Issuu

CONTENTS

08 Saif Textiles Mills and the case of loan-for-equity swap

14 10 Die, cash, die! 18 If Honda has any tricks up its sleeves, this might be the time to pull them out

24 21 Distribution woes again! Fahd Ali 23 Can’t pay the bills with ‘experience’

Profit

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

Saif Textiles Mills and the case of loan-for-equity swap The company is looking to pay off its loans but is it fair for the shareholders?

By Zain Naeem

hat do you do when you’re a company that needs a loan? The obvious answer might be going to a bank and applying for one. But if your company is part of a larger group of companies there might be a simpler option available to you. Take the case of Saif Textile Mills. The mill is part of the Saif Group and when it needed a loan instead of approaching a bank they went to an entity by the name of Saif Holding Limited — an associated company that is also part of the Saif Group. Saif Holding gave a loan facility of upto Rs 77 crores to Saif Textile Mills in the past. Except the loan wasn’t being given free of consideration or with a payment plan. The loan was a running finance facility and had to be paid back to Saif Holdings with interest. Now the mill feels that it can pay off the past loan with issuing shares in the name of Saif Holding Limited. This is what is known in the finance world as a loan-to-equity swap.

Background to the loan being paid

The loan that was given to Saif Textiles was for working capital requirements. The loan was given till 31st December 2023. For the last few years, the company has been making losses. This creates pressure on its assets and ability to pay back its loan. As the company was suffering losses, the best option for the company was to secure a short term loan from a bank, get extension or restructuring of this debt or to give out equity in exchange. Saif has announced that they will take the third option. The company is basically printing shares and giving them to another company as a com-

pensation for the loan that they have been given. But since both companies are part of the same larger group, it shouldn’t be an issue, right? The only problem is that while the two companies are associated they are still entirely separate entities. That means the shareholders of the textile mill are investing in a different company from the shareholders in the holding company. As a result, some shareholders are not pleased with the deal because it means the rights and the holdings of the shareholders are being diluted. But is it as big of a deal as it is being made out to be?

Just how badly has shareholding been diluted?

aif Textile Mills is a publicly listed company. Up until recently 49.58% of shareholding in the company was held by the Saif Holding Company. As an associated company this isn’t particularly strange. But overall the textile mill is an entirely different entity with its own investors and books. But as the company is part of the Saif Group, they had secured a running credit facility with Saif Holdings, an associate company, that could go up to Rs. 77 crores given at mark-up at the rate of average local borrowing cost of lender + 0.1% spread. The loan was to be paid off by December 31 2023. From this facility, till date, it has used around Rs. 60 crores. On the 2nd November this year, Saif Textiles communicated to the stock exchange that it was converting the loan of Rs. 60 crores that it had secured from Saif Holding and converting this into equity. It would do so by issuing Saif Holdings an additional 6 crore shares at a par value of Rs. 10 each which would be equal to the loan that had been given to it. The company would give the associate company the shares and the loan would be considered settled. Now let’s look at this in a little more detail. The company currently has a free float of 50% which means these shares are held by

investors who are not associated with the company. Increasing issued shares from 26.4 million to 86.4 million with all of the shares going to the Saif Holding will tilt the bulk of the shareholding towards the associated company. The shareholding of Saif Holding alone will stand at 84% in the new company while the other shareholders will have 16% of the shareholding where earlier they held 50% of the shareholder. As a result, the book value per share of the shareholders will go from Rs. 151.9 per share as it stands today to Rs. 53.4 per share which can be seen as a destruction of 65% net worth of investors with the single stroke of a pen. Book value is the value of the company after its liabilities are deducted from its assets as declared in their financial statements. The logic is that if the company were to sell off its assets and pay off its creditors, what is the amount that will be available to be distributed to its shareholders.

The January notification

he concern that is being raised in the market regarding this issue of shares is due to the notification which had been sent by the company back in January. The notification was a clarification sent by Saif Textiles denying any rumors circulating in the market that Saif Textile Mills was going to be sold. This point becomes pertinent as, if the company was going to be shut, the company would have to sell off its assets and pay off its liabilities. The remaining amount would be paid to the shareholders. That means that the book value of Rs. 151.9 per share would be expected by the shareholders as things stood. Shareholders would buy shares of such a company in order to get a payback of Rs 150 after buying the shares at Rs 10 in the market. According to companies own accounts, Saif Textile Mills has recorded its freehold land in its accounts at Rs. 1 billion while the forced

sales value shows that the land is actually worth Rs. 6.6 billion. If this value is used instead of the book value of the asset, the book value of the company actually jumps much further to Rs. 365.6 per share.

