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CONTENTS

09 Is Fauji Foods finally standing on its own two feet?

16 16 Why Cnergyico the conglomerate makes more sense than Cnergyico the oil company 23 Foreign Direct Investment – the Good, the Bad and the Ugly Naveen Ahmed

27 27 The GMO oilseed saga comes to a close

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29 Is petrochemical set to be Pakistan’s next industry to watch?

Publishing Editor: Babar Nizami - Joint Editor: Yousaf Nizami Senior Editor: Abdullah Niazi Executive Producer Video Content: Umar Aziz - Video Editors: Talha Farooqi I Fawad Shakeel Reporters: Taimoor Hassan l Shahab Omer l Ghulam Abbass l Ahmad Ahmadani Shehzad Paracha l Aziz Buneri | Daniyal Ahmad |Shahnawaz Ali l Noor Bakht l Nisma Riaz Regional Heads of Marketing: Mudassir Alam (Khi) | Sohail Abbas (Lhe) | Malik Israr (Isb) Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

Fauji Foods

finally standing on its own two feet?

After years of using the Fauji Foundation as a financial crutch, Fauji Foods reports consecutive profit growth for the first time By: Nisma Riaz

ot for the first time, the faujis were struggling. This time, it was to do with one struggling FMCG: Fauji Foods. The ‘bad egg’ of Fauji Foundation had been a perpetual drain on the conglomerate’s resources, bleeding losses and relying on subsidies and loans from its more lucrative ventures. What could possibly be the issue? One could assume that the dismal performance was due to a flawed governance, which placed the reins of an FMCG in the hands of bureaucrats and industrial engineers, bereft of the expertise to run a consumer centric business. In conversation with Profit, Fauji Foods’ chief executive officer Usman Zaheer Ahmad recognised this deficiency, stating that, “It’s a fiercely competitive business landscape, and we need a talent pool that can hold its own

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against industry giants like Nestle and Engro.” Given the company’s track record, however, such a feat seemed like a pipe dream. And yet, something remarkable has happened. In an unexpected turn of events this year, the company has finally turned a profit, and that too with a consecutive growth recorded in the last four quarters ending in June 2023. How did they get here? The promising turnaround strategy that enabled this transformation involves a revamped team of professionals, a focus on value-led growth, a strategic portfolio pivot and a sustainable model of operations.

The Fauji Foundation and its problem child

auji Foods operates under the Fauji Foundation, which is a conglomerate owned by the Pakistan Army, with divisions spanning over sectors that

include cement, fertilisers, and food. The history of Fauji Foundation dates back to its establishment in 1945 as a Post War Services Reconstruction Fund (PWSRF) for Indian War Veterans, who fought against the axis powers in World War II. After the fund’s division between India and Pakistan in 1947, the civilian administration managed it until 1953. Subsequently, in 1954, control was transferred to the army, leading to the formation of the Fauji Foundation that makes up the Fauji Group of Companies today. Instead of distributing the remaining balance of around Rs 18.2 million to beneficiaries, the army invested it in setting up a textile mill. This mill’s earnings were later used to establish the first 50-bed tuberculosis hospital in Rawalpindi. This marked the beginning of the Fauji Foundation’s core mission: engaging in business endeavours to generate profits for supporting Pakistan army

When we pivoted the portfolio, we automatically changed our set of competitors. And our competitors became Milkpak and Olpers, who are both value-oriented. Since these are our new competitors, we are at a parity price to them. We don’t sell cheaper and we can’t sell cheaper due to the value-oriented nature, and we’ve been able to pass on this inflation, especially in the last two years. So, shifting to a branded play has been a major part of this transformation Usman Zaheer Ahmad, CEO of Fauji Foods Ltd

veterans and charitable causes. Over the years, the conglomerate flourished and managed successful ventures, including ventures in the fertiliser and cement industries. However, the foundation had not been as successful in the food industry, with Fauji Foods being a financial drain for the conglomerate. The history of Fauji Foods dates back to 1966, way before the Fauji Foundation came into the picture. Formerly known as Noon Pakistan Limited, this legacy dairy company owned the Nurpur brand, which is a popular household name in Pakistan. Noon became Fauji Foods Limited in September 2015, when the Fauji Foundation acquired it. According to Usman Zaheer Ahmad, the chief executive officer (CEO) at Fauji Foods, “Noon was a very traditional company. Historically, in Central Punjab, it had a good footprint. It was never a big operation but it was a good local brand. The Fauji Foundation acquired it for Rs 639 million and it was a good buy if you wanted a foothold in the dairy sector. The most important asset in an acquisition is the brand and Nurpur was already a good heritage Pakistani brand. So, in that sense, if we look at it from the acquisition perspective, it was never too big but it was a good local business to acquire and build upon.” However, the new ownership was not able to flip the fate of its newly acquired dairy company, due to a myriad of legacy issues spanning over concerns relating to governance, financial decisions and strategy. Ahmad noted that the first thing one does after investing in a consumer business is to make a strong brand because growth and sustainability are directly linked to strong branding. Ahmad explained that, “The early volumetric growth at Fauji, either by design or by default, came through a commoditised segment called Dostea. And there is always

vulnerability where there is commoditization but no branding. This does not only result in low margins but also greater volatility. So, in the absence of a good brand equity, the margins and volumes both were constantly fluctuating.” Instead of focusing on building the brand and securing the consumers’ loyalty, they decided to throw money at the problem. According to the company’s financials, a whopping Rs 7,260 million between 2015 and 2018 were spent on a large-scale modernisation of factory assets and infrastructure. All in debt. Ahmad highlighted that the interest rates in Pakistan have always been quite high and such a large debt was the last thing Fauji Foods needed. “So, on the one hand Fauji Foods had a huge legacy debt and on the other hand, the commoditization also meant extremely low margins,” Ahmad explained. And that is how Fauji Foods was set on an ill-fated course of consistent losses for years to come. The company made a loss every single year from 2015 up until 2022. It reported an astonishing loss of Rs 2,849 million in 2018, and yet another shocking loss of Rs 5,789 million in 2019. According to its annual report of 2019, Fauji’s current liabilities exceeded its current assets by Rs 8,789 million, while its total debt amounted to Rs 13,638 million. In 2020, revenue stood at Rs 7,373 million, which was an improvement from 2019’s Rs 5,745 million, and comparable to 2017 and 2018 revenue levels of around the Rs 7,000 million mark. Even though the company managed a positive gross profit, the jump in revenue was not enough to overcome other costs. The company’s net income in 2020 stood at Rs 3,058 million – the second biggest loss after 2019, while its financial liabilities had risen to a hefty Rs 9.5 billion. In August last year, Fauji Foods re-

leased its half-yearly financial statements ending in June 2022, which were deeply concerning to say the least. The report indicated that the company faced a staggering loss of Rs 1,253 million after taxes, a significant increase from Rs 758 million during 2021. Fauji Foods’ gross profit plummeted from Rs 545 million to Rs 178 million. The financial statements revealed a substantial rise in costs related to revenue, marketing, and distribution, resulting in an operational loss of Rs 708 million. This marked a dramatic 505% surge from the Rs 117 million recorded in the first half of 2021. At this point, it would be fair to ask: how has the company managed to survive for almost a decade when all it has known are losses? Well, it is no secret that Fauji Foods has always relied on bailouts from the Fauji Foundation and its more successful businesses. For instance, in a stock market announcement earlier this year, it was disclosed that Fauji Foundation shareholders would be providing a loan of Rs 2.35 billion to Fauji Foods, primarily said to cover working capital requirements. It’s worth noting that this was not the first time Fauji Foods has received aid: in fact, in 2020, Fauji Fertilizer Bin Qasim Ltd bailed out Fauji Foods with a loan of Rs 3.5 billion. Read: Fauji Fertilizer Bin Qasim to bail out Fauji Foods with Rs3.5 billion loan – yet again

Fauji Foods onto greener pastures

few months ago Fauji Foods released its half-yearly financial report for the period ended 30 June, 2023. The financial quarter ending on 30 June, 2023 witnessed a net profit of Rs 22 million. In stark contrast, the corresponding quarter of the previous year reported a

This wasn’t just Fauji Foods’ transformation but the entire Fauji Group’s transformation, with governance and executive leadership changes across the group. And when seasoned professionals from the industry saw those similar to them be incharge, they also became eager to join. So if you are working with the likes of Sarfaraz Rehman, the man behind Olpers’ and Pepsi’s success, or Waqar Malik, who came from ICI and is such a big name in the corporate world, you would want to work here too Khurram Javaid, CCO of Fauji Foods Ltd

loss of Rs 754 million. To express the scale of this difference, we first need to understand that moving from a loss to a profit is already a 100% improvement. However, the scale of this turnaround is even more dramatic when we consider the actual figures. To comprehend the scale of this transformation, let’s delve into the numbers. The difference between this year’s profit and last

year’s loss is Rs 776.6 million. If we consider this difference relative to the absolute value of last year’s loss (Rs 754.3 million), the percentage change would be 103%. This means that the financial turnaround is equivalent to approximately 103% of last year’s loss. This isn’t a traditional percentage increase since we’re moving from a negative to a positive number. However, it does provide a sense of the scale of the im-

provement. In essence, this is not merely about transitioning from a state of loss to a state of profit. It’s about surpassing the previous year’s losses by an additional 3%, thereby creating additional value. This granular detail underscores the magnitude of the financial turnaround achieved in this period. Moreover, the financial quarter ending on 30 June 2023 recorded a revenue of Rs 9,838 million, while the revenue for the corresponding quarter of the year 2022 and 2021 were reported to be Rs 7,554 million and Rs 4,747 million respectively. This shows that the quarter on quarter revenue increased by 30.2% compared to last year. This marks the inaugural instance in Fauji Foods’ history where the company has achieved a positive bottom line. How exactly did Fauji Foods manage to pull this off? Let’s talk about Fauji Foods’ turnaround strategy that has enabled it to produce gross profit for four consecutive quarters.

Replacing the faujis

o, what did Fauji Foods do differently this time? Well, they probably grew a backbone and devised a strategy that would help them abandon their loan-seeking ways and transform the company to be a self-sufficient one. It would be fair to assume that the root of Fauji Foods’ problems was the fact that fertiliser experts – more attuned to the industrial engineering challenges of manufacturing fertilisers – and, well, faujis, were made responsible for an entirely new type of business that was focused on consumer preferences. Profit asked Ahmad to break down Fauji Foods’ turnaround strategy. According to him, the first pillar of the transformation was capability, because without capable people, the whole endeavour would have been

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Pakistan’s dairy sector is one of the worst performing sectors and it has been this way for years. Markets like India and China were introduced to packaged milk at the same time as Pakistan was, however, they have adapted to it much faster than Pakistan Abdul Sattar Babar, CEO of IPSOS

like-minded and talented individuals to follow suit and become part of Fauji Foods’ transformation.

Prioritising value-led growth

T rendered useless. “It’s a competitive business and you need a talent base that can compete with Nestle and Engro. So, firstly, we need the right people in the right roles, who have the capability to take on Friesland or Nestle.” So, the company conducted training programs in-house, installed talent and performance management processes, as well as focused on talent acquisition. In November 2020, Fauji Foods hired a new head of marketing by replacing their old chief commercial officer (CCO) with Khurram Javaid. He brought his 19 years of experience in marketing at British American Tobacco to Fauji Foods. In late 2021, the chief human resources officer was succeeded by Faisal Sheikh, whose management and HR experience spans over two decades. Not soon after, in March 2022, the company replaced the CEO Ebad Khalid with Usman Zaheer Ahmad, who had previously worked at Engro Foods and Nishat Sutas Dairy. Three months after that they brought in Wasim Haider as the company’s new chief financial officer. When asked to elaborate on the internal governance changes and the traits they looked for when hiring a new executive and management team, Ahmad shared, “The most important thing when it came to building a new team was domain knowledge. We needed professionals from the field and that

is why the common trait that you would see in almost everyone in the new team is from an FMCG and then a large number of them are from dairy specifically.” According to Khurram Javaid, CCO of Fauji Foods, professionals with years of experience within this domain were eager to join Fauji Foods because there was a very strong notion that this is a Pakistani brand. “If you look at the dairy landscape, this is the only big local player, whereas the other big players are both multinationals. So, it was a very unique opportunity where you had room to create something from a Pakistani perspective and a Pakistani identity.” Javaid said, “This wasn’t just Fauji Foods’ transformation but the entire Fauji Group’s transformation, with governance and executive leadership changes across the group. And when seasoned professionals from the industry saw those similar to them be incharge, they also became eager to join. So if you are working with the likes of Sarfaraz Rehman, the man behind Olpers’ and Pepsi’s success, or Waqar Malik, who came from ICI and is such a big name in the corporate world, you would want to work here too.” This changed the general perception that the company is run by ‘faujis’. According to Javaid, prominent industry names joining the Fauji Foundation drove

he second major pillar of Fauji Foods’ transformation was what they like to call value-led growth. Ahmad defines this as, “A margin accretive growth strategy or focus, whereby any new category that Fauji Foods entered or any new product it launched would be margin accretive instead of just increasing volumes.” He admitted that they consciously prioritised launches that would allow better margins. Part of this value-led growth strategy involved Fauji Foods’ portfolio pivot. “We always had the House of Nurpur brand but we also had a commoditized and low-margin brand Dostea. Three years ago, 85% of what Fauji Foods sold was from the commoditized brand Dostea, while the sales of value added products were a meagre 15%. During the transformation at Fauji, we flipped this ratio completely by deprioritising Dostea and redirected investment towards value-led segments such as Nurpur butter, milk, cream and flavoured milk. Now our value-added portfolio is 85% and the traditional commoditised portfolio is 15%.” This change proved to be a good one for Fauji Foods, especially in terms of growth. Profit was requested not to share the exact growth numbers due to concerns of confidentiality, however, Javaid confirmed that after their portfolio pivot, Nurpur has become the fastest growing dairy brand in Pakistan. Yet another arm of this same value-led growth strategy was root to market. This is a strategy concerning distribution, including when, where and how. “We digitised our approach to sales and distribution to have greater control to drive our distribution.” The digitisation of distribution was also accompanied by a change in strategy, wherein the targets for distribution were reevaluated.

“Our low-margin, commoditized products used to be distributed to over 290 cities because small volumes of it would in several cities. We concentrated distribution in the top 15 cities instead, where our value focused portfolio performs better,” Ahmad explained. He continued, “And here we deployed state of the art digital tools for better control, visibility, penetration. These three things, including value-led growth, portfolio pivot and the reshaping and digitisation of our distribution collectively formed Fauji Foods’ basic growth propeller.”

A much needed rebranding

owever, we cannot talk about Fauji’s portfolio-pivot without discussing Nurpur’s rebranding. Javaid shared that his team did an extensive research exercise to discover what is of value to the consumers. He informed Profit that, “We wanted to know what characteristics people look for in a brand, what is being offered to them currently in the competitive landscape and whether there is a gap in the market, offering us the opportunity to provide customers with something they want but isn’t being offered to them.” “Our next question was, can we, as a House of Nurpur, credibly own this space that our research found?” Javaid elaborated. They found that while health holds a certain priority, taste is a very important factor for Pakistani consumers. Fauji Foods’ takes pride in Nurpur butter, which they claim holds up as the consumers’ favourite local butter. Waqas Ghani, the deputy head of research at JS Global Capital Ltd, noted that,

“There has been a historical price difference between Olper’s and Nurpur, specifically within the UHT milk segment.” However, in Fauji Foods’ most recent corporate briefing, it was emphasised that they have successfully narrowed this price gap. The re-branding also bled into restructuring of profit margins and pricing. According to Ahmad, “So, when we pivoted the portfolio, we automatically changed our set of competitors. And our competitors became Milkpak and Olpers, who are both value-oriented. Since these are our new competitors, we are at a parity price to them. We don’t sell cheaper and we can’t sell cheaper due to the value-oriented nature, and we’ve been able to pass on this inflation, especially in the last two years. So, shifting to a branded play has been a major part of this transformation.”

Sustainability for the win

he reason why Fauji Foods had been in a financial rut for so many years was inefficient spending and extremely high costs of goods sold. After doing some costing analysis and benchmarking with the rest of the industry, it was discovered that Fauji Foods’ gross margins were much higher than others. This was because their energy costs were too high. Ahmad explained that energy in the factory is used for two components, including power and for steam processing of milk. They were using heavy fuel oil (HFO) for power and coal for steam processing. “To tackle this, we took two major initiatives that took us to greener and cheaper energy. We have shifted all our steam production to bio-fuel. This is taken from the

stubs of crop waste that is usually burned to discard, which is a major pollutant as well. We buy these stubs to use as green fuel and we have completely eliminated the use of coal,” The ash produced from the crop waste after burning it is sold back to farmers which they then use as fertiliser, creating a circular system that limits wastes and promotes recycling. Additionally, a 1MW solar plant has been installed to limit the reliance on HFO for power. While reducing their energy costs, Fauji Foods has also significantly reduced its overall carbon footprint. Ahmad said that these changes were introduced last year and became fully operational during the first quarter of this year. Another cost cutting strategy that Fauji Foods implemented was localisation of packaging materials. Ahmad told Profit that some stock keeping unit (SKU) packaging materials used to be imported, but due to the import bans, a global surge in material prices after the Ukraine-Russia war, as well as the rapidly devaluing rupee, continuing to import those materials was not viable or sustainable. Lastly, the company addressed some issues it had been ignoring for years on the financial front. According to Ghani, “When we talk about earnings, it also includes financial charges, which dropped significantly during this time. Fauji Foods’ financial charges on average were 300 million per quarter for the past many quarters, but for this last quarter in June, the charges were 36 million only.” This sudden drop was due to the payment of a debt amounting to roughly Rs 8 billion, which is no longer reflected in Fauji Foods’ balance sheet. “We don’t have the latest financials for June but in March they

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mentioned this in their financial reports. So, this debt will no longer drag their performance,” Ghani concluded.

How have Fauji’s competitors performed?

e cannot talk about Fauji Foods without talking about other prominent dairy companies such as Nestle and Engro-FrieslandCampina. According to Pakistan Dairy Association’s (PDA) economic survey 2022, despite being the third largest milk producing nation in the world, only 7.4% of our milk is processed and packaged. The rest of the 92.6% milk is unprocessed, unregulated and untaxed. This means that the three main companies operating within the formal dairy sector only make up 7.4% of the pie, while the informal sector takes more than 90%. Within this small formal sector, the division between the market share among the three main companies remains undocumented. However, we can still gauge the profitability of each company over the past year. In the quarter culminating in June 2023, Nestlé posted a profit of Rs 5.32 billion, a significant surge from the Rs 3.24 billion reported in the corresponding quarter of the previous year. This equates to a substantial increase of approximately 64.2% from the previous year. However, comparing Nestlé’s profit growth with that of Fauji Foods may not provide a fair comparison due to Nestlé’s considerably more diverse portfolio and the undisclosed financial results for their dairy segment. Meanwhile, Engro Foods’ Friesland-

Campina reported a profit of Rs 1.33 billion for the quarter ending in June 2023. In contrast, the net profit for the corresponding quarter of the previous year was Rs 938.17 million. This denotes a notable increase of approximately 41.4% from last year. Over the past 12 years, the operating margins of the three companies have witnessed great fluctuations, with FFL experiencing the highest growth among the three in the past four years. One can see Fauji Food’s exceptional growth since 2019 in the line graph depicting the gross margins of all three companies. While Nestle and Engro continue to stay on a trajectory of growth and profitability, this is the first time that Fauji Foods Ltd has joined the race and recorded a significant 103% hike in net profit in just one year. Ahmad argued that, “This is not a seller’s market, so the production capacity and the size of a company matters, but just because you can produce it, doesn’t mean you can sell it. It is a very competitive consumer business. So once you are in the market, you have to earn the share from consumers.” Abdul Sattar Babr, the CEO of multinational market research and consulting company IPSOS believes that this is not a unique event. According to Babar, “Pakistan’s dairy sector is one of the worst performing sectors and it has been this way for years. Markets like India and China were introduced to packaged milk at the same time as Pakistan was, however, they have adapted to it much faster than Pakistan.” Babar argues that the real competition lies not between Fauji Foods and other competitors, but in the massive unregulated market. Instead of capturing the existing market share, companies could shift their

focus to market conversion, and thus experience better and faster growth. Ahmad, agreeing with Babar, asserted that, “In the long term, every dairy player that is in Pakistan, is in this for conversion and that’s what makes this market attractive. That is why Nestle chose to come in Pakistan and also why Friesland acquired a business and made an investment in Pakistan. That is why our group is in the dairy business because dairy culture exists in Pakistan. It is a consumer market and this is an opportunity.” “20 years ago loose milk was sold in Turkey, just like it is in Pakistan today. However, a consensus was developed around the world and on a scientific basis that it is impossible to preserve the goodness and nutritional elements of milk in a supply chain in loose form, countries changed their consumption behaviours and adapted,” added Ahmad. He believes that our regulators have acknowledged the importance of processing, storing and selling milk through an organised and safe procedure, but they lack the resources to formalise the sector completely. However, as our societal and segmental awareness increases, the conversion will happen. “It is bound to happen,” he said. Industries such as FMCGs rely on agile and rapid decision-making, along with fast-paced marketing approaches, to adapt to shifting trends and maintain a competitive edge. After almost seven years of operating as an archaic and traditional organisation, Fauji Foods has finally made drastic changes in both, their governance and operations. But most importantly, they have invested in developing their brand, which is a necessary requisite for battling the volatility characteristic of consumer centric industries. n

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Why Cnergyico the conglomerate makes more sense than Cnergyico the oil company Pakistan’s largest oil refinery is in the dumps. Can a corporate restructuring save the company that owns it?

By Daniyal Ahmad

omething is brewing over at Cnergyico. The petroleum company is in the doldrums. Over the past five years their production as an oil refiner has gone from an impressive 20 million tons (MT) to a shadow

of its former self at 6.8MT this year. Similarly its market share has fallen from 22% in 2018 to barely 10% in 2022. And these are merely the symptoms. For the past few years Cnergyico has been sick. The ailing organ has been the company’s heart — its massive oil refinery in Hub Balochistan which, at the capacity of 156,000

barrels a day (bpd), is the largest refinery in Pakistan. This refinery is everything to Cnergyico. It is the company’s largest asset, its trump card, its pride, its joy, and its biggest gamble. And possibly also its biggest fumble. But then why does the company seem so calm? In fact it seems they are in quite the peppy mood. Between October 2022 and

We’re set to embark on this restructuring once the board in principle agrees upon it. It will then be contingent on legal approvals, however, the reason is simple. Everything currently falls under a single listed entity, making it rather unwieldy for managing different risks and returns for potential investors Usama Qureshi, Vice Chairman of Cnergyico

January 2023 Cnergyico quietly established five new subsidiaries to manage its assets. Two were designed to oversee its refinery business, one for its oil marketing company’s (OMC’s) operations, one for its planned petrochemical venture, and another for the additional single point mooring (SPM) it has approval for. The pattern is clear. Cnergyico is looking to manage its assets as subsidiaries

and form a conglomerate. The company is also very open in expressing their desires to shift from an oil refining company in the business of turning crude oil to fuel to a refining company focused on turning crude into chemicals. And there is more where that came from. The Abbassciy family that owns Cnergyico is perfectly positioned to turn their assets and businesses into a conglomerate.

The only question is, even if Cnergyico goes the conglomerate route, what will become of the 156,000 bpd refinery sized elephant in the room? If the company manages to tame the elephant they will be in the enviable position of having a thriving, big, oil refinery business that compliments their other subsidiaries. But if the refinery business continues to tank will they have the good

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There is no alternative for OMCs. OMCs must first uplift local production, and only then can the deficit be imported into the country. There’s no other way around it Zeeshan Tayyeb, Group Chief Operating Officer at Gas & Oil Pakistan

sense to abandon ship, or will they instead let everything else sink with the Big Kahuna? Profit spoke to the company’s management as well as other industry leaders to figure out just what is happening at one of Pakistan’s biggest and most fascinating petroleum companies.

Why is the refinery struggling?

he equation is straightforward. Cnyergico’s oil refinery is in dire straits. With each passing year, the refinery’s capacity dwindles, operating at an ever-decreasing rate. It eked out a meagre 6.8 million tons (MT) of petroleum products to close out 2023, marking its lowest output since 2014. However, when contrasted with the refinery’s potential capacity, its utilisation has plummeted to an all-time low. Cnergyico has always been plagued with issues, a saga that this publication has chronicled extensively, capturing both the highs and the lows.

Read more: The scapegoating of Byco… and what it says about Pakistan’s energy sector, and The Rs54 billion HASCOL scam, explained | Profit Explains The question is, why are they not producing more? Pakistan’s regulatory framework is such that it guarantees them sales. In Pakistan, OMCs (which are the retail end of the fuel business) cannot import fuel unless and until all of the fuel produced locally has been sold. That means if Cnergyico or any other refinery produced more fuel the OMCs would have to buy it. They’d have no other option. “There is no alternative for OMCs. OMCs must first uplift local production, and only then can the deficit be imported into the country. There’s no other way around it,” explains Zeeshan Tayyeb, Group Chief Operating Officer at Gas & Oil Pakistan The real problem is that Cnergyico simply doesn’t have the liquidity to produce more than it currently is. Running a refinery takes colossal amounts of money, and to get that money you need to go to the banks. Refineries depend on letters of credit from banks and

short-term debt to import crude oil for refining and subsequent sale. This makes them beholden to their credit lines, but banks also have a right to be cautious. Refineries have famously poor levels of working capital meaning they don’t have a lot of cash on hand. In this environment, Cnyergico has been at the bottom of the barrel since 2019. It is something the company’s Vice Chairman, Usama Qureshi, readily admits. “This is largely due to the constraints imposed by credit lines on the working capital available to refineries. These credit lines are denominated in Rupees, while our crude oil purchases are made in US Dollars. Therefore, any depreciation in the Rupee inevitably impacts our capacity to import crude for our refinery.” Refineries depend on letters of credit from banks and short-term debt to import crude oil for refining and subsequent sale. This makes them beholden to their credit lines, but banks also have a right to be cautious

The holding company model is not a magic bullet. It requires a clear vision and a strong rationale for diversification. If you are doing corporate restructuring just for the sake of it, or just for the sake of financial imperatives, then you’re on a weak footing Taimur Adil, Founding Partner at the Impetus Advisory Group

of refineries due to their universally poor working capital. Our protagonist happens to have had the worst working capital from 2019 to 2023. Why? There are no straight answers and everybody has their own theories but the overwhelming perception is that Cnergyico is just a badly run company. A consequence of this is that companies with poor working capital also tend to have a poor total liabilities-to-shareholder equity ratio.

Oil. Furthermore, NRL is managed by ARL — arguably the best performer in the category. While we’re on the subject, PARCO also has a sovereign guarantee. In fact, it has two sovereign guarantees, courtesy of the Government of Pakistan and the Government of UAE’s shareholding in it. This is what we are left with. Cnergyico has the largest refinery in the country. They operate in a sector with a guaranteed customer base. Operationally, it aligns more with the

When considered in conjunction with one another, it becomes abundantly clear: Cnergyico finds itself in league with Pakistan Refinery (PRL) and National Refinery (NRL), rather than Attock Petroleum (ARL) and Pak-Arab Refinery (PARCO), on the lower echelons of the refinery industry in terms of total crude refined. For those unacquainted with the landscape of Pakistan’s oil refineries, being compared to them is definitely not something you want on your bingo card. And on top of this PRL and NRL have their own advantages over Cnergyico. These companies have different shareholdings compared to Cnergyico. PRL essentially has a sovereign guarantee attached to it due to the Government of Pakistan’s shares in it through its ownership of Pakistan State

low performers of the sector than the high performers. The only difference is that the other two low performers have very strong backing. When the company fails to sell to its guaranteed customers, it lets revenue slip to competitors and ends up worsening its own liquidity position. This, in turn, leads to an even worse risk assessment and subsequently lower bank credit to purchase crude oil. Do you see the pattern? It’s a vicious cycle, really.

The restructuring ploy

o what do you do if your company’s biggest asset is bleeding it dry and there is no respite in sight? The natural impulse might be to try and shuffle

things around. On this front the company has not been slothful. As we mentioned in the beginning, from October 2022 to January 2023, Cnergyico quietly established five new subsidiaries to manage its assets. In addition to this it seemed that there would be a shift in focus towards the petrochemicals business. Companies tend to diversify in this manner when they are either so flush with cash that they don’t know what to do with it, or their existing market is no longer lucrative for them. Cnergyico is currently afflicted by the latter thanks to their refinery. In common parlance many people use the term “conglomerate” synonymous with any company that is involved in many businesses. The legal definition of what counts as a conglomerate is more complicated. A conglomerate is not a large corporation involved in multiple businesses. Rather it is an entity made up of several different, independent businesses. In a conglomerate, one company owns a controlling stake in smaller companies that each conduct business operations separately with a holding company at the head of the table. What exactly will going on this path do? We’ll start with the most straightforward aspect: attracting investors. Investors come in two varieties: financial and strategic. The first kind are just looking for steady returns while the latter are looking for advantages or synergies with their own businesses. Consider the case of Engro-Friesland. Engro was able to attract Friesland only because Engro Foods was an independent entity at that time, having been spun off from the core Fertiliser business years prior. It’s highly unlikely that Engro could have enticed Friesland to invest in their food business if they were obligated to enter through their primary fertiliser company. This is also not a revelation by any means. Qureshi has conceded it. What does having access to strategic investors such as this entail? Better focus. Engro-Friesland, by all means, is more successful than Engro

ENERGY

If you can manage double taxation, then corporate restructuring towards a holding company model with smaller independent subsidiaries is prudent for the majority of Pakistan’s larger groups Urooj ul Hassan, Group Head of Corporate, Investment Banking & Shariah Advisory at Meezan Bank

Foods. That’s fine. Friesland’s bread and butter (no pun intended) is food. Engro’s forte? Fertiliser, and lately energy too. “We’re set to embark on this restructuring once the board in principle agrees upon it. It will then be contingent on legal approvals, however, the reason is simple. Everything currently falls under a single listed entity, making it rather unwieldy for managing different risks and returns for potential investors,” explains Qureshi. “If someone wishes to invest in one of our ventures, they would, under the present structure, have to acquire a stake in the entirety of Cnergyico, which may be less appealing to prospective investors.” But it isn’t just about access to these investors. Let us continue with the Engro example. Spinning off businesses does not inflate your market capitalisation, or value at all immediately. However, it affects your long-term value. Engro was formidable when it decided to split its businesses from its fertiliser division, but they are a far more formidable beast now. Spinning off companies has been so beneficial for Engro that they can’t actually cease doing it now. Just last month they notified everyone that they will be divesting from their thermal assets. Now that might seem innocuous, but those are perhaps some of the largest assets in that industry and Engro just went up and decided it no longer cares. And they can do it, because they’re getting someone in again.

What it means for Cnergyico

ssentially, converting into a conglomerate gives you access to investors as well as flexibility in terms of managing different arms of the business separately. With their current structure, Cnergyico cannot even imagine doing something similar despite having parts of their business that some investors might want to put money in. Just look at their OMC arm. The company’s OMC division has grown in significance as a revenue hub. The OMC business they had cumulatively invested Rs 552 million in from 2014 to 2023 had actually out-earned the refinery business they had invested Rs 24 billion into across two of the past three years, and almost matched it in all other years. Much of this was due to the collapse of the refinery’s operations. But theoretically if a company wanted to invest in Cnerygyico’s OMC arm they could not do so without also getting involved in their refinery business. Similarly, as mentioned earlier, if they get into petrochemicals they will continue to carry the baggage of the refinery.

Converting into a conglomerate changes that equation. Then there is the other advantage: debt management. Spinning off multiple entities broke down Engro’s stock price into smaller more liquid stocks which just allowed it to slosh more around for more

ventures to in turn make more money. These multiple companies also increase the theoretical debt ceilings that companies might have. How so? Firstly, the debt is just distributed into separate companies. Rather than having one company approach the bank to solicit loans, you will have multiple doing so. Whilst this might diminish the ticket sizes of the loans, it does provide the banks with a bit more lucidity as to what the company intends to do with the loan because the entity that requires it is asking for it directly. The bank can more effortlessly trace the cash flows of the company. Put it this way, even if Cnergyico wanted a loan for its OMC wing, because everything is under one entity, the bank will at some point have to decipher what an SPM is. If the OMC wing was a separate entity, then the bank really would not care about that SPM. Following a restructuring, the mountains of negative working capital won’t restrict the entire group but just the oil refining business. Banks could actually lend to its newer entities with at least some sigh of relief that they haven’t signed off on something they wouldn’t otherwise have had that company not been in the refinery sector. “If you can manage double taxation, then corporate restructuring towards a holding company model with smaller independent subsidiaries is prudent for the majority of Pakistan’s larger groups,” explains Urooj ul Hassan, Group Head of Corporate, Investment

TEXTILES

Banking & Shariah Advisory at Meezan Bank. “The holding company model is a catalyst for growth. It bestows upon management a laser-like focus, it paves the way for diversification, it magnetises investors, and it infuses your business with additional liquidity. Moreover, as a holding company with distinct entities, you can manage your debt obligations more effectively than if you had amalgamated all your businesses.”

How to botch a restructuring

here’s a reason we used Engro as an example. Beyond it being the gold standard for what a company can pull off with the holding company model, there’s also a survivor bias. More companies than Engro have tried their hand at the model, and even more have failed. Cnergyico could well fall into either of the camps. “The holding company model is not a magic bullet. It requires a clear vision and a strong rationale for diversification. If you are doing corporate restructuring just for the sake of it, or just for the sake of financial imperatives, then you’re on a weak footing,” warns Taimur Adil, Founding Partner at the Impetus Advisory Group. Cnergyico claims to have a plan to diversify, but it also has evident financial pressures. The battering it has taken over the past few years makes it vulnerable to predatory investors who are not interested in building anything meaningful. Restructuring also brings with it the challenge of diluting core ownership and leadership. Does Cnergyico have trustworthy partners at its disposal? That remains uncertain. “Partnerships can be precarious, and often ephemeral,” warns Adil. “If you divest too hastily, or align with partners whose intentions or compatibility are unclear, you’re setting yourself up for failure.” The ongoing conflict within K-Electric’s board of directors serves as a stark reminder of the discord that can arise when stakeholders are at odds. However, this is not to suggest that Cnergyico should curb its ambitions. Quite the contrary, we believe they could be more audacious with their resources. Both Hassan and Adil concur that listing your company on the stock exchange can be beneficial for a holding company seeking capital, despite the associated challenges. Yet Cnergyico, based on our discussion with Qureshi, has no immediate plans to list their new entities on the stock market. Whilst being listed on the stock market may feel like operating in an office made entirely of glass, it does provide access to capital – something Cnergyico is in dire need of. There’s no harm in Cnergyico not having

a plan currently in motion; however, the structure is incredibly conducive to having all companies listed on the stock exchange and reaping the potential windfall of earnings. This strategy was instrumental in Engro’s success. Cnergyico’s competitor Attock has three separate businesses listed on the stock exchange, two of which directly compete with Cnergyico’s oil businesses. The Lucky Group, which has come closest to emulating Engro’s success, has two companies listed. The Nishat Group – once considered the gold standard before Engro – has over five listed companies. Do you see our point? Why are we hammering home this point so much? Because we are afraid that Cnergyico might just stop halfway. It is this timidity that then extends to their best kept secret: Premier Systems.

Cnergyico best kept secret

nergyico may already qualify as a conglomerate – albeit a fragmented one. Its hidden gem is Premier Systems: an information technology company with diverse and lucrative subsidiaries. It is the sole distributor of Audi’s cars in Sri Lanka, Bangladesh, and Pakistan. It has its own fintech venture called PayFast. It is the only manufacturer of completely indigenous mobile phones in Pakistan, Dcode. And it outperforms Cnergyico. Premier raked in Rs 2 billion and Rs 1.4 billion in profit across 2022 and 2021 respectively. This may seem modest compared to Cnergyico’s Rs 4 billion and Rs 3 billion. But Premier achieved this with a total asset base of Rs 13 billion. Cnergyico had Rs 151 billion worth of assets over the same period of time. Cnergyico, however, was tight-lipped about Premier. It boasted about its achievements, and promptly corrected us when we mistakenly thought Premier only sold Audi vehicles in Pakistan. It also proudly told us about how Premier has created Pakistan’s only indigenous mobile brand. But the moment we mentioned them as part of their conglomerate, Qureshi went silent. He quietly told us, “Premier is a separate company from Cnergyico. It has its own management, and board.” Premier actually has both a complex, but relatively simple relationship with Cnergyico. The two, based on each other’s annual reports, do not interact. Premier is listed as an associated company in Cynergico’s documents, but that’s about it. What’s the link between the two? The Abbassciy family. The family owns the majority of Cnergyico. Premier has four shareholders based on its annual results for 2022. Three of them are from the Abbassciy family. The only one

not from the family is a former member of Cnergyico’s board of directors who held his position in Cnergyico for a decade. In terms of the shareholding between the four individuals, the Abbassciy family owns the lion’s share of Premier with the aforementioned Amir Abbassciy being the largest shareholder. Cnergyico’s plan to spin off assets will likely yield some dividends. It would certainly inject some capital in, and perhaps even boost refinery utilisation. However, confining itself to the existing landscape of the verticals might be problematic. After all, using Premier they could very well market themselves as a conglomerate that is larger than just energy. “You can’t have a holding company model where some entities are dependent on others for survival. You need to have independent and viable businesses that can stand on their own feet. You can’t be cross-subsidising, cross-pricing, or cross-financing companies indefinitely. Otherwise you create infant companies that are perpetually relying on one of the companies to sustain them,” Adil elaborates.

Leaving money on the table

nergyico’s strategic transformation is a judicious manoeuvre, mirroring the evolving dynamics of their revenue channels and their standing within the markets they inhabit. The incorporation of fresh assets into the enterprises they envisage is not only astute but also addresses the impediments they seek to surmount. Their sole quandary, perhaps, lies in avoiding alliances with the least desirable entities across their sectors – a predicament that is, in itself, a favourable one to grapple with. The market’s fascination with Shell underscores that the OMC sector is far from obsolescence. Even under the most pessimistic circumstances, should Shell’s acquirer choose to infuse additional capital into the firm, Cnergyico and its future collaborator could simply amplify their petroleum sales to them, thereby augmenting their profits. Ultimately, Cnergyico is poised to secure a portion of the capital influx it desires, primarily because the petroleum industry will persist in Pakistan. It stands to generate greater revenue than before as it now confronts its constraints head-on. However, they have embarked on a journey towards becoming a conglomerate without fully acknowledging that they have likely been one for quite some time. The crux of the matter boils down to how much wealth Cnergyico wishes to amass. We’re just afraid that the company might not be making as much as it could. It might very well miss out on some golden opportunities. n

ENERGY

OPINION

Naveen Ahmed

Foreign Direct Investment – the Good, the Bad and the Ugly

infrastructure. Meanwhile, the overall economic activity continues to be defined by a conspicuous absence of food security, energy security, human development, and climate action – a state of deprivation made worse only by the hard currency demands of these businesses. Just as government policies on investments are often motivated by political expediency rather than long-term capacity building, unsurprisingly, the capital we tend to attract is similarly opportunistic. Annual foreign direct investments in excess of a billion dollars a year began entering the country in the early 2000s. A third of this capital propped up the power infrastructure, which has historically offered a wide range of incentives to investors including guaranourting foreign investors in a dollar-starved economy is teed sales, dollar IRRs in the 20% ballpark and favourable a rite of passage for every successive government. As we taxation. It would have been wonderful to report win-win speak, pledges are being sought from Middle Eastern outcomes for both the public and the investors, except that investors and efforts are underway to divest a batch of the consumers are now burdened by capacity payments state-owned enterprises. And why not, one may ask. Afowed to imported fossil-fuel based IPPs that are dispatched ter all, some of the largest economies in the world such as US, China, at half their available capacity. I can reach across the table Hong Kong, Germany or Netherlands are as much investor economies and say that the governments did what had to be done to as investee economies. bring significant electricity generation capacity online withIndeed, where FDI results in the transfer of capital, technology in a relatively ambitious timeframe, but the caveat remains: and expertise to address a country’s unique pain points or generates there is still no energy security for Pakistan without access employment and improves the balance of payment, it is a worthy to and control over generation inputs. pursuit. Yet, in Pakistan’s context, such benefits are vanishingly unOne doesn’t have to look hard to find other examcommon. Seven decades of ad hoc policies ushering investments, and ples where short-termism of the policymakers has placed fifty billion in FDI dollars later, there is nary a sector that is regionally us squarely in the eye of the balance of payment storm for competitive without subsidies or trade protections. Past experiences sectors that are not quite as strategic as energy. Take the from across industries, whether consumer goods, communications automobile industry for instance, featuring on the priority or utilities suggest that when left on their own, manufacturing list of the Board of Investment, where capital was solicited enterprises gravitate towards trading and the service industry lets under the Automotive Development Policy 2016-21. To asthe quality degrade to avoid reinvesting in people, processes, and sess the efficacy of such FDI through the balance of payment lens, we can look at a typical assembler’s transactions with their stakeholders, that is, capital providers, contractors, customers and input suppliers during the business lifecycle. Let’s begin with cashflows during the investment The author is an investment and pre-commissioning period. For most capital-intensive projects, it is a fair assumption that the banking professional, board engineering, procurement and construction contract would be awarded to experienced international member and an academic firms who are often subsidiaries or affiliates of the offshore investor. The contracts would be remunerated in dollars and be 50%-70% of the total capital cost of the undertaking. We also expect that these projects would be leveraged such that the debt component would pay for 50%-80% of the assets of the company. A back of the envelope calculation indicates that for every $100 in invested equity, there is an outflow of $100 to $350 for imported equipment and technical services, from the get-go. Note that I haven’t even considered joint venture arrangements where the foreign equity component is actually a

The sort of FDI we need and the sort we don’t

COMMENT

fraction of the total investment, nevertheless entitling them to sell components, spares or fully built vehicles to the Pakistan operations under long-term contracts. The next cash outflow on the agenda is the return on capital owed to foreign investors, which like the initial investment, is independent of the nature of the business. Since Pakistan is a frontier market with a high degree of political risk, macroeconomic imbalances, precarious security situation and questionable infrastructure, the return levels that incentivize foreign investors tend to be in the double digits with typical payback periods averaging at five years or lower while profit repatriation would happen throughout the life of the business. So again, hard currency outflows far exceed the original investment inflows when considered over longer time horizons. The litmus test for long-term desirability of these enterprises is in how they impact the trade gap during their operations phase. There are four possibilities that determine whether the business is a net consumer or producer of dollars: A: The inputs are paid for in rupees and sales are also generated in rupees

B: The inputs are paid for in rupees and sales are generated in dollars C: The inputs are paid for in dollars and sales are generated in dollars D: The inputs are paid for in dollars and sales are generated in rupees It is easy to see that B is the most favourable scenario. A & C are quite acceptable, while D spells trouble. Any CBU and CKD kit reliant automobile assembler would fall squarely in category D, even before we consider secondary effects such as putting more gasoline-chugging, carbon-emitting, private vehicles on our crumbling roads. A review of data from the State Bank of Pakistan provides support for this thesis. The cumulative Net FDI in all sectors of the economy during the seven years from 2016-2022 has been $15.2 billion, while profit repatriation was $11 billion. Foreign inflows in the power sector were estimated at $5 billion while $7.6 billion worth of equipment was imported, some of it for renewable energy and indigenous coal-based plants. Data for auto industry’s initial capex is not identified separately by the SBP but their operating inputs, being CKD kits, stood at $9.4 billion for the same period.

My analysis would not be so grim, had Pakistan been an attractive market, with far more greenbacks flowing in with each passing year, than leaving the ecosystem. Or if we were building our own turbines or industrial robots or self-winding watches. Or tens of thousands were being employed at a decent living wage and upskilled. Or if the businesses were so competitive, that they would export their output globally and pay meaningful taxes too. This gap between what could have been and isn’t, makes it clear that the “Come one, come all!” approach to FDI needs a rethink. The policymakers must discriminate and direct incoming funding to sectors that align with the country’s long-term goals for economic prosperity, preferably in areas where we have or could acquire a competitive advantage. Investors must also be held to standards of conduct, to not indulge in exploitative business practices on product or service pricing, or wages and working conditions, or contribute to environmental degradation. Should they acquire significant market power, one must remember Russia as a cautionary example where at least a thousand foreign firms curtailed operations recently, leaving significant gaps in provision of goods and services. n

COMMENT

The GMO oilseed saga comes to a close More than a year after they were first stopped, the Sindh High Court has allowed the consignments to go ahead By Ghulam Abbas

ore than a year after it first began prompting heated arguments in cabinet and at least one altercation in a committee of the national assembly that turned physical, the saga of consignments of oilseeds stuck at the Karachi Port is finally over. For now. A recent decision of the Sindh High Court (SHC) has ordered that the customs department allow the soybean seeds stuck at the port to be released. The consignments that have been stuck at the port for the past year are worth over $400 million. But what exactly has happened over the course of the past year and what has changed now?

Fearmongering

t all started with a technicality — but a technicality that was being ignored for a few years. On October 20, last year, two shipments were stopped at Port Qasim in Karachi. The shipments contained GMO oilseeds worth some $100 million on board. And despite the very vocal protestations of the importers that had paid for the consignments, they stayed stuck at the port pending a single certification from the ministry of climate change. In the months that followed, more vessels joined the two stuck at Karachi and the value of the oilseeds piling up at the port grew over $300 million. The most important thing to

IMPORTS

understand is one term — oilseeds. When most people hear the term oilseed, they think it is a seed that is to be sown in the ground and harvested for the production of edible oil. Oilseeds is actually a term for the seeds or ‘fruit’ that certain crops produce that are then pressed to get edible oil. So, for example, olives are an oilseed and so are the fruits produced by palm plants and soybeans since all of these are pressed and used to extract oil. Another example of an oilseed is cotton, the seeds from which are pressed and the oil extracted from them. Pakistan is heavily dependent on these oilseeds for its edible oil. According to a report of the central bank, Pakistan’s palm and soybean-related imports stood at US$ 4 billion in FY21, rising by 47% year-on-year, compared to compound average growth of 12.3% in the last 20 years. And in addition to edible oil, these seeds fulfil another crucial purpose: providing feed for livestock including for chickens. In the three decades since 1990, the consumption of oilseed meals as feed for livestock has tripled in the country – a big reason for which is the growth of the poultry industry. This is particularly true in the case of the soybean. Since it is rich in nutrition, its meals offer better digestibility, quality mix of amino acids and have the highest protein content (around 44-50%) compared to all other oilseed meals. These qualities make it a better feed ingredient for chicken in comparison to cottonseed – which was the traditional oilseed used in Pakistan. According to the Pakistan Poultry Association (PPA) estimates for 2015-16, approximately 9.5 million tonnes of poultry feed was produced, nearly a third of

which was oilseed meals. This means around 2 – 2.8 million tonnes of oilseed meals were used in Pakistan’s poultry industry. As demand for poultry increases, the number of chickens raised also goes up and so does demand for soy seeds as feed. As a result, the poultry industry was suddenly in crisis as well. Now, it is worth pointing out here why the shipments of GMO oilseeds were stopped. Pakistan is party to the Cartagena Protocol on Biosafety to the Convention on Biological Diversity, signed in 2001 and rectified in 2009. The Cartagena Protocol is an international treaty governing the movements of living modified organisms (LMOs) resulting from modern biotechnology from one country to another. Its purpose is simple. One of the observations scientists had after genetically modifying different crops was that when certain modified plant varieties are introduced to new environments, the results can be disastrous for the local ecology. As a result, to make sure there is no unchecked introduction of GMOs to new environments, the Cartagena Protocol monitors this. And as part of the Pakistan Biosafety Rules of 2005, the ministry of climate change needs to give approval to any new GMO shipments coming into the country.

Jurisdictional hell

his was a broad strokes summary of the past year. The legal realities of these consignments were stuck in bureaucratic hell. You see the controversy began when Department of Plant

Protection, halted biosecurity clearance to US soybean cargo anchored at the Karachi port in October 2022 on the tip off of the customs intelligence, Karachi that the citing cargo is GMO and imported misdeclaring as non-GMO and is devoid of license of Environmental Protection Agency and No Objection Certificate (NOC) of Ministry of Climate Change and pestered the DPP to release the cargo having been arrived in violation of existing Pakistan Biosafety and Plant Quarantine Regulations that bans the import of GMO products in Pakistan. Notably, this move attracted media attention and became a contentious issue within the country. Despite strong opposition from the former Federal National Food Security Minister, Tariq Bashir Cheema, importers, known for their significant influence, managed to get entry to nine out of eleven soybean vessels by portraying them as non-GMO that were imported in the previous year. Furthermore, one soybean consignment was re-exported by the DPP, leaving only one vessel that was declared as GMO by the importers stranded at the port for approximately a year. The resolution of this case came through a single bench court order, as it appeared that the Ministry of Climate Change, the Environmental Protection Agency (EPA), the Ministry of National Food Security and the Department of Plant Protection could not defend their decision to halt the consignments, as per the existing rules. The Ministry of National Food Security and Research (MoNFS&R) has now ordered release of the last remaining consignment of soybeans declared as genetically modified organisms (GMOs) by the Environmental Protection Agency (EPA) following the Sindh High Court order. This development brings an end to a year-long dispute between the government and influential importers who had sought the release of these GMO oilseeds without fulfilling national biosafety regulations, valued at over $400 million.

Influence at play?

ou’d think that would be the end of it, right? The release of the consignments has raised allegations of influence peddling. A so called friend being ex-colleague of the caretaker Federal Minister of Food Security, who, allegedly, is also consultant to All Pakistan Solvent Extractor’s Association (APSEA) and pursuing Food and Climate Change Ministries and EPA for getting permission of import of GMO and Living Modified Organisms (LMOs) products in Pakistan since long on behalf of the association, has been accused of playing a crucial role in securing the release of the stuck GMO consignment without conforming

existing biosafety rules, which are worth billions of rupees. He also has privileges to have acquaintances with the principal secretary of the caretaker prime minister, the sources inside the ministry revealed. These allegations remain unverified as the relevant individuals could not be contacted for comment. The saga began in October last year when the Customs intelligence department gave lead to the Department of Plant Protection regarding arrival of a GMO soybean vessel bereft of the necessary license from the EPA and Climate Change Ministry and forbade the DPP from clearance of that soybean cargo until verification of GMO, a move that had not been practiced in the past by the DPP owing to the reasons that the importers always declared import of non-GMO oilseeds to the DPP and the DPP is not empowered to test goods for GMO under existing plant quarantine regulations. The situation escalated to a point where the previous federal cabinet had to intervene and make decisions. While the federal cabinet allowed the re-export of two GMO consignments, the importers of one GMO cargo opted to re-export consignment to a third country with forgiving import conditions regarding GMO products while the importers of second cargo instead of re-export filed petition before the Sindh High court of Karachi for release of GMO cargo in Pakistan. Most of the soybeans imported into Pakistan are GMO and released in the country due to obsolete biosafety regulations and lack of the Environmental Protection Agency infrastructure at ports, which gave free opportunities to the importers to delude the DPP and continued import of GMO in Pakistan misdeclaring the import as non-GMO oilseeds. The Pakistan Biosafety Rules of 2005 require the mandatory registration of GMOs and LMOs with the National Biosafety Council and license from the EPA for import of GMO products in Pakistan. However, the relevant department within the Ministry of Climate Change has been unable to carry out its duties related to the certification, inspection, and issuance of license for GMO products and to foil release of GMO products in Pakistan since Pakistan’s signing of the international Cartagena protocol and promulgation of biosafety rules.

The legal battle

he SHC’s decision followed an extended legal battle that spanned over ten months. The dispute began with the detention and deportation and re-export order of one vessel carrying GMO soybeans at Karachi port by the Department of Plant Protection, which was part of a larger consignment collectively worth over $ 400 million. While nine of the eleven oilseed consign-

ments were eventually released because the importers disported them as non-GMO to the DPP and the EPA and Ministry of Climate Change did not inspect and test them for verification of GMO, one was re-exported to Bangladesh by the DPP under instruction of the former Federal Cabinet. The last consignment, initially declared to contain GMO soybeans, remained stranded at the port and is being released on the strict direction of caretaker Federal Minister of Food Security, which would ultimately pave way for release of GMO products in Pakistan without undergoing necessary risk analysis evaluations and certification of the EPA and climate change ministry. The Ministry of National Food Security during the previous Government directed DPP to challenge the import consignments and re-export GMO oilseeds consignments from Pakistan, claiming they contained GMO soybeans, a product prohibited in Pakistan in line with biosafety regulations. The importers, in response, sought legal recourse through the Sindh High Court, which eventually ruled in their favor. However, the Ministry of National Food Security decided to escalate the case to a superior court and enjoined the DPP to file appeal before the double bench of Sindh high court and supreme court of Pakistan and leave no stone unturned to stop its release in Pakistan on technical grounds fearing potential threats to public health, environment and agriculture in addition to financial penalties and other damages if the consignments were released following the court’s verdict. In the recent court case, Mr. Justice Mahmood A. Khan presided, with Iffco Pakistan Ltd. and others as plaintiffs and the Federation of Pakistan and others as defendants. The plaintiffs argued that the defendants lacked the authority to restrict imports on environmental grounds. Justice Mahmood A. Khan dismissed this argument, emphasizing that both federal and provincial laws coexisted within their respective domains. The court then delved into the central issue, highlighting the importance of clarity in understanding the matter. After a thorough examination, the court found insufficient evidence to classify the imported product as a GMO or subject it to any restrictions. This allowed the plaintiffs to continue importing the soybeans for oil extraction and feed production purposes, with the defendants retaining the right to further investigate the matter within the framework of the law. The legal battle has finally concluded, with the last consignments of GMO soybeans released, providing some resolution to a protracted and contentious issue that has persisted for over a year. n

IMPORTS

Is petrochemical set to be Pakistan’s next industry to watch? Pakistan is on the precipice of its first ever petrochemical policy By Daniyal Ahmad

wo years have slipped by since Abdul Razak Dawood, the then Adviser on Commerce to the Prime Minister, first breathed life into the concept of a petrochemical policy. Now, Pakistan teeters on the precipice of finally sculpting its maiden petrochemical policy. Media murmurs this week hint that the Government of Pakistan is meticulously applying the final brushstrokes to the policy, and the industry is positively buzzing with anticipation. However, let’s address the elephant in the room. Many of the industry’s most seasoned stakeholders are left scratching their heads over the policy due to the protracted delay since its initial announcement. Let’s take a moment to jog our memory and revisit what we know thus far. According to media whispers, the policy aims to lure investment into the midstream industry to kickstart indigenous manufacturing of petrochemicals. The Engineering Development Board (EDB) is currently engaged in consultations with public and private sector stakeholders to put the finishing touches on the Petrochemical Policy of Pakistan (2023). The goal? To ignite indigenous manufacturing of petrochemicals such as polypropylene, polyethylene, LAB, etc., and ensure sustainable development through local availability of plastic resins for the downstream engineering industry. A draft policy was reportedly handed over to the Ministry of Industries & Production in July 2023 and is currently under scrutiny from relevant Ministries/Divisions. It will subsequently be presented before the Economic Coordination Committee of the Cabinet for consideration.

INDUSTRY

The proposed policy is anticipated to yield a plethora of benefits. It is expected to ensure the availability of essential raw materials for a wide array of downstream sectors. These include, but are not limited to, textiles, construction, automobiles, pharmaceuticals, fertilisers, and synthetic rubber. While all the specifics related to the policy remain cloaked in secrecy, there’s no denying that anticipation within the industry is reaching fever pitch. “The Government deserves a round of applause for prioritising the development of a long-term roadmap for the petrochemical sector,” declares Jahangir Piracha, CEO of Engro Polymer & Chemicals. He continues, “This could be a catalyst for industrialisation in Pakistan.” Piracha underscores the need for a petrochemical policy that encompasses both existing and new petrochemical assets. He states, “It’s crucial to attract substantial investments into these projects which are capital intensive and have long gestation periods.” He also tips his hat to Pakistan’s existing petrochemical players, saying, “They invested during challenging times and it’s their success that will pave the way for large-scale petrochemical investments.” Echoing similar sentiments, Asif Jooma, CEO of Lucky Core Industries asserts, “Petrochemicals form the backbone for multiple industries in Pakistan and have been instrumental in supporting various downstream industries and services.” He adds, “They are one of Pakistan’s largest imports and investments in this sector are pivotal for the country’s economic growth.” Now, while this may be the sector’s first brush with a dedicated petrochemical policy, it certainly isn’t Pakistan’s maiden voyage into industrial policy. In fact, Pakistan’s tryst with

industrial policy has been somewhat chequered. Profit reached out to the EDB to understand their rationale behind selecting this particular sector but was met with silence. So, will this time be any different? But first things first - what exactly are petrochemicals and why does it seem like they’re being singled out by the Government as a sector in need of a dedicated policy?

What are petrochemicals?

he midstream segment of the petrochemical industry encompasses monomers and polymers. These are derived from naphtha cracking and utilised by the downstream segment to create a myriad of plastic products. These include, but are not limited to, sheets, films, tubes, profiles, containers, filaments, ropes, and more. These products find their application in a wide array of industries such as packaging, construction, automotive, industrial products, wind turbines, solar panels, electrical & electronics, artificial leather, home appliances, bottles & jars, furniture, kitchen wares, household toys, disposable utensils and packaging. The major petrochemical products currently manufactured in Pakistan include poly-vinyl-chloride (PVC), polystyrene (PS), purified terephthalic acid (PTA), polyethylene terephthalate (PET), phthalic anhydride (PA), and linear alkyl benzene sulfonic acid. However, it’s worth noting that Pakistan’s chemical sector appears to have hit a roadblock. The output seems to have stagnated at $8.3 billion. This is a step back from its 2021 peak of $9.7 billion. Moreover, if all other factors remain constant (ceteris paribus), this trend is expected to continue until 2027.

Output by Type of Chemical 2016

2022

2027

Basic chemicals

$2,177 million

$2,141 million

Fertilisers and nitrogen compounds

$2,658 million

$2,613 million

Plastics and synthetic rubber in primary forms

$696 million

$685 million

Pesticides and other agrochemical products

$352 million

$346 million

Paints, varnishes, printing ink and mastics

$671 million

$659 million

Soap, cleaning and cosmetic preparations

$1,594 million

$1,567 million

Other chemical products

$236 million

$232 million

Man-made fibres

$62 million

$61 million

Source: Global Research & Data Services ( GR&DS

So, could investments in the sector bring about any meaningful change? Piracha posits that a $1 increase in petrochemical output could potentially amplify the gross domestic product by approximately $4, courtesy of a high GDP multiplier effect. “Pakistan’s petrochemical sector is underdeveloped; we are one of the few large economies without a cracker,” Piracha rues. He sees a silver lining in the mid-stream petrochemical sectors, which he believes offer an opportunity to invest $3 billion. “The strong local demand for six products - polypropylene, PTA, PET, PVC, Methanol and linear alkyl benzene - justifies the setup of world-scale plants in Pakistan,” Piracha adds. This then posits the question: why do you need an industrial policy with tariff production if there’s already domestic demand for the sector to capitalise on?

Why the need for consistency?

wo pivotal factors are at play here: the imminent Saudi refinery and the potential for stability to catalyse the sector’s growth. The Petroleum Refining Policy, formally known as the Pakistan Oil Refining Policy for New/Greenfield Refineries 2023, was unveiled earlier this summer. This policy has been tailored specifically for a single project – a greenfield deep conversion integrated refinery and petrochemical complex with a crude oil processing capacity of 300,000 barrels per day (bpd). This project is being established in collaboration with Saudi Arabia. The policy does not permit any future refinery projects that utilise a different oil refining process or technology other than deep conversion, or have a capacity less than 300,000-bpd. Moreover, it stipulates that it must be an integrated refinery and petrochemical complex, regardless of feasibility. Refinery projects with a capacity of less than 300,000-bpd will be considered under a separate package offering lesser incentives and concessions.

Rumours are also circulating that the installed capacity of the Saudi Refinery may be increased to 400,000 bpd. While the refinery sector may not be entirely pleased with the policy, it could prove to be a boon for the petrochemical sector. Firstly, at 300,000 bpd, the Saudi refinery would become the largest in Pakistan, boasting a cumulative capacity equivalent to that of PARCO and Cnergyico’s combined – currently the two largest refineries in the country. This would not only ensure a steady supply of feedstock for the petrochemical sector from the refinery but also stimulate ancillary industries into action and pave the way for economies of scale for whichever Pakistani company manages to achieve them. Furthermore, the 300,000 bpd limit in the refining policy suggests that the forthcoming petrochemical policy may also set similar production thresholds for players wishing to capitalise on the sector. While this could further limit the sector to even fewer players than currently exist, it also ensures that those who do operate will be running world-scale plants. This brings them closer to achieving economies of scale and potentially contributing to the country’s exports. The existence of such a policy would also provide much-needed consistency to the sector. Petrochemical plants typically take around four to five years to become operational. Therefore, any large-scale investment would require safeguards for at least that period. One common sentiment echoed across our interactions with various sector stakeholders was their hope that such a policy would shield the sector from erratic decisions like the super tax. However, this is where our optimism concludes. This is not Pakistan’s first industrial policy, nor is it likely to be our last. Based on historical precedents, we have an established track record of either botching policies or setting up policies destined for failure from their inception. Let’s now examine all the ways this policy could potentially go awry.

How to tentatively botch the policy altogether

irst and foremost, when a sector is shielded by tariffs, it invariably exerts pressure on the downstream sector. This could be either inadvertent or deliberate. The downstream sector then protests that their production costs have escalated due to the additional protection granted to the upstream sector (or midstream in our case), leading to a tug-of-war. The government typically finds itself in the middle of this struggle, necessitating the intervention of the National Tariff Commission to resolve the issue. This is precisely what transpired with polyester, PTA, and polymers. “The domestic market needs to be naturally large enough to attract investors. If it isn’t, no one will invest regardless of the artificial gains you provide,” states Asif Saad, former CEO of Lotte Chemical. “Shielding one or two products in the value chain engenders imbalances and is not favourable for the growth of the entire sector. The examples of synthetic polyester and pvc show that they are unable to grow to any significant scale despite the high level of tariff provided historically,” Saad adds. . “China and India invested in domestic capacity building to achieve economies of scale and then gain competitive advantages in global markets. The government needs to invest in large-scale infrastructure. It needs to enhance ports, storage tanks, shipping etc., so that the petrochemical producer is provided with a plug-and-play model. Currently, all of this is undertaken by the companies in the sector themselves,” Saad continues. “Petrochemical is also a broad term. You can’t have one policy for the entire sector. You need to narrow the scope to provide investors with greater clarity. Paraxylene, for example, has its own value chain that requires the refiner to allocate additional molecules. Every product in the sector has its own value chain,” Saad criticises. While the sector may be elated with the incoming policy, there’s also perhaps a hint of bitterness across them. This will be the country’s first policy of its kind, and they will now be competing in a world dominated by large incumbents, with China and India being just the most recent additions. Some might even argue that the opportunity to develop the sector to compete with regional and global peers perhaps sailed thirty years ago. However, now that we have a policy on the horizon, we can only hope that this is not a repeat of our automotive experiments. “To fully leverage the benefits of scale and integration, it is highly beneficial to evolve a policy that addresses the current and future needs of an integrated refinery and petrochemical complex,” emphasises Jooma. n

INDUSTRY