the project?

3. How are the Javedan Corporation, Arif Habib, and GRR all tied together — essentially what is the ownership structure of this entire project?

4. What does this mean for the larger Naya Nazimabad project?

Profit spoke to a number of industry experts, analysed the project prospectuses of both GRR and the Javedan Corporation, and spoke to Muhammad Ejaz, CEO, Arif Habib Dolmen REIT to try and get to the bottom of why the Arif Habib group has gone for the REIT structure for this project, and what this means for the future. But we will start, of course, at the very beginning and answer the four major questions that are necessary to understand how this whole thing works.

The basics (Do not skip)

REIT and GRR: Real Estate Investment Trust. REITs are not a concept unique to Pakistan, but they are an underutilised one. Essentially, a REIT is an ownership structure under which public or private ‘shareholders’ split ownership of a real estate project. The ‘REIT’ is a legal entity that either acquires land to develop real estate or acquires already developed real estate . The developed real estate is then either sold or rented out, and the money from this is then distributed among the unit holders or ‘shareholders’ in the REIT. In Pakistan, going for a REIT offers many benefits in the form of tax breaks. For REIT projects, there is no tax on capital gains on transfer of immovable property. No tax on income.

How is public money involved: REITs are collective investment schemes that take money from investors and deploy it in real estate projects. Because public money is involved, they offer a degree of protection and transparency that regular real estate projects just do not have. And with trust in real estate at an all-time low, a REIT project brings with it a certain level of legitimacy.

Ownership structure: Take the case at hand, for example. The Global Residency REIT (GRR) as we’ve mentioned earlier is a project constructing nine apartment towers inside Karachi’s Naya Nazaimabad. Now, the Naya Nazimabad project was launched back in 2011 by the Javedan Corporation, which is owned in large part by the Arif Habib Group. Originally a cement manufacturer operating since the 1960s, after the Arif Habib Group took over its attention was diverted from cement production towards real estate development.

Its biggest undertaking and still greatest purpose was Naya Nazimabad. Spread over 1,366 acres and located just 2km from Sakhi Hasan, North Nazimabad, Naya Nazimabad was envisioned as a big chunk in the middle of Karachi that would be free of all of Karachi’s problems — a gated utopia.

Within Naya Nazimabad, of course, there are a number of different projects going on. The 1,366 acres of land are not being developed single-file Soviet style. Different areas within Naya Nazimabad offer the options of houses, apartment buildings with different styles of construction, different levels of amenities, and even different management all fall under the umbrella

of Naya Nazimabad. Of this, nine apartment towers are not that big, so what is the big fuss with converting this one project into a REIT?

It has gone something like this. The nine towers were of course owned by the Javedan corporation. Javedan in its prospectus claims that “the REIT is established with the objective of upliftment and construction of the acquired real estate including construction of residential units under the project named “Globe Residency Apartments” (the “Project”) for generating income for the Unit-holders.”

Further details reveal that the project was acquired by the newly minted GRR from the Javedan Corporation, and the SECP has approved the transfer which came into effect on the 1st of April this year. The REIT has a limited life of 48 months spread over 5 fiscal years. That is, of course, because a REIT’s scope is limited.

For example, if this current project has nine towers, the land will be acquired for them, development work will begin, grey structures will be built and the ‘files’ for the under-construction apartments will already start to be sold. Separately, the law requires that the REIT be listed on the stock exchange and that at least 10% of the units (REITs are sold in units not shares) be offered to the general

public. The rest of the 90% is split between the consultants working on the project (5%) while 85% is being offered to the existing shareholders of the Javedan Corporation. Essentially, the nine under-construction buildings were a project of Javedan and owned by them. The project was then shifted to the ownership of GRR in exchange for which Javedan got the ‘units’ for GRR, as well as more than Rs 2 billion.

From here on out, once the project is completed and all the earnings from it are distributed amongst the unit owners, the REIT will finish since the ownership of the apartments will then be with the actual buyers who will either live in or rent out these apartments.

So what is in it for the Arif Habib group? How will they make money off of this? For starters, a vast majority (85%) of the units on offer for GRR are being offered to the existing shareholders of the Javedan Corporation at a set rate of Rs10 per unit. The offer to the general public is only for Rs 140 million, and the only reason for the IPO seems to be that as per REIT regulations, a REIT is required to be listed within three years of financial close to acquire the tax benefits. GRR does not require any funding from the IPO for the project. In fact, the proceeds from the IPO are being used to pay the GRR sponsor — Jave-

dan. Including the 14,000 units up for sale to the public in the IPO, the overall value of the units being sold is Rs 1.4 billion. Since the project has been acquired for Rs 3.24 billion, the remainder of the liquid cash has to be paid to Javedan.

Then, of course, there is another small twist in this intricate web of ownership. The GRR project needs to be managed. The Global Residency REIT is not a company, it is just a structure for ownership. The day to day management of the project will be managed by the Arif Habib Dolmen REIT Management Limited (AHDRML) — which will of course charge a management fee.

During the four years, the REIT management company will charge a fee of Rs 126 million to the REIT. This amount is slightly less than the funds raised by the REIT from the general public in the IPO. If the life of the REIT extends beyond 48 months, the RMC fee will be higher.

The nitty gritties

All of that, of course, was just the tip of the iceberg. A more thorough look at the nine buildings under question that are now the ownership of the GRR shows just how many players are involved in this one project. The objective of the REIT Scheme includes construction of 9 towers with a total of 1,344 (2 Beds and 3 Beds) residential units under the project named ‘Globe Residency Apartments’. The goal is to build and afterwards sell these apartments and generate profit for the ‘unit holders’.

However, other than the ownership structure, things are pretty much standard in terms of how the project is being financed. “It needs to be clearly understood that this is an “Offer for Sale” by the existing unitholder. This offering is

related

not

to project

Fortunately, the majority of the risks have been addressed as the bulk of the available inventory is already sold with a healthy track record for collection. Participation by Meezan further strengthens the project finances

Muhammed Ejaz , CEO at Arif Habib Dolmen REIT Management Limited

financing”, says Muhammad Ejaz, CEO of Arif Habib Dolmen REIT — the management company that is overseeing the GRR. He says that they did not go the REIT route to collect money, and that the financing for this project was still mostly coming the typical way — buyers of apartment files making advance booking payments before the development stage, and instalment payments during the development stage.

Like most real estate projects, the entire construction will be financed by customer advances. The total project cost is Rs.20.6 billion. JVDC has provided equity in the form of partial land contribution. That is the only equity contribution to the project. The project was acquired by GRR at a consideration of Rs3.24 billion. Out of this, the land consideration of Rs 2.54 Billion has already been paid to Javedan Corporation Limited out of the REIT Fund. This constitutes: Rs 1.4 billion paid through equity via issuance of 140,000,000 REIT Units of face value PKR 10.00/- per unit, and Rs 1.14 Billion paid using proceeds from a finance facility of from Bank Alfalah Limited for a period of 4 years.

Thus, since the IPO proceeds will not be used towards the project, the IPO is a liquidity event for shareholders of the Javedan Corporation who will be able to realise the profit from the tax-free sale of land by JVDC to GRR. Since Javedan provided the land on an as-is basis to GRR for Rs.3.24 billion, the IPO proceeds are only being used to provide exit liquidity to JVDC shareholders. None of the IPO proceeds will be used toward the project.

Globe Residency REIT and Meezan Bank Limited agreed to launch three towers (Tower 2, Tower 3 & Tower 4) on FL-05 for sale to the public after completion of the grey structure. And preference will be given to buyers intending to obtain long term mortgage financing from Meezan Bank Limited for the purchase of subject apartments. As of September 30, 2022, 1,084 units have been booked, comprising 676 units booked directly by customers, and 408 apartments have been booked by Meezan Musharaka. While Meezan Bank has booked the three towers but as per the prospectus, the units in these three towers will only be released for sale once the grey structure of these towers is complete.

With the exception of the three Meezan bank towers where Meezan will finance the grey structure through a Musharakah arrangement, no additional cash is being provided by the banks or the sponsors.

It’s a gamble

This is the major risk of the project. If the customer advances are delayed and usually they are due to circumstances beyond the customer’s control, the project will be delayed. The REIT doesn’t generate any cash flows. All the construction and expenses of the REIT are to be financed from the cash advances received from the customers. Thus the GRR unit investors are taking a punt on not only all the units selling but the buyers of these units making payments as per forecast.

Considering that the sponsors are only putting in the land, and barring the three towers for which Meezan bank will be providing partial financing for the grey structure, the financing of the rest of the project is solely reliant on payments of instalments from customers. On top of this, inflation has taken a turn for the worse in Pakistan. This can result in an increase in the construction cost of the project in excess of what is budgeted (including contingencies) in the cash flows.

There are other complications. The towers being financed by Meezan bank cannot be sold till the grey structure is complete. How will the funding shortfall over and above the amount Meezan bank has pledged, for these three towers then be managed? Would customer advances received against other towers be used here?

“You have correctly identified the risks, but these are dangers that are inherent in such projects. The capital structure (combination of Equity, Debt and Customer Advances) of such projects defines the present competitive landscape. For this project,

fortunately, the majority of the risks have been addressed as the bulk of the available inventory is already sold with a healthy track record for collection. Participation by Meezan further strengthens the project finances,” explains Muhammad Ejaz.

“It may be noted that instalments received by customers have three in-built components: 1) cost of land, 2) cost of construction and 3) profit for the developer. Hence there is enough liquidity with the REIT fund to contribute its share in the construction of structures of three towers jointly with Meezan Bank after setting aside construction of the remaining towers”.

Be careful what you invest in

With inflationary pressure making even developers sweat, there is a very serious problem of this entire project being financed by customer advances. In that way, just because it is a REIT project does not make it safer than most real estate projects. Just look at the issue of payment plans.

The payment plans for this project may be unrealistic. As per the prospectus, the target market of the project is people with a monthly household income between Rs.120,000 to Rs.150,000. How can buyers with a household income of Rs.120,000 to Rs.150,000 afford these instalments when the size of the monthly instalment is more than their monthly income and half yearly instalment is three-times their monthly income?

This is the price of the units as per the prospectus:

We have already seen that a 4-year payment plan is unrealistic for the target market. We also know from the prospectus that out of the total 1344 units in 9 towers, only 50% of the units are sold

• Sold units: 676 units (50%)

• Meezan* units: 408 units (30%)

• Unsold units: 250 units (20%)

*Meezan has booked the three towers but as per the prospectus, the units in these three towers will only be released for sale once the grey structure of these towers is complete.

However, as the REIT is expected to last only 48 months, and the repayment of unit holders can only be from sales collection from customers, the prospectus shows this unrealistic collection schedule where the purchase price from year 2 sales is expected to be collected in a little over two years and purchase price from Year 3 sales are expected to be collected in a little over 1 year.

While one can assume that for the 30% of units booked by Meezan, the purchase price will be paid by Meezan in a lump sum for providing a mortgage to buyers, however, it still leaves 20% of the units. If the 48-month payment plan was unrealistic for the target market, this assumption about future sales to be collected within one to two years is bordering on ridiculousness. Unless all the units are to be sold to rich in -

Rs.120,000 to Rs.150,000 is an iffy claim.

Why go for a REIT?

This is the Rs3.24 billion question. We have talked about what the REIT is, how it is structured specifically in the case of GRR, what the pay-off is going to be to the unit holders, how the shareholders of the Javedan Corporation are going to benefit off the back of this. But one important question is left: why go for the REIT in the first place?

The most logical answer would be the tax breaks that going the REIT route offers. The problem with this is that while it is true, this current project involving GRR there are very few tax benefits. The original land owner, Javedan Corporation Limited, has owned the land since 1961. Hence there is no implication of capital gains. The project is also registered with FBR under the fixed tax regime, which was an amnesty scheme introduced in 2021 under which a lot of tax breaks were given. Hence no additional tax benefit to the REIT scheme.

Why then jump through hoops to first establish a REIT knowing that 10% of the units would have to be offered to the public in the form of an IPO. One of the more obvious explanations is that this offered liquidity to the shareholders of the Javedan Corporation — top in that list of shareholders is the Arif

Habib Group itself. However, there is also the possibility that this is the Arif Habib Group also trying to think ahead of the curve.

“The perception that the mere purpose of establishing GRR is to take full advantage of the tax benefits available under the amnesty scheme and generally available to REITs is not correct. The project is being developed in the REIT mode as REIT regulations subject the project to a stringent regulatory regime that demands transparency, discipline, and accountability by all the participants,” Muhammad Ejaz explains.

“We have a plan here. The offering is made at a stage when most risks related to such projects, such as: acquisition of land with clear title and possession, planning, designing, approvals and sales have already been addressed. Hence, it’s a low risk opportunity for retail investors for projects of this nature. Meanwhile, as far as the financing of the project through customer advances is concerned, assets like these are acquired through years of savings by the household. The instalment plan merely tries to facilitate buyers and tries to match their outflow with the construction plan. The target market is defined for indicative purposes and is based on our understanding of a particular economic strata.”

“Holding a certain percentage of inventory and gradually off-loading it as the construction progresses is a sure way to hedge against inflation and to benefit from higher values. There is a certain market segment which needs assets closer to completion at a higher cost as completion risk gets gradually addressed.”

Apparently, there is no additional tax benefit to the REIT scheme. The entire benefit of the REIT structure is that it allows one to bypass the corporate tax if 90% profits are distributed and here Ejaz is saying that we are not going to benefit from it. Then why go through with it at all?

The only thing that makes sense is that they are trying to establish a track record for future REITs they are planning where they will need financing. If you go through the financial statements of JCL, there are a few more development REITs in the pipeline. But it is true that REITs have been getting a lot of attention in the past couple of years since a changeup in regulation. What happens next is anybody’s guess. n

The below table gives the 48-month payment plan as per the prospectus:

vestors (see next section) and the talk about a target market with a household income of

Ammar H. Khan

Anatomy of a Black Market

There is a dearth of foreign currency liquidity in the country, as the central bank tries to maintain an official inter-bank rate at artificially suppressed levels. As the PKR started depreciating, and became a politicized tool, the ‘independent’ central bank started managing its price. Earlier it at least pretended that there was no management, and that the price of the US$ against PKR was fair, but lately they have stopped pretending as well. However, as the price remains artificially suppressed, the flow of foreign currency into the country through formal channels has slowed down to a trickle.

Households receiving remittances are getting an increasing number of remittances through the informal channels. Similarly, any institutions looking to bring in foreign currency liquidity to invest are also delaying bringing in the same given an expectation that PKR is set to depreciate against the US$. Finally, export receipts have also slowed down, as exporters try to delay receipt as much as possible to get a better rate in the near future. Due to such dynamics, the spread between the exchange rate managed by the central bank, and the exchange rate at which transactions are happening in the open market, or on the margin continues to increase.

Only about a year back, the central bank imposed draconian measures to restrict purchase of foreign currencies through exchange companies. Numerous layers of scrutiny and documentation were added to discourage the same, thereby

The writer is an independent macroeconomist and energy analyst.

creating grounds ripe for a shadow of black market. Time and again, institutions have tried to tweak market prices, and everytime they have failed, or have made the situation worse. Markets are humbling, but individuals managing affairs may just have the humility to learn from such humbling experiences. Fast forward, a full one year later, we have a parallel exchange rate at play.

Currently, there are three exchange rates. An inter-bank rate, which is the official rate at which banks transact with each other, or use for conducting trade, etc. An open-market rate, at which individuals can buy foreign currency from licensed exchange companies. However, the same rate is defunct, as there is no supply available at that particular rate. One can have enough demand, but it is a market and price failure if there is no supply in the market at that price.

Finally, the third price is that of the black market, or shadow market. This is the price at which transactions are happening in the ‘real’ open market, where demand and supply sets the price. Some people may say that they are illegal – well, yes, they are illegal. But the core function of a market is determination of an equilibrium point, which is referred to as the price where demand and supply interact. If institutions that are responsible for ensuring orderly conduct of the market prefer to fix a price irrespective of demand and supply dynamics, then a shadow market will eventually emerge.

The same has been observed in economies with a currency crisis over the years. As the official price fixed by the regulator diverges away from the actual open-market price, the crisis deepens further. Currently, the shadow market price is at a premium of roughly 10 percent to the inter-bank price, but if the institutions continue to keep a fixed price and continue to pretend that there is no currency crisis, then the premium is only going to increase further.

As long as institutions and the government continue to try to fix a price without taking into context demand and supply dynamics, there will always be imbalances, and there will always be shadow, or black markets. If we want shadow markets to stop existing, then we should also stop interfering with prices, and let the market function. We should focus on improving market structure and enabling price discovery through the market, rather than shutting it down and allowing shadow markets to prosper.

We can either focus on fixing structural imbalances, or we can continue to believe that a certain arbitrarily fixed price is better than a market determined price.

The making of a big shot Pakistani wedding

By Momina Ashraf

There is a frenzy in the air. A young team of set designers is running frantically with flowers and other props; a supervisor screaming on their heads to do better, run faster. Panic and hysteria take centre stage as the DJ in the background carries out his sound check for both music and mic. Camera people navigate through ideal spots to create the perfect frames. The star of the show is getting ready in her vanity room, with designated best friends to constantly reassure the look and makeup. There are some last minute mishaps, of course, and these must be fixed before the final walk. As soon as the curtains go up and the spotlight shines bright, the 10-minute entrance walk seems to roll out of a staircase from heaven. That’s the thing about a good stage performance, the audience cannot tell what went on behind the curtains. There are lights, camera and action.

But this is not a film set, this is a Pakistani wedding.

Just like in a film, a lot of time, money and energy goes behind a Pakistani wedding. Getting hitched does not come cheap. In fact, it’s the investment of a lifetime, and epitome of a neoliberal dream. It sells the idea that if money can’t buy happiness, it can at least pay for the perfect wedding.

“So we are two siblings and my parents saved separately for both of us. We always knew there was a certain amount we could use for our higher education, setting up a business or for any other thing. I got a good job after my undergrad and didn’t want to study further, so we decided to utilise my portion of savings for my wedding,” mentioned Haya Khurram whose nikkah ceremony alone amounted to more than Rs 2 million in December 2021. “My parents had been planning my wedding since my childhood. I’m

They say money can’t buy happiness, but in a desi wedding it definitely can

There are at least a hundred families in Lahore who are competing against each other. It’s a common practice there that a family reaches out to the caterer and asks the amount a certain business family spent on its wedding. We tell them that they spent Rs 50 million, they quote us a 10 million higher and ask

Salman Ashraf, CEO Hanif Rajpoot

the only daughter so my parents made sure that all my wishes were fulfilled,” she continued.

How much does a happily ever after cost?

There are a lot of costs that go into the wedding of your dreams. There is not sufficient documentation of the wedding industry in Pakistan but according to Karachi-based bloggers and wedding curators who have been working in the wedding business since a decade, the industry was worth Rs 900 billion per annum in 2013, of which Rs 168 million was earned in Karachi alone. This means that the urban centres contribute the most to the industry.

To know what current costs in the market are, Profit reached out to Hanif Rajpoot, the oldest event planner of Islamabad. “Let’s consider an average upper-middle income household wedding in the city with at least 250 guests. We charge Rs 2500 per person. This cost includes the venue and the food. Because Islamabad is not a wedding hub, we have between 10,000-15,000 weddings a year. What it means for us is that at a minimum we earn about Rs 6.25 billion (250 x 2,500 x 10,000). This is of course a conservative number and doesn’t include decor costs, which is something that tends to go up more than the food,” explained Salman Ashraf, CEO Hanif Rajpoot.

From the customer’s point of view a typical upper-middle class Islamabadi family pays Rs 1-1.5 million for a two day event. Then there are other costs as well, such as decor, accommodation, dress, photographers. The food costs usually amount to just 20% of the entire budget.

“In a Rs 10 million wedding, 6 million will go just into decor, 3 million into food and 1 million into miscellaneous things. The ratio remains almost the same as the millions multiply in the budget,” explained Ubaid ur Rahman, Head of Operations at Hanif Rajpoot.

Profit also reached out to a Kara-

chi-based wedding planner who wishes to stay anonymous. During a conversation with her, she said that among the big industrialists’ families spending Rs 50-60 million is not out of the ordinary. At such an event, the per head cost is easily Rs 5000. The menu includes all sorts of dishes from seafood to BBQ to Italian to continental items. The decor cost is charged separately, which can go up to about Rs 8 million per event depending on what the client wants. The decor is set differently for each event, for example, for Mehndi or Sangeet functions the decor is custom designed and so additional costs add up. Similarly, an average wedding of this scale has three major events at least with these costs, and other smaller events for which charges differ.

The big shot weddings

Happiness also means different things for different families. It would seem that the family’s occupation defines the kind of wedding they would prefer. In Islamabad, flashy weddings are not a norm. It seems that the ‘rich elite’ is mainly the educated, bureaucratic class who make calculated decisions while spending. “The biggest wedding in Islamabad is around Rs 10-20 million. These are mostly the weddings of top army families,” smirked Rahman.

It is not so for the business community. Those are an entirely different ball game. The wedding market in Islamabad is very different from other cities. The most expensive wedding in Islamabad would cost Rs 20 million at maximum, but for those belonging to business families, mostly in Lahore, Karachi and even Sialkot and Gujranwala, spending Rs 50-60 million on a wedding is not uncommon.

“You know what the Lahore culture is?” pointed out Ashraf who also has expertise in catering big weddings in other cities. “There are at least a 100 families in Lahore who are competing against each other. It’s common practice that a family reaches out to the caterer and asks the amount a certain business family

spent on its wedding. We tell them that they spent Rs 50 million, they quote us 10 million higher and ask us to arrange a better wedding.”

Conversely, the trend of hosting smaller weddings is rapidly increasing. Gone are the days when a wedding function would have about a 1000 guests where most of the guests are meeting the couple for the first and last time. “We wanted a destination wedding for my sister-in-law mainly because we wanted to get out of Karachi and invite only those people who could make it. This would give us an easy bail out for keeping an intimate function with just close friends and family,” said Laiba Khan, whose in-laws run a successful leather tannery business within and outside of Pakistan. She said that the family had booked Kempinski resort in Turkey for December 2021 for the wedding. They had made a down payment estimating around Rs 2 million, but eventually had to change plans as the omicron virus spread and having a wedding party became a major health risk. “We were not getting a refund for the payment so the close family just went to the resort and had a mini family vacation,” she continued.

However the wedding did take place, just a lot more expensive than originally planned. The family decided to have the wedding in London in the summer of 2022. Khan’s in-laws paid 1000 pounds per night per apartment in central London. “We had to pay huge costs for accommodation which became a lot more than the estimate of the destination wedding in Turkey. But we had no other choice since everything was so last minute,” mentioned Khan. Later, during the conversation Khan mentioned that her family business hit major lows during covid lockdown and then also due to inflation but the wedding was still celebrated lavishly because the bride was the last sibling in the family and it was a special event for everyone.

Although it seems like money is being thrown blindly at lavish weddings, a lot of calculations go behind each detail. In a conversation with Areej Ammar, who got married in the summer of 2022, it was learned that weddings

us to arrange a better wedding

are a big opportunity for the country’s top artists who are invited to perform. Ammar’s inlaws managed the Sangeet function and looked for top entertainers in the industry to perform. “We were trying to cut costs, that’s why we called Ali Zafar who only charged somewhere around Rs 4-5 million. Our other options were Rahat Fateh Ali Khan and Atif Aslam but they were asking for approximately Rs 17 million for the same duration. I was not too big on spending so I agreed to Ali Zafar even though I’m not proud of it,” she added.

While listing the costs of Ammar’s wedding, Profit learned that her in-laws spent Rs 20 million for her jewellery alone. Ammar, who herself belongs to a more middle-class family, said that she did not want an extravagant wedding so the functions from her parents’ side were small and held at home.

On the other hand, the two events held by her in-laws amounted to Rs 7.5 million. She was hesitant about the detailed costs of her wedding. Upon asking about the dress, she mentioned that since she knew the designer personally she got a discount and got two bridal dresses made within just a month. The designer, her best friend joked, is one of the best female bridal designers in the country. On her best friend’s insistence to open up, Ammar did point out that the costs were vaguely around Rs 1 million for each dress. Ammar wasn’t the happiest with a huge wedding. She mentioned that although it was huge according to her standards, for her in-laws, who own a textile and cosmetics industry, the spending was conservative. “My husband’s chacha said that I was a good child as I did not have any expenses,” she said.

Did the inflation have any impact?

Agood way to measure any industry is to see its performance in times of severe economic crisis. Pakistan currently faces a double digit inflation, owing to rupee depreciation and global energy crisis. Inflation is essentially the rise in prices of various things over a set period of time. In August, Pakistan faced a historical 27% inflation, the highest since the 1970s.

Just like any other business, wedding planners are also struggling with rising costs. “The food costs have skyrocketed. For example, just a year ago a 1600 litre cooking oil tin used to cost Rs 2700 but the same tin costs Rs 9700 now. So our costs have increased three times but per head prices have not increased in the same way. Before inflation, per head price was around Rs 1000-1500 and now it’s Rs 2500. What we have noticed is that families are cutting down their guest lists but do not want to compromise on food. So we are the ones who have to let go of economies of scale

We were trying to cut costs, that’s why we called Ali Zafar who only charged somewhere around Rs 4-5 million. Our other options were Rahat Fateh Ali Khan and Atif Aslam but they charged around Rs 17 million for the same duration. I was not too big on spending so I agreed for Ali Zafar even though I’m not proud of it

and cater to a lesser number of guests with the same items,” said Rahman, while explaining the impact on Islamabad’s wedding market.

A lot of families are trying to save up on the costs where they can. For example, a lot of families have stopped the order of beverages for guests and sort that at home on their own. “Aunties usually try to cut costs as much as they can. They serve guests at home with drinks to avoid the per-drink cost at the venue,” said Halima Ahmed, Head of Decor at Hanif Rajpoot.

Where wedding planners are struggling, clients are pushing their budgets also. The same event at a marquee costs almost double now, mentioned Khurram. “If I have the same level of festivities for my wedding function (planned in October 2023) as I had in my nikkah, the estimated costs are about Rs 5 million, almost double,” she said. Due to rising costs her family has decided to not go as overboard as they did in nikkah and stay ‘within limits’ she said. Khurram’s family is willing to cut down on the wedding guests and decor, but food and jewellery is something the parents are not willing to compromise on, and will pay no matter what the cost.

Similarly, there are costs which even the big industrialists’ family are hesitant to pay. Khan mentioned that the family tried to cut down costs wherever they could. Her sister-inlaw, the bride, found her desired wedding dress in Dubai for $10,000-12,000, which was out of the budget. That’s why she decided to fly to Canada and get the same dress made for $5000.

The average client is clearly hacking down costs, but so are many businesses, it would seem. Take the bridal couture industry for example. In a conversation with the members of staff of LAAM, an online one-stop shop for Pakistan’s designer brands, Profit learned that the bridal couture business boomed during COVID lockdown as people had all the time to scroll through the internet and create their perfect wedding dress online. This popularity is cashing today in times of economic crisis. “Many big designers such as Mohsin Naveed Ranjha and Hussain Rehar have

launched low-budget collections for wedding dresses. Previously, they used to have premium collections only,” said a staff member.

The multiplier effect

While big-budget weddings become something like a performance for many families, they are also fertile soil for various businesses to sow their money trees. For example, in a recent piece on wedding photography, Profit learned that even the new ones in the field with little experience and a DSLR camera make at least Rs 20,000 per event. The higher costs can go up to Rs 250,000 a day. Because photography is one of the main elements of modern day weddings, most photographers end up making hefty amounts, similar to those earned by people working full time in the corporate sector.

But it’s not just about the lucrative service sector, but also about the low-income daily earner. From the mochi who makes khussa to the kareegar who makes embroidered pieces, from the farmer who grows flowers to the technician who manages the light, the wedding provides a source of income for many. The multiplier effect of the business was most evident in 2020, when there was a ban on weddings for the most part of the year. “The industry leaders arranged protests against government policies in the three big cities,” said Ashraf, “what we were shocked to see was the low-income daily wage workers joining us, such as the khussay-wala and gotay-wala. Their income had been impacted also.”

So if you’re looking for a clever business scheme to survive in Pakistan, think weddings! And if you’re an artist who is looking to turn their fate around, think weddings again! Despite economic hardships, bigger weddings are still happening. Now it’s not just about money, but how tastefully you can display your money. As they say, money can’t buy you class: and weddings are a perfect time to show that you have both. n

(Some names have been changed to maintain anonymity of the sources)

Areej Ammar, a bride who got married in the summer of 2022

ConunDARum:

Pakistan gives into China’s demand

ith Pakistan desperate to make up for gaps in its external financing, the government has made a key move to signal where it expects the help to come from. A meeting of the Economic Coordination Committee (ECC) of the cabinet last week greenlit establishing a revolving fund account for independent power producers (IPPs) operating under the umbrella of the China-Pakistan Economic Corridor (CPEC).

The timing is notable. Finance Minister Ishaq Dar had claimed that by early December the position of reserves would be stronger, that would be progress on the 9th IMF review, and that there would be a better macroeconomic environment. Most of this is still up in the air, and reserves continue to remain at a dangerously low level.

The revolving fund marks a key concession from Pakistan which Beijing has been demanding ever since the first signing the original CPEC agreement eight years ago. China had pressed for such a mechanism as the circular debt issue plaguing IPPs in Pakistan had resulted in over $1 billion being stuck in arrears for Chinese companies.

A prime reason for the delay had been because Pakistan finds itself in an International Monetary Fund (IMF) programme. The largest shareholder at the fund – the United States –has already expressed concerns about preferential treatment to Chinese companies on various forums.

WHowever, good relations with China prove to be imperative as Pakistan’s external account problems continue to persist. As part of the ECC’s move, the title of the account has been changed from the Pakistan Energy Revolving Fund to Pakistan Energy Revolving Account.

The interbank rate has stabilised as outflow controls, such as LC restrictions, have worked and demand has dampened. The demand in the open market is up, based on a quick profit making in the exchange market and is amplified by savers dollarizing their savings and people rushing to currency exchanges for foreign currency as travel has picked up.

Tahir Abbas, Head of Research at Arif Habib Limited, thinks Pakistan setting up a revolving fund for CPEC IPPs will help: “It will reduce the quantum of circular debt, which is actually what the IMF wants to do. This step will mean timely payments for CPEC power projects and its lenders, the Chinese.”

“To some extent, Pakistan can expect some form of inflows from China as this was one of the conditions the government finalised before the Prime Minister visited China.”

“This has been a hurdle in the approval of new investments from China, and will certainly help in improving flows from the friendly country,” says Fahad Rauf, Head of Research at Ismail Iqbal Securities. “This is part of a sovereign agreement, and Chinese IPPs are well within their rights to enforce this,” he adds.

Rauf adds the IMF will not have a problem with this as long as the fiscal targets are met and circular debt is managed. Dar had said back in November that most of Pakistan’s

external financing needs have been secured. Things were supposed to be normalising in early December on the back of inflows. Last week, during an interview on Geo News, Dar dropped the news that Pakistan would receive $3 billion from a “friendly country”. The finance czar, however, did not name the country.

Earlier in November, Dar said Pakistan had to pay back $22 billion to meet multilateral and commercial liabilities over the next 12 months, and the current account deficit is projected to be around $10 billion-12 billion.

He added, “We have covered half the mileage… Pakistan has secured financial commitments of around $13 billion to $14 billion, which includes commitments from China and Saudi Arabia,” he added. Pakistan’s FOREX reserves clocked in at $6.7 billion as of December 2 following a $1 billion payment against maturing Pakistan International Sukuk and other external debt repayments. Pakistan has recently received $500 million from the Asian Infrastructure Investment Bank (AIIB).

The Saudi Development Fund also rolled over a $3 billion deposit that was to mature and be paid back this month. A rollover, however in this case means the funds will stay with Pakistan and does not mean a bump up in reserves.

In a podcast hosted by the SBP, the central bank’s governor Jameel Babar stated that Pakistan expects another $8.3 billion rollover for maturing obligations as discussions are underway.

The governor stated that the Government is also in talks with a friendly country for the disbursement of a $3 billion loan and negotiations with multilateral agencies are progress-

“So far Pakistan has received another $4 billion rollover from China earlier this year. It is important to note that $30 billion alone of Pakistan’s external debt is owed to China”

Shahbaz Ashraf, Chief Investment Officer at FRIM Ventures

With IMF review delayed,

With no word on fresh in-flows, and rollovers in sight, where do Dar’s promises stand?

ing, for further financial support. He did not mention the name of the country.

The Central Banker added that the SBP repaid two commercial loans totaling $1.2 billion. “These banks are expected to refinance the same amount, in coming days, helping to raise the country’s foreign exchange reserves,” he adds.

He added that Pakistan is having trouble raising funds from international financial markets due to the war in Ukraine, international commodity prices, and monetary tightening by central banks.

“So far Pakistan has received another $4 billion rollover from China earlier this year. It is important to note that $30 billion alone of Pakistan’s external debt is owed to China,” says Shahbaz Ashraf, Chief Investment Officer at FRIM Ventures, an investment company.

Ashraf thinks the decision by the ECC to set up the fund will help bring inflows from China.

“While Saudi Arabia has announced an extension of its deposit, inflows may come in once Muhammad bin Salman visits Pakistan. KSA just announced $5 billion of safe deposits for Turkey, if they want they can extend the same to us too. If we do not get external debt, the situation will get dire. The currency will slip”, he adds.

Dar had also gone on record claiming the rupee is undervalued and one dollar should be worth Rs 190. It stands well beyond Rs 220 – and that’s in the interbank. “The REER has reached 100 from 91. This implies the currency is fairly valued, if not overvalued. There are greater chances for the PKR to depreciate considering how Pakistan needs more debt to pay debt, remittances can further slow down, exports will slow down too, and inflation inch-

ing higher”, Ashraf says.

While the rupee is no longer depreciating significantly against the dollar, the widening gap between the open market and the interbank remains a concern. There is usually a differential or spread between the two rates, primarily because exchange companies have margins so that they make money. In normal circumstances, the difference between the two rates is small. The difference between the two has grown, however, exacerbating the current currency situation.

Due to the current controls on outflows from the country, the rupee has withstanded significant depreciation. However, the controls on imports are to be undone in the near future. Babar during the podcast added that the SBP placed restrictions on imports mentioned in chapters 84, 85, and certain items of 87. He said these restrictions covered about 15 percent of Pakistan’s total imports whereas no restrictions have been placed on 85 percent of imports. Babar also claims that less than 10% of the country’s imports are currently subject to administrative controls.

Managing the rupee and reserves artificially through these restrictions will hinder talks with the IMF and therefore it is likely that the SBP will begin acting on it. Babar said all such restrictions are temporary and will be reversed.

Meanwhile, the ninth review of the IMF programme, which is to release $1.2 billion, is facing significant delays. As per television reports on Express News, the last meeting between Pakistan and IMF officials was not very fruitful due to the latter’s call to comply with actions that were not due during the ninth review period.

According to a report by Shahbaz Rana,

the IMF was unsatisfied with the revenue and spending plans shared by Pakistan and sought additional information. In the meanwhile, Dar went live on Shahzeb Khanzada’s show on Geo to state the IMF is behaving “abnormally” and that he “won’t take dictation” from the IMF. He also said he “didn’t care” if the IMF delegation was not visiting as per schedule.

The first working day after Dar’s interview, the stock market closed in the red as investors booked profit. The bourse bled 537 points, down 1.27% in a day, closing at 41,612.67 points after posting an intraday low of 41,514.81 points.

“The review needs to go well. However, before that measures such as a mini-budget, some revenue measures such as gas tariff hikes, and sales tax imposition on petroleum products need to happen.

Ashraf however points out that while everyone is talking and focusing on the Current Account Deficit (CAD), a prime concern should be the financial account. “The CAD is being managed. Out of the total funding gap, around 70% alone is debt obligation; while the CAD is just $10 billion this year. If the CAD is lower or further managed economic growth will suffer; while external debt will haunt all governments to come in the future.”

Ashraf adds, “Currency can only stabilise if we reschedule our foreign debt or political stability prevails. Our total foreign debt is around $100 billion billion and the payment required in the next three years is around $65 billion. By the looks of it, Pakistan needs $15 to $20 billion debt from the IMF. However, it is unlikely for any political party to opt for such a massive IMF programme due to political ramifications.”

n

“It will reduce the quantum of circular debt, which is actually what the IMF wants to do. This step will mean timely payments for CPEC power projects and its lenders, the Chinese”

Tahir Abbas, head of research at Arif Habib

“This has been a hurdle in the approval of new investments from China, and will certainly help in improving flows from the friendly country”. This is part of a sovereign agreement, and Chinese IPPs are well within their rights to enforce this”

Fahad Rauf, head of research at Ismail Iqbal Securities

How does Pakistan’s auto industry contribute to

balance of payment crisis?

By Daniyal Ahmad

The first four months of the current fiscal year have seen a cumulative automotive demand of 59,402 cars sold. This is 46% lower than the 109,238 units sold over the same period in the previous year based on the data provided by the Pakistan Automotive Manufacturers Association.

So what happened? Very briefly put, the dip in demand for cars has been very deliberately managed by the government. And there has only been one agenda behind managing this demand: Pakistan’s dwindling foreign exchange reserves.

What do cars have to do with Forex reserves, and how has the government managed to curtail the number of new cars in the market? The matter goes deep to the root of how Pakistan’s automobile industry is set up. Entirely based on imports, the prices of and demand for cars in the country are directly linked to the rupee-dollar parity. And in the latest crisis, the handiest tool at the disposal of the country’s finance czars has been the State Bank of Pakistan (SBP).

What happened this year?

In May this year, the central bank issued a circular stating that it now possessed administrative oversight over the import of completely-knocked down (CKD) units of cars being imported into the country.

In Pakistan, no cars are locally manufactured. So where do all the cars come from? They are either imported in completely assembled form — what are known as ‘Completely Built Units (CBUs)’, or as ‘Completely Knocked Down (CKDs)’. Most cars that get imported are CKDs which are then assembled at local factories and sent out to the market.

This is where the SBP comes in. The SBP’s announcement regarding CKD imports came only a day after the government imposed an import ban on luxury items in an attempt to stem foreign exchange outflows. While cars were not a part of the ‘luxury’ items banned by the government, they did come under scrutiny from the SBP in a much subtler manner.

Essentially, the central bank told car companies in Pakistan that they needed to seek permission before performing transactions in dollars for the import of CKD (completely-knocked-down) units of cars. This meant that auto assemblers in the country will now need express permission from the SBP to assemble them in the country.

Through this permission, the SBP was now able to control how many cars were being imported and how many dollars were outflowing. This became the cudgel that the State Bank now uses against the automotive industry in an attempt to provide life support to Pakistan’s dwindling current account position.

And while this was still not part of the import ban, a sector that constituted about 15% of Pakistan’s large-scale manufacturing, according to the Pakistan Economic Survey 2021-21, was thrown into the same conversation as imported luxury goods.

The Government rescinded the ban in August, and opted instead to utilise other measures to curb imports. Imported automobiles in particular saw a blanket increase in duties as a means to deter their consumption. However, there was no conversation about the curbs on CKD kits at all.

If silence is golden then any onlooker could surmise that the domestic automotive sector had been deemed a far bigger prob-

“Localisation has not been a successful policy given that the main part, the engine, is still imported”

Dr. Aadil Nakhoda, assistant professor at IBA

its

Policy makers did not hesitate to place the sector under the guillotine when foreign exchange reserves dwindled, and they will not hesitate again if the sector does not reform its ways

lem child in terms of Pakistan’s balance of payment crisis. Profit seeks to explain why one of Pakistan’s largest industrial sectors has such a toxic relationship with our balance of payments.

Problematic

beginnings “O

ne of the very first textbooks I ever read said the following, there are two ways to produce cars.” Dr Ali Hasanain, Associate Professor at LUMS, told Profit. “One way is to set up an engine plant, a body shop, manufacture tyres, and put it all together in your country. The other is to grow rice and wheat, send them to Japan in ships, and those ships will magically convert those into automobiles.” Hasanain continued.

Pakistan chose the former of the two options, and the reason for that boils down to the belief in import substitution as a means to conserve Pakistan’s foreign exchange reserves. How does this work?

“With CKDs you can preserve foreign

exchange to the extent that you are adding value between a CKD, and a completely builtup (CBU) unit.” Dr Ishrat Hussain, former Governor State Bank of Pakistan, told Profit. “CKDs also have the tendency to enable import substitution as imports start to disappear and are replaced by local counterparts.” Hussain continued.

So how did the automotive sector, created to conserve foreign exchange, end up bleeding Pakistan’s precious foreign exchange?

Tryst with deletion standards “P

roducing automobiles in Pakistan is inefficient is because we don’t have that industrial capacity or selahiyat to produce these things more efficiently than developed countries which have a more mature industrial base than us.” Hasanain told Profit.

However, the Government of Pakistan persisted and supported the sector by nurturing it in a protectionist environment. The Auto Industry Development and Export Policy (AIDEP 2021-26) reveals that Hasanain is wrong in his assessment as the Big 3 of Suzuki, Toyota, and Honda have achieved upwards of 50% in terms of deletion across the lionshare of their portfolio.

But if localisation levels are this high, then is the Government of Pakistan an idiot for doing what it has done? The devil is in the details, and the fault in Pakistan’s deletion standards lies in their construction. Pakistan’s deletion standards account for the number of parts that have been localised and not the value of the vehicle that has been localised. Automotive companies are cognisant of this loophole and exploited to its maximum potential.

“Localisation has not been a successful policy given that the main part, the engine, is still imported.” Dr. Aadil Nakhoda. Assistant Professor at IBA, tells Profit.

“What happened was, because we lacked the capability to build cars in Pakistan, we made the floor mats and other minor accessories here, but we ended up importing the major inputs.” Hasanain told Profit.

This situation gives rise to the more expensive parts of domestic cars still being imported. Realistically deletion levels are

far lower than the ones advertised as part of AIDEP.

Furthermore, “CKDs are dependent upon imported parts and accessories.” Nakhoda tells Profit. Pakistan’s deletion methodology does not account for the imported inputs being used in domestic inputs. If accounted for, net deletion levels would probably plummet even lower.

Wrapping up

“L

et’s assume we could buy a CBU for $10,000. So the parts for equivalent CKD may be let’s say for $9,000. The CKD has saved $1,000 in terms of a foreign exchange, but this saving comes at an efficiency cost.” Hasanain told Profit.

What is the efficiency cost? The efficiency cost Hasanain tells Profit is firstly the likely higher overall cost (exceeding $10,000) the domestic customer would have to pay to obtain the vehicle. However, more importantly, it is the opportunity cost that Pakistan could have done with that $9,000 instead of importing a CKD kit.

“Now suppose we said, let’s kill the Auto industry and make whatever we could produce more efficiently more, e.g. toy manufacturing. By throwing more resources into whatever we are good at doing, we generate more dollars to buy CBUs with, and have money left over to play with, on both our foreign accounts and overall growth.” Hasanain tells Profit.

This opportunity cost is important because Pakistan has to obtain foreign currency from some source in order to import these kits to begin with. In the absence of net localisation levels, it is likely that, complemented with the fuel cost of actually running all these cars, that in net terms the domestic automotive industry is in reality a drain on our foreign exchange reserves.

Even if the Government and the Engineering Development Board disagree with such an assessment, the State Bank likely agrees with it. Why else would it restrict the activities of one particular sector in the economy if that sector was actually a valuable vehicle (no pun intended) for obtaining foreign exchange reserves at such a crucial junction (no pun intended again)? n

“One way is to set up an engine plant, a body shop, manufacture tyres, and put it all together in your country. The other is to grow rice and wheat, send them to Japan in ships, and those ships will magically convert those into automobiles”

Dr Ali Hasnain, associate professor at LUMS

With the price cap, how will we get oil from Russia to Pakistan ?

The west has imposed new sanctions on Russia by capping the price of seaborne oil at $60 per barrel. Russia has rejected this, and has said it will not deal with any country that complies with these sanctions.

By Asad Ullah Kamran

In an effort to limit the Kremlin’s capacity to continue funding the conflict in Ukraine, the Group of Seven (G7) price ceiling and the European Union’s complete ban on Russian seaborne oil went into effect on Monday.

The G7, EU, and Australia decided to establish a cap on the price of Russian oil at $60 per barrel on December 2. The EU announced a restriction on Russian crude oil transported by sea back in May. The 27-member group also announced that beginning on February 5, a prohibition on the imports of refined petroleum products will be in effect.

In tweets on social media on Saturday, Mikhail Ulyanov, Moscow’s envoy to international organisations in Vienna, reiterated Russia’s position that it will not supply oil to nations who adopt the cap.

Separate from this flurry of activity, Pakistan has been in talks with the Russian Federation to procure cheap oil from them. But as the details of the conversations between Pakistan and Russia have come to the fore, it has become increasingly clear that the hurdles in the way of Russian oil becoming a reality are far larger than any possible benefit from it. But with the federal government still using it as a political talking point, is there any possibility of Pakistan pulling it off despite the sanctions?

As Pakistan made its announcement of having productive discussions with Russia on importing oil and collaborating on energy infrastructure projects, this price cap has the potential to shatter all of these plans.

The G7 price cap will not prevent non-EU nations like Pakistan from continuing to buy Russian crude oil by ship, but it will prevent shipping, insurance, and re-insurance firms from transporting cargoes of Russian crude around the world unless it is sold for less than $60.

This might make it more difficult to transfer Russian oil priced above the cap, even to nations that are not signatories to the deal.

The effect of the price cap

The Wall Street Journal reports that numbers from two data suppliers on Russian crude both show a large reduction in exports since fresh sanc-

tions and a price ceiling went into effect earlier in the week.

Russia’s seaborne exports decreased by about 500,000 barrels per day (bpd) on Tuesday, a 16% decrease from the 3.08 million bpd average for November, according to the commodity-analytics company, Kpler.

Russia’s crude shipments decreased by about 50%, according to TankerTrackers.com, a website that watches marine vessels using signals and satellite photos. With the majority of the decline in shipments coming from Baltic and Black Sea ports.

The US Treasury stated in a fact sheet that “the price cap’s operation depends on a vital element of the global oil trade: the maritime services industry, which includes insurance, trade finance and other key services that support the complex transport of oil around the globe.”

Who owns oil tankers ?

Aship constructed specifically for the bulk transportation of oil or its byproducts is an oil tanker, often referred to as a petroleum tanker. Crude tankers and product tankers are the two main categories of oil tankers.

Crude tankers transport massive amounts of crude oil from its extraction location to refineries. Product tankers, which are often much smaller, are made to transport refined products from refineries to locations close to markets for consumer goods.

Oil tankers are broadly categorised according to their carrying capacity in deadweight tonnes (DWT), which is the sum of the ship’s weight including its crew, supplies, cargo, and other weights less the weight it would have if it were empty.

The 1960s saw the development of very large crude carriers (VLCC), which can transport two million barrels of oil and have a capacity of over 200,000 DWT. The capacity of ultra large crude carriers (ULCC) is greater than 320,000 DWT, or almost three million barrels of oil. Medium Range (MR), Panamax (the largest tankers that can fit through the Panama Canal), Aframax, and Suezmax (the largest tankers that can fit through the Suez Canal) are additional classifications of tankers .Companies in Europe and the UK insure a large number of ships coming from China, India, and other

nations. The EU, G7, and Australian price cap on Russian seaborne crude oil now apply to these ships.

About 90% of the market is controlled by businesses based in the G7, making it susceptible to the cap, according to the US Treasury, adding that “almost all ports and major canals require ships to carry protection and indemnity insurance.”

This essentially means that to procure oil from Russia has been made significantly more cumbersome especially with the fact that Pakistan has a fledgling economy. The issue now arises that even if we’re able to strike a deal with Russia how would it be transferred thousands of miles as oil tankers would be less likely to ship Russian oil that is being sold above the imposed price cap.

What are the alternatives?

Since the sanctions do not prevent the purchase of Russian oil, Pakistan still has the potential to import it. However procuring a tanker to transfer the oil from a Russian port to Karachi would be an issue that needs to be addressed.

However, according to some media reports, since its invasion of Ukraine, Russia has amassed a sizable “shadow” tanker fleet that it can utilise to transport the majority of the displaced volumes; nevertheless, some analysts point out that the insurance component is likely to provide serious problems.

Over 100 oil tankers have been gathered into a “shadow fleet” in an effort to evade Western sanctions put in place after Vladimir Putin’s invasion of Ukraine. According to shipping brokers and observers, Moscow has secretly accumulated additional tankers this year.

This clandestine fleet of oil tankers might be the only way Pakistan can oil from Russian port to Pakistani port, as far as insurance, financial and legal requirements are concerned it is still a question mark.

Profit reached out to Pakistan National Shipping Corporation the national shipping carrier for comment, however they did not wish to comment at this moment. Even though a deal with Russia seems like a much needed break for the country, it might just be another hollow promise. n

By Asad Ullah Kamran

According to data published by the International Trade Center, in 2021 Pakistan was able to export $3.8 million worth of military equipment and the country imported $30.1 million. As industries go, this is one where there is some potential for exports by Pakistan’s own standards.

And while the industry is robust relatively, there is much to be desired. For starters, Pakistan isn’t even a blip on the map of the global defence market. The overall market size according to the “Defence Global Market Report 2022” is $ 513.7 billion. With a compound annual growth rate (CAGR) of 8.2%, the global defence industry increased from $474.69 billion the previous year. Pakistan’s portion in this is unmentionable. So what can be done?

Pakistan’s defence industry

It starts with a delightful little moment in time where military history and the etymology of the English language meet paths. In the 16th century, the military shorthand for a written command given by a senior officer was referred to as an ‘ordinance’. Of course, the word ordinance itself has a religious root, with ‘ordinances’ being Christian rituals that need to be followed rather strictly.

And while that is where the military got its usage of the word ordinance from, at some point there was a slight change. A lot of the ordinances that were issued by commanding officers, particularly in writing, had to do with the issuance of arms and ammunition. Very quickly, the word ordinance became synonymous with weaponry. At some point the ‘i’ dropped out of the word and ‘ordnance’ became shorthand for all kinds of arms and ammunition.

That is why in Pakistan and in India, arms manufacturing plants are called ‘ordnance factories’. A relic of colonialism, the East India Company realised very quickly that to increase their political hold they considered military hardware as a vital element. During 1775 British authorities accepted the establishment of the Board of Ordnance in Fort William, Kolkata. This marks the official beginning of the Army Ordnance in India.

The growth of the Ordnance Factories was continuous but in spurts. There were 18 ordnance factories at the time of partition in 1947, and all of them were on the Indian side of the border. Since none of the sixteen ordnance factories on the subcontinent were located inside the new Pakistan’s limits, they all came under Indian control after the partition. This has significantly infringed the

Pakistan’s defence export potential

country’s ability to expand its share in the global market for defence.

The founding of Pakistan Ordnance Factories (POF) in 1951 to produce the necessary ammunition for the Defense Forces and Law Enforcement Agencies marked the beginning of indigenous weapon development.

From then on Pakistan has been able to make significant strides in domestic production to meet the military’s defence requirements. Multiple production facilities have been established throughout Pakistan that are able to meet some of the requirements of the military.

As of today Pakistan develops a range of systems both in the public and private domains. The bulk of defence production is done through state owned entities such as Heavy

Industries Taxila (HIT), Global Industrial Defence Solutions (GIDS) or Pakistan Ordinance Factory (POF).

To simplify the overall structure, all of the defence industries fall under the jurisdiction of the Ministry of Defence Production. Under this ministry there are several state run entities for the most part being run by serving or retired military officers.

Defence is the new priority

The last two decades have seen significant developments in the domain of defence production. This in particular can be attributed to the global war on terror, this spurred investment and

The Russia-Ukraine war has resulted in increasing demand for defence products around the globe. Can Pakistan establish a foothold in the market?

capital towards developing and producing new and modern weapon systems.

If you were to consider more recent developments, governments and military analysts around the world have realised that conventional warfighting capabilities cannot be undermined in light of the Russia-Ukraine war and the Nagorno Karabakh conflict between Azerbaijan and Armenia.

The role of heavy equipment — such as tanks, artillery and warplanes— in a conventional war was being debated all over the world, whether or not the cost of upgrading and maintaining this equipment was worth it.

The recent conflicts have shown how critical heavy equipment in combination with infantry is critical to achieving battlefield suc-

The modern battlefield

The war in Ukraine and the Nagorno Karabakh war has completely transformed how wars are being fought.

Excessive use of smart weapons and artificial intelligence has made wars way more violent than they used to be.

Drones are dictating how wars are fought at the moment as armies want to minimise the risk to their combatants. Furthermore drones provide a very clear and real time picture of the battlefield assisting commanders in making decisions on a macro as well as micro level.

To give you an example as the war wages on in Ukraine, social media and information technology has allowed armies to strike terror into the hearts of their enemies. Each day new footage emerges from the battlefield showing how modern weapon systems work.

The most obvious example portraying this is how the Azerbaijani military released hours of drone footage showing strikes on the Armenian military during the Nagorno Karabakh conflict. Without a doubt drones and loitering munitions originating from Turkey and Israel made the difference and it was recognised by Azerbaijan. At victory parades in Baku, flags of both the countries were carried next to the Azerbaijani flag.

The footage served as an amazing propaganda tool for Azerbaijan, not only did it motivate their own military but also damaged the morale of the opposing side. Similarly in Ukraine footage emerging from drones shows how the war is being fought from both sides.

What can Pakistan do in the defence industry ?

cess. However it must be noted that how these weapon systems are applied in the battlefield make the difference.

The war in Ukraine is drawing in weapons from all over the world right now and the difference in performance of Soviet origin equipment against its western counterparts is being revealed. The difference in quality of the equipment was also glaringly obvious during Operation Swift Retort in 2019 by the Pakistan Air Force.

Pakistan is not behind the curve either as the country has the capacity to manufacture its own weapon systems ranging from fighter jets to small arms, however the quality, integration and manufacturing ability require attention.

To understand how defence export deals work, it must be first understood that it involves a lot of various factors ranging from diplomatic ties to trade ties. Furthermore what equipment is being exported or bought also matters, for instance the Pakistan Air Force operates a fleet of F-16 fighter jets which require a constant supply of spare parts and other necessary equipment to keep the jets flying.

Consider the fact that since Russia invaded Ukraine, India has been struggling with arranging spare parts for various Russian origin equipment. Furthermore delays are expected in delivery of Russian origin tanks that India had purchased, since Russia is prioritising its own military requirements over exports.

This has also been proven by pictures which show the export version of the Russian main battle tank T-90 being used by its army on the frontline. This clearly shows how the

operational effectiveness of Indian equipment is being compromised as spare parts and equipment are being diverted to the frontlines in Ukraine rather than being exported.

Therefore any defence deal involving heavy equipment such as tanks or fighter jets requires a very long term approach. And the final decision of the importing country is prone to external pressures. For instance India has blocked several potential deals that Pakistan would have signed with the French government, due to the fact that India is a huge customer for French products especially in the defence sector.

The most obvious advantage that we have over other countries is the lower costs for equipment that is just as good as it western counterparts to fulfil the requirements of countries that do not have a huge defence budget at their disposal.

Furthermore, given the recent conflict in Ukraine, it has become a test bed for new equipment. Pakistan too can get in on the action by exporting critical equipment like anti-tank guided missiles which are in huge demand by the Ukrainian military, it would not only boost sales but also serve to complement the relationship we have with Ukraine.

Other high end equipment such as drones and surveillance equipment can also be offered which would also serve as an excellent marketing tool for Pakistan origin equipment. As the situation stands, news outlets have already reported how Pakistan has supplied artillery shells to Ukraine which were airlifted by British cargo planes from Pakistan.

Pakistan has the capacity

Pakistan has the ability to develop and employ modern weapon systems, and given the current global outlook there is a gap in the market specifically in developing countries. The US and European defence exporters are prioritising Ukraine at the moment leaving other players to market and sell products that are in short supply like armoured vehicles, small arms, ammunition etc.

Israel is a model example of focusing on defence exports that has the potential to transform an entire economy. Outside of the US, Israel is one of the biggest innovative giants in the market and is a huge player in the global defence market.

Although it might not be ideal to compare Pakistan to Israel, there are commonalities in circumstances between the two countries. Public private collaboration and opening up the defence industry to the private sector can play a huge role in promoting the industry, as it stands the demand for our own military itself can serve as a lucrative opportunity for private players to enter the market. n

People like Sidra Humaid shouldn’t be allowed to cheat investors out of crores without at least a stock exchange license: Absa Komal

By The Dependent

Coming down harshly on the recent trend of informality across all fields, Dawn News anchor Absa Komal has said that people like Sidra Humaid – who has to pay investors’ Rs 420 million in a tripwiring of saving committees gone wrong – should not be allowed to do so without at least being registered on the Pakistan Stock Exchance (PSX.)

“First it was the pawwry girl, who got cast in ad campaigns and television serials, then it is the dil pukaaray aaja tiktokker, who seems set to get roles over students studying the theatrical arts in colleges, and now it is Sidra Humaid, who isn’t even registered on the stock exchange,” she said,

speaking at a literary festival.

“In fact, I have been told she hasn’t even ever been to II Chundrigar Road even once,” she said. “How do you think that affects the mental health of all those youngsters who are working at the brokerage firms and want to screw people out of their money fair and square?”

“Seriously, there is just no appreciation for talent and expertise in this country, and it is all just ditzy but well-packaged, meaningless fluff,” said the mouth on the pretty face.

The above piece is a work of satire and does not present itself as the truth.