The shareholders being disadvantaged

t this stage, it can be seen that a company which was rumored to be being sold is looking to give out shares to the market. On the face of it, it is clear that shareholders are losing out. In the future, if the company does close down, they would end up getting a lower price for their shares. As the number of shares increase, the book value per share falls leading to a decreased payback. Even if the company feels that the increased interest of the associate company will turn around the fortunes of the company, the company will see depressed earning per share and loss per shares will also fall. At this point it can be seen that shareholders are losing out due to the issue being carried out. If I was an investor, I would feel that in addition to my shareholding being decreased, my stake in the company has decreased and I get a lesser share in the profits of the future aswell.

What can be alternative

n alternative that can be used is a rights issue which could be much more fair to the investors as they would be allowed to subscribe and invest in the company and this would not deplete their shareholding or book value of the company. The additional funds raised could be used by the company to pay off its debt. The equity increase would be funded by an increase in the assets of the company and the shareholders would still own the same percentage of the company that they held before. Currently the share issue has been sent to the Securities and Exchange Commission of Pakistan (SECP) which has to approve the resolution being allowed to be passed.

So where does it stand?

t initial glance it doesn’t look too good. Here we have shareholders watching their shareholding diluted and the value of their shares drop drastically. But could this be a case of crying wolf? First of all, let us consider the point of view of an investor who currently holds the shares of the company. Right now, the shares are being traded at Rs. 9.35 per share. This is the most a buyer is willing to pay for my share. In case I feel the company is going to disadvantage me, I can sell my shares for this price. It might seem like I am

selling it for a low price but the fact is that Saif Holdings is going to buy the same shares at a higher price of Rs. 10 compared to me. The loan is not being paid off in the amount of pennies per say. Secondly, the book value has been highlighted in many places. It is acceptable that book value is seen to be a good proxy for the actual price for the shares, however, it is not the value at which the company should be valued at. The book value is just a value that is being associated with the assets of a company. The real intrinsic value can only be calculated once the company stops operating and all of its assets are sold. As this company is still operating, no real value can be attached to future earnings, revenues and profitability of the company. The book values do not account for the future operations of the company and that caveat needs to be made here. Relying on just the book value is problematic as it is being seen in isolation. In addition to that, the transaction has been classified as a “share issue other than a rights issue” which means that this is intentionally designed as not being a rights issue. The purpose is not to provide additional shares to the current shareholders or to just the sponsors or associates of the company. This is being used to pay off a debt of an associate company which is seen as a loan-to-equity swap. This is being done to reduce the burden of loan on the company which is beneficial to the shareholders as it decreases the interest payments in the future. This tool is used extensively in the corporate landscape of Pakistan. Now let’s get the SECP involved in this as well. In addition to getting approval from the SECP for the issuance of shares otherwise than right issue, the company needs to “get approval of shareholders through a special resolution for further issue of shares otherwise than rights passed by a majority of not less than threefourths of such members entitled to vote, as are present in person or by proxy at the general meeting.” This means that Saif Holdings has to get an additional 25% from the free float or minority shareholders in order to get this resolution approved before even being considered by the SECP. The minority shareholders have the power to stop such a move if they feel they are being taken advantage of.

The problem to the solution

t might still be worth looking into just exactly what is being suggested, which is that a rights issue should be carried out. A right issue is a mechanism in which the company asks its current shareholders to subscribe for additional shares. The ones who want to subscribe, pay an additional amount to subscribe for the shares. The ones who do not want to subscribe, can waste these rights. The right shares are also traded in the stock exchange which means an

associate company like Saif Holdings can buy these rights from investors willing to sell in the market. The investors who subscribe, retain their shareholding percentage in the company. The ones who sell their rights, see their shareholding fall. The ones who buy the rights in the market get to increase their shareholding. The funds that are raised by the rights issue go to the company which can then use these funds to pay off their debts. The problem with this solution is that it is a roundabout way of doing something simple that can be done with a loan-to-equity swap as well. The company first collects the funds from Saif Holdings and then gives it back to Saif Holdings to pay off its debt. Another problem with this is that the company cannot guarantee that, even after a right issue, the shareholding will stay the same. The investors who do not want to invest more funds in the company will see their shareholding decrease so to expect shareholding percent to stay the same is delusional. Lastly, just like share price falls after dividend or bonus is announced, a right share also leads to a decrease in the market price if additional shares are issued at a discount from the market price. In this case, this would have taken place as well. By issuing shares through a loan-to-equity swap, the share price remains the same. It is good to see that there are hawks sitting in the market who have a keen eye and interest to keep on a look out for injustices and abuses being carried out by the corporate sector in the country. However, in this case, they are seeing an abuse which quite clearly does not exist. On to the next one I presume.

Is there a technical loophole in the laws?

hile this issue of shares can be protected against due to the high amount of free float held by the market, this does highlight a case where shareholders will see the carpet being pulled from under their feet. And they would not be able to do anything about it. This is a special case where the company has 50 percent shareholding held by investors other than insiders of the company. Due to this, shareholders could and should join together in order to stop any abuse from being carried out. What about cases where less than 25 percent is held by other or minority shareholders? In such a case, the share issue will pass the threshold set by SECP, have the backing of the shareholders and the only recours left would be to file a court case against such an alleged abuse. Companies can even abuse such a law to decrease the shareholding of minority shareholders by taking a loan with the intention of never paying it back, show losses for a few years and then float the idea of a swap. In that case, all these rationale can be used to dilute shareholders value and worth. n

STOCK EXCHANGE

PAYMENTS

By Farooq Tirmizi

ome time over the next 12 months, Pakistan’s economy will cross an important milestone: the total volume of transactions that people conduct using their credit and debit cards, their bank apps, and web portals will exceed the total amount of cash they withdraw from bank branches or ATMs. In other words, to make a payment, if you are one of those Pakistanis who has a bank account, you will be more likely to use a card or the internet than go get cash from the closest bank branch or ATM. Cash is still very much king in Pakistan, accounting for about 37.2% of all transactions in the country (excluding interbank and government bond transactions) as of the second quarter of 2023, according to Profit’s analysis of data from the State Bank of Pakistan. But the myth that Pakistanis do not like transacting using electronic means needs to die. The evidence is in. In fact, the question is not even whether and at what speed cash will go out of fashion. The most important question on this subject is how do business leaders take advantage of this shift that is already happening? Which payments companies or startups are poised to take advantage of this change? And given all of this, what effects can consumers expect to see in the scope of services that will be available to them? It may be hard to see it now, given the incredibly difficult period that the Pakistani economy is still going through, but a tipping point has been reached and an exciting new stage of economic development is in the offing for Pakistan. In this story, we will explore where we currently are with respect to the evolution of digital payments in Pakistan, how we got here, and what comes next.

Methodology of data analysis (feel free to skip)

brief note on the data and methodology used in this article. The data comes from the State Bank of Pakistan’s quarterly and annual Payment Systems Review reports from the third quarter of calendar year 2016 through the second quarter of calendar year 2023. The reports extend much further back into the past as well, but the data appears to be compiled using a different methodology in prior years, and we included only data from the years where it seemed most directly comparable. Unless we specify otherwise, all growth rates mentioned in this article refer to the total value of transactions, not volume. We also felt this was the most pertinent period to examine, since this is also the time when Pakistanis began to gain access to the internet in large numbers, following the auction of the 3G and 4G mobile broadband internet spectrum, which gave tens of millions of Pakistanis access to the internet for the first time. Profit has not just compiled the data, but also combined it with other banking sector data to create as holistic a picture of payments in Pakistan as possible. While the data for every other payment method is available in that report, what is not available is the volume of cash transactions that do not touch the banking system at either end (i.e. neither the giver nor the receiver of the cash is a banking or financial entity). While the volume of cash transactions is not directly measured by the State Bank of Pakistan, because it issues bank notes, it has a fairly good idea of exactly how much physical cash is in circulation at any given moment in time. We made a simplifying assumption that

the velocity of transactions involving physical cash is approximately the same as that involving the payments system in any given period. We are not certain as to how accurate this assumption is likely to be, but we also do not have a better number to go on. Having calculated the total value of transactions involving cash, we then subtract from that the value of cash transactions involving the banks (ATM or branch withdrawals and deposits) to arrive at an estimate of the size of the cash-only transactions economy. This estimate is then plugged into any calculations involving market share of cash vs electronic payments. One other note: we excluded interbank settlements and government bond transactions in our analysis, since those are transactions that are needed to keep the payments and banking system running. Counting them would likely end up double-counting many transactions and hence result in a skewed picture of what people are actually using to make their payments. One final bit: we are putting in US dollar equivalents for many numbers in this story to help illustrate the scale of what we are talking about. Since almost all of the numbers involved represent flows over a period of time, we will adopt the convention of utilising the average exchange rate during that period, defined as the midpoint of the open market buying and selling exchange rates as published by Business Recorder.

The current state of play in payments

ake a look at where the current state of payments is in Pakistan, and you will notice the absolute dominance of cash. About 37.2% of transactions

are cash-only – meaning they do not interact with the banking system on either the payer or receiver side. Another 11.8% are deposits and withdrawals from bank branches, and a further 1.6% are withdrawals and deposits at ATMs. All told, the total amount of transactions involving physical cash is about 50.7% of the value of all transactions in the country. Indeed, purely electronic transactions account for just 15.9% of the value of all transactions in the country. (The bulk of the remainder is taken up by things like cheques, and other paper instruments.) But take a look at the growth rates and it becomes clear that growth in payments is coming largely from electronic payment methods, with cash and paper slowly but surely losing ground.

On the chart of the growth rates in payment value by payment type, all of the top five spots are taken up by internet-based methods. Bank mobile apps are the fastest-growing, with the total value of mobile app transactions growing by an average of 135% per year since 2016. It is getting to the point where bank apps are no longer just a niche that is posting high growth rates purely due to a low-base effect. For the fiscal year ending June 30, 2023, transactions initiated on mobile apps reached Rs23.7 trillion ($92.7 billion) in value. That means that every month, there are nearly Rs2 trillion ($7.7 billion) worth of transactions taking place, mostly at the beginning of the month, just off people’s mobile phones. Transactions on the desktop websites

of banks – which were a larger market than mobile apps as recently as the second quarter of 2021 – are the second-fastest growing, at an average rate of about 60% per year since 2016. Bank websites and mobile apps are now rapidly becoming a favoured method by which Pakistanis transact. In the second quarter of 2023, the most recent period for which data is available, transactions worth Rs12.4 trillion ($40.7 billion) took place on bank websites and mobile apps. During that same period, total cash withdrawals from both bank branches and ATMs were only slightly higher, at about Rs 14.5 trillion ($49 billion). If current growth rates hold, we suspect that cash withdrawals from banks will be smaller than bank mobile and website transactions within the current

PAYMENTS

quarter, and almost certainly by the end of the current fiscal year. In some categories, consumers’ desire to transact online is quite high. For instance, about 48% of all utility bills in Pakistan by value were paid during the second quarter of 2023 on a bank website or a mobile app. That number was less than 4% in 2017. Card-based e-commerce – i.e. NOT cash on delivery – is growing at 57% per year, the electronic large retail and B2B transactions system at 35%, and physical card transactions at a point-of-sale (POS) machine at 28% per year. The relative magnitude of these growth rates, and which ones are higher and lower tells us a lot about the state of mind of the Pakistani consumer, and what strategies might be applied for businesses that want to take advantage of this.

How we got here

made my first e-commerce purchase in Pakistan in 2009, when I bought a book on the Liberty Books website and paid with a debit card. At the time, virtually everyone I knew told me I was stupid and that my card information would be leaked and my money would be stolen. That kind of thing does, of course, happen, but it did not happen to me. Those kinds of concerns have largely receded into the background today. People still have a strong preference for cash-on-delivery, but it is not because they fear putting their card information into a website. They may be sceptical of merchants, but they trust the payments system, and for that, we must give the banks credit. Pakistan is nowhere near where it needs to be in terms of availability and ease of elec-

tronic payments, but there is no denying that the progress has been impressive over the past five years. In a previous story on the subject, we mentioned the fact that the prevalence of 3G and 4G internet was a massive enabling factor in the rise of electronic payments. We must add that both the State Bank of Pakistan and the banks have done a good job. The banks, pushed both by the State Bank and the payment networks (Visa and Mastercard), have helped the public gain trust in using cards online, in shops, and on ATMs. They have built largely secure websites and apps that – while being less than stellar in performance sometimes – are products that people feel they can trust to do the job well and, most importantly, not let their money get stolen. This is not, in any way, to suggest that fraud does not happen or that hacks are not a concern. They are, but they have become rare enough that the public at large is not too frightened to use electronic means of transacting, and for that, the banks, the payment networks, and the central bank deserve credit.

And the fact that card-based e-commerce is also growing rapidly – albeit less rapidly than bank apps and websites – suggests that the horror stories of e-commerce notwithstanding, people are a bit more willing to trust e-commerce merchants than meets the eye. One hypothesis that some people have put forward: people will pay cash-on-delivery for the first, or first few, orders from an e-commerce merchant. But once they establish trust, they will then place subsequent transactions using a debit or credit card. Talk to e-commerce merchants and most insist that cash-on-delivery accounts for between 80-90% of their business, and for some it is even higher. We have no reason to believe this is not the case, but the fact that Pakistanis spent $564 million in fiscal year 2023 through their cards on Pakistani e-commerce websites and apps – and that this number has been growing at an average of 57% per year for the past 6 years – tells us that card-based e-commerce is not just a curiosity. People clearly wish they could trust e-commerce websites

TEXTILES

enough to use cards as their default payment method. So how do we reconcile both of these data points: card-based payments are growing rapidly, but merchants say the proportion of their revenue coming from cash-on-delivery is about the same as it was in 2016. Only one explanation makes sense: e-commerce as a category is growing by that rapid rate. An interesting question to which we tried to get an answer but have not yet found one: how much of this growth is coming from new users trying out e-commerce for the first time vs expanded spending by existing e-commerce customers? If we find data that answers that question, we will report back. And after years of stalled growth, there now appears to be a sharp increase in transaction value for card payments at retail outlets. POS transactions were a relatively slow growing category between 2016 and 2020, but over the past three years have averaged about 54% annual growth. What caused the sudden change? The number of POS machines. As of September 30, 2020, there were just shy of 53,000 POS machines deployed across all of Pakistan, a number that had grown at an embarrassing 1.2% per year for the previous four years. As of June 30 of this year, that number has more than doubled to 115,000 POS machines. Intensifying competition amongst the banks and payments companies appears to be behind this increase, though the number of banks that offer POS machines – nine – has not changed during this period. In short, this data is telling us that people in Pakistan largely trust the payment rails that help them transact electronically. When those rails are made more accessible, they will use them. They only pause when they do not trust the person on the other end of the

transaction.

What comes next

o if you are a bank CEO or a startup founder, what should you take away from this? How can you take advantage of what is clearly the mother of all economic behavioural changes taking place in Pakistan today? In our view, the answer is simple (even if its implications are complex): any business that is able to increase trust between transacting parties will build a winning business. This can take many forms, whether it be a high-service-quality e-commerce merchant, or a marketplace that insists on performing verifications of every merchant it allows onto its platform. Or it could look like Safepay’s recurring payment feature. To recall, Safepay is one of Pakistan’s leading fintech startups focused on enabling e-commerce merchants to accept electronic payments, and after spending at least two years working on it, they have finally been

able to launch their recurring payment feature. It could, if used right, be a game-changer for Pakistan’s economy. Why? Because it reduces the barriers to trust between any two transacting parties. By allowing the buyer to break up the payment they owe the seller into multiple smaller payments, each of which is automatically authorised when they set up the first payment, they are reducing the risk each party is taking on in transacting with the other. The number of businesses that can be built on top of this is simply astounding. Here is a partial list of things that could potentially be built using this feature from Safepay. (Note to aspiring founders: some of these are startup ideas.) 1. Rental payments: A web portal that allows landlords to collect rent from their tenants on a monthly basis rather than insisting on annual rent being paid up front, which many prospective tenants find difficult. By making monthly payments the norm, the size of the population that can consider renting their own place would increase, which would reduce the vacancy rates on rental properties.

PAYMENTS

2. Insurance: Instead of having to pay annual premiums, insurance company clients could pay monthly premiums, which would increase the market size by allowing more people to try out insurance. 3. BNPL: Buy-now-pay-later companies can substantially reduce their risk by allowing users to enter recurring payment authorizations on their debit cards, which would lower at least some of the default risk. 4. Services professionals’ fees: Imagine being able to pay a lawyer, an accountant, or an advertising agency their fees in smaller instalments, all authorised as recurring payments on a debit card. Payments for such services would feel more manageable, more people and businesses would feel they could afford them, and the service professionals in these fields which are notorious for low pay that often comes late will find higher and more predictable cash flows. Notice one thing the above list has in common: all of these are services and products that currently exist but are accessible only to a small number of buyers, and the sellers find their selling experience highly unpleasant since there are so many trust issues. Lowering the lump sum costs by breaking them up into predictable, automated monthly payments would increase trust. (Remember: lump sum payments are often the result of low trust to begin with. For example, in the case of annual rents for real estate.) It also, quite obviously, makes costs more manageable without necessarily decreasing them, thereby increasing market size. And if banks were to allow recurring payments from bank accounts – and thereby

avoid the 2.9% debit card fees – some more use cases would open up. 1. Automated car loan and mortgage repayments: Banks could reduce a significant portion of their repayment risks on car loans and mortgages if they stopped resisting the attempts by 1Link and others to implement a recurring payment feature in bank accounts. It would open up their lending book to all banking customers, instead of just the customers of their banks, and in turn would increase their ability to grow these business lines. 2. Systematic investment plans: This would allow people to deposit money into mutual fund or brokerage accounts at a regular cadence, allowing them to systematically invest their money and ensure that they could build

up wealth for themselves and their families. One piece of software, in other words, would help us both trust each other more as a society, and help increase access to many different types of services that we could benefit from but currently feel we cannot afford. More broadly, increasing trust makes the country a less scary place. Every bit of fear that gets taken out of the economy is fear that we as individuals do not need to feel, and some of the clenched muscles that come from us being in a metaphorical crouch all our lives might unclench just a little bit, allowing us to breathe incrementally a bit easier. Who knows? We might even become a society that encourages people to take a bit of risk and consider entrepreneurship. n

PAYMENTS

If Honda has any tricks up its sleeves, this might be the time to pull them out The HR-V’s honeymoon period seems to be coming to an end By Daniyal Ahmad

onda has a pricing problem. If it wasn’t clear enough when they introduced the Honda Civic back in January 2022 at the price of Rs 60 lakh (which has since risen to the Rs 1 crore mark), it should by now have become a player with how Honda has handled their latest attempt at rejuvenation: The HR-V. As a car it is one you would expect to do well. It boasts the distinction of being the first indigenously produced Japanese crossover-sports utility vehicle (C-SUV) in Pakistan. Not only this, the HR-V was the first C-SUV launched by one of the “Big Three” (Suzuki, Toyota, and Honda) car companies in Pakistan. The hype surrounding it was justified, and Honda hit the ground running with it. The vehicle was fully booked for the first six months merely a day after its launch. But that is all in the past. Sales of the car have since nosedived. It has also tanked on the secondary market making it an undesirable car in terms of resale value. This fall has been bad enough that the HR-V is now being sold on interest free instalments in a two year plan. That is how desperate Honda seems to have gotten to wash their hands of the car. So what went wrong?

AUTOMOTIVE

The Vezel psyche

ur story starts with a different car in a different era. Back in 2014-15, the Pakistani car market was facing an influx of refurbished Japanese cars. The Toyota Vitz was possibly the most successful of these cars but there were other iconic four wheelers too. The Toyota Passo and Prius were both famous on this market as well. But Honda’s contribution to this was the Vezel. Vezel is the name that the HR-V has on the Japanese domestic market. At the time, a Honda Vezel in good shape would sell at a range of Rs 35 lakh to Rs 36 lakh at a time when the Toyota Corolla and Honda Civic

were around Rs 10 lakhs cheaper than this. But the Vezel was not a sedan. As one of the first crossover SUVs to hit the Pakistani market it immediately made its place in the car circuit in Pakistan. In fact, the Vezel was an early herald to another iconic car: The KIA Sportage which hit markets in 2020. Before Lucky Motors heralded the arrival of the KIA Sportage, Pakistan’s C-SUV landscape was barren, compelling consumers to depend on an assortment of imported vehicles to bridge the market void. The nonexistence of a C-SUV at the in Pakistan did not signify a dearth of demand for one. The Vezel was the precursor of the Sportage, and the C-SUV sensation. By 2014-15, consumers had grown

In my opinion, the HR-V was launched as a half-baked product. Chinese automakers provide more features such as driver assistance and panoramic sunroofs. In contrast, Honda has failed to equip the HR-V with even basic amenities like cruise control or a sunroof Shaheel Shahzad, Co-founder of Bloombig Overdrive

familiar with auction sheets, a development that coincided with Pakistan’s resolution to peg its currency to the dollar. These elements collectively fuelled the Vezel’s meteoric rise in popularity. So much so that Honda launched the global rendition of the Vezel, the HR-V, in 2016. The 2016 HR-V was a completely builtup unit (CBU) — a fully imported entity — whereas the current version is a completely knocked down (CKD) unit. Consequently, the 2016 HR-V does not lay claim to the accolade of being the inaugural locally manufactured Japanese C-SUV. That distinction is reserved for the present iteration. The fact that the 2016 model failed to secure this honour, despite its launch over half a decade ago, speaks volumes about the market’s reception of the vehicle. The CBU HR-V’s debut in Pakistan in January 2016 was met with lukewarm response, as the vehicle was under-equipped and overpriced in comparison to the Vezel offered by importers. To provide some context, the Vezel was a hybrid, equipped with a 1.5-litre internal combustion engine and a 30 hp electric motor. The HR-V, in contrast, was fitted with a standard 1.5-litre internal combustion engine — identical to the engine powering the more budget-friendly Honda City at the time. The

HR-V bore a price tag of approximately Rs 36 lakh, while the Vezel was priced at Rs 34 lakh. The Vezel also enjoyed the benefits of superior quality of life features and enhanced build quality. Ultimately, by 2018, Honda decided to discontinue the HR-V altogether.

The relaunch

espite all this, Honda knew that the HR-V had the potential to be a big seller. They also knew that to have the best shot at selling it they would have to introduce the latest shape, model, and make of the car to convince people to buy it. In October 2022 the HR-V had a successful launch. Merely a day post-launch, the company was inundated with bookings stretching well into the early months of the following year. Within a week, whispers began to circulate that the vehicle was sold out until spring, and perhaps even beyond. However, charting the HR-V’s triumphant trajectory is no simple task. Honda, in its monthly sales report to the Pakistan Automotive Manufacturers Association (PAMA), merges the HR-V’s sales figures with those of the BR-V. Consequently, discerning the individual sales of each model becomes a challenge. While some third-party reports provide inklings

about the composition of Honda’s sales, the company itself remains tight-lipped, leaving everyone in a state of speculation. We find ourselves in the same boat. Our analysis delved into the five-year history, spanning from September 2019 to September 2023, of the HR-V/BR-V category in Honda’s sales filing to PAMA. Our objective was to gauge the growth in sales volume of the category since the HR-V’s introduction. The combined category of the HR-V, and BR-V accounted for a total of 2,962 vehicles sold from January 2022 to October 2022. In stark contrast, from November 2022 to March 2023, the category registered 3,262 sales, marking a 10% increase in half the time. Furthermore, when examining the category’s sales relative to the entire car category, the category represented a modest 2% of total sales on average from January 2022 to October 2022. However, from November 2022 to March 2023, it ascended to 5%. In the absence of disaggregated sales figures, one could surmise that the surge in sales was due to the BR-V overshadowing the HR-V in terms of general interest. Yet, a cursory glance at Google Trends reveals that the HR-V has consistently piqued more interest than the BR-V for the majority of the time from

The HR-V’s price range now offers a multitude of options. This is a stark contrast to the market in 2016 when the BR-V launched as the only locally manufactured seven-seater vehicle. Even if these competing vehicles only sell a few hundred units per model, it adds up Usman Ansari, Founder of CarSpiritPK

September of the previous year until now, with the HR-V only recently descending to interest levels comparable to the BR-V. This is where our problem lies, and the second part of our story begins. While the HR-V made a spectacular debut, it appears to have lost its initial momentum. In terms of nominal sales, sales relative to the entire car market, and sales relative to Honda’s portfolio alone, the aforementioned dual category has experienced a significant downturn. The HR-V and BR-V category, based on PAMA’s sales figures until September of this year, is actually trailing the average sales for the category from September 2019 to date. This trend has been evident since February 2023. Nominal figures might be deceptive, given the current turbulence in the automotive

industry, but the narrative remains consistent in terms of relative sales to the overall car market. The category has only once surpassed its five-year average since February 2023, with it lagging behind said average for several months as well. To ensure a comprehensive analysis, we also investigated whether the HR-V was trading at a premium or a discount in the secondary market.

What the ons can tell us about demand

s most Pakistani automotive buyers would be aware, there’s an alternative barometer of market interest: the elusive ‘on-premium’. This term refers to the additional sum a customer will-

ingly parts with, over and above the ex-factory price of a vehicle, to secure their coveted car on the very same day, thereby circumventing the agonising wait of months for delivery. The reason for this delay is that Pakistani automotive companies only produce the car after getting an order for it. The HR-V retails for between Rs 76.5 lakh to Rs 79 lakh based on which of the two variants you get. However, here’s where the on-premium comes back in. Like all other cars, the HR-V does not retail for the listed price. And unlike most other vehicles, it does not benefit from the secondary market’s markup being in it’s favour. If anything, consumers, currently, think it migh be overpriced. What do we mean? To find out the premium for the HR-V, we drew comparisons with other vehicles that

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could potentially serve as substitutes. Our selection criteria included vehicles that were either Rs 5 lakh cheaper or more expensive than the HR-V Vti and the HR-V Vti-S, respectively. These included the Corolla Altis special edition, the Corolla Grande with beige or black interiors, Hyundai’s Tucson GLS and GLS Sport, KIA’s Sportage Alpha and Sportage FWD, Haval’s Jolion, Peaugeot’s Allure 2008, MG’s HS, and Changan’s Oshan X7. We examined a total of 309 vehicles across the 13 models, giving each model a sample size of 25 where possible. Out of the 13 vehicles, 8 traded at higher prices than their original ones. However, the HR-V models were not among them. So, what led to the dismal situation of Honda’s HR-V?

Lacking the bite

“I

n my opinion, the HR-V was launched as a half-baked product,” declares Shaheel Shahzad, Co-founder of Bloombig Overdrive. “Chinese automakers provide more features such as driver assistance and panoramic sunroofs. In contrast, Honda has failed to equip the HR-V with even basic amenities like cruise control or a sunroof. Not to mention, but the 1.5L naturally aspirated engine is sluggish” Shahzad expounds. When it comes to features, Shahzad’s argument holds water. A comparison of the HR-V with its potential rivals reveals that the HR-V Vti is second from the bottom, while the HR-V Vti-S is fourth from the bottom in terms of features across the range of vehicles. The only two vehicles that the HR-V manages to surpass — the Corolla Altis special edition and Hyundai Tucson GLS — are not only more economical but also larger in the case of the latter. The HR-V’s shortcomings become glaringly apparent when we focus solely on the

C-SUV segment. “The Sportage Alpha, with its cruise control, larger engine, and cabin size, is a better option in my view,” Shahzad adds. Although the HR-V’s only real competitor based on size alone is the Peugeot 2008, the HR-V is, on average, pricier than the Peugeot and sits squarely in the middle of C-segment C-SUVs across the board. This point is pivotal because while the difference in features is essentially an indictment against the HR-V, the size difference is of greater significance. It is perhaps the catalyst for the C-SUV market’s initial success. This publication has previously discussed how the dimensions and pricing of KIA’s Sportage—and its peers—have chipped away at the traditional sedan market. Read more: Can KIA be King, or do the Big 3 have another trick up their sleeve? The heart of the issue is that Pakistani customers have a preference for larger vehicles. While the HR-V is larger than some of the sedans it competes against, it is no longer the only player in the game. “The HR-V’s price range now offers a multitude of options. This is a stark contrast to the market in 2016 when the BR-V launched as the only locally manufactured seven-seater vehicle. Even if these competing vehicles only sell a few hundred units per model, it adds up. That’s market share

being wrested away from Honda,” explicates Usman Ansari, Founder of CarSpiritPK. However, Honda’s predicament may not be unique to Pakistan, at least according to Ansari. “On a global scale, the Japanese have been slow to respond to the C-SUV market. In stark contrast, the Europeans and Chinese have capitalised on it. As a result, while the Japanese have a smattering of models, the others have a veritable arsenal,” Ansari asserts.

Between a rock, and a hard place

n ostensibly straightforward solution for Honda to bolster its market presence could be to either slash the price of the vehicle or amplify its features. However, these alternatives are not as unambiguous as they appear. Trimming prices in Pakistan’s automotive market solely for the sake of sales is a venture fraught with risk. Your vehicle could emulate either the trajectory of the KIA Sorento or the Peugeot 2008. There’s an absence of certainty, and the hazards of having the former’s fate in your portfolio are something any car manufacturer would shudder at. As for augmenting features, they might merely inflate the cost and aggravate the predicament. The quandary Honda faces bears a striking resemblance to the conundrum it grappled with from 2016 to 2018 with the predecessor of the HR-V. The only divergence is that the stakes have been raised this time around. Unlike in 2016, Honda has now ventured to manufacture the vehicle on Pakistani soil. Consequently, it has invested billions in the hope of the car’s success. This bold move comes at a time when every automotive titan has resolved to conquer the C-SUV market. This is not to insinuate that Honda is oblivious to its challenges. The unexpected offering of 24-month interest-free instalments provides the company with an ingenious method of reducing prices without enduring the Sorento debacle themselves. However, if Honda has any trump card hidden up its sleeve, it might need to make its move sooner rather than later. n

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OPINION

Fahd Ali ALL THINGS ECONOMICS

Distribution woes again!

It’s not just a battle between the rich and the poor. There is also a conflict between the employees and their employers

e will continue with the theme discussed in my first column; distribution of national income. There are different ways of studying distribution of national income in an economy. Before I elaborate let’s understand how national income or GDP can be divided among people. We know that people earn their incomes in different ways in an economy. Most people we know work for somebody else. They provide their labour to firms, and in return earn wages and salaries. Then there are some who own their own firms and earn profits. There is also a third kind, called rentiers. They neither work nor own a firm but live off on rental income. For simplicity we assume that we are considering an economy that only has workers and owners of firms. How do people earn their income in this simple economy? Well, workers earn a wage from the firm they are employed at and firm owners or capitalists receive profits. Collectively these two i.e. workers’ wages and capitalists’ profits add up to make the national income or the GDP. So we can say that GDP of an economy can be divided into two parts - the wage part consisting of the sum of wages

The author is an economist whose work focuses on macroeconomics and economic history with political economy as a common theme to both

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received by all the workers and the profit part comprising the sum of all the profits earned by the total number of firms in the economy. Let’s call them wage share and profit share. Since they are shares out of the GDP therefore if we know one, we can easily calculate the other by simple subtraction. Another way of studying income distribution is to divide all households in an economy in equal income groups. For example a decile would have 10 equal groups and a quintile would consist of 5 equal groups. In my first column I talked about how much of the national income was owned by the top 20% of the households in Pakistan. I had quoted a study that investigated income distribution in the Pakistani economy. Both methods have their pros and cons. For instance, top 20% households would have both high salary earners as well as high profit earners. Wage and profit shares on the other hand tell us the distribution of income between the two factors of production. Wage share would include both high and low income earners just the same way profit share would include high and low profit making firms. But importantly, factor shares of income can also tell us something about the conflict between workers and capitalists. Capitalists or firm owners want to earn as much profit as they could, while the workers would want to push for higher and higher wages. Both come from the output that the workers produce. Capitalists and workers can then be thought of trying to capture as big a share of output as they could, respectively. This conflict over output share also tells us the distribution of output between the firm owners and the workers. Economic theory also tells us a link between wage share and economic activity i.e. whether wage share and GDP are linked. We usually track this by finding a link between growth rates of wage share and the real GDP (real GDP is GDP adjusted for inflation). Normally the causal link

runs from the growth rate of wage share to real GDP growth rate. Figure one below shows the share of workers in national income in Pakistan over the past decade with the real GDP growth rate. Wage share is shown on the left axis while real GDP growth rate is shown on the right axis.

Before I comment on the graph above, a word about the data. Normally, wage share is calculated by data collected in labour force surveys. The idea is that the survey is a thorough exercise that collects information on workers’ earning in different sectors and income levels in the economy. The survey is representative and the data collected can be used to calculate national averages. However, Pakistan’s labour force surveys do not allow us to calculate workers’ wage share directly from the data. The reason being that in Pakistan a large section of the workforce is self employed and/or doing family labour. These categories do not report their income the same way workers employed at a firm would. This makes it difficult to calculate wage share directly. Then there is the added difficulty of the reliability of data. Household income and labour force surveys carried out in Pakistan are known for not collecting data from the upper echelons of income levels. So one has to often take the numbers not just with a pinch, but a bag full of salt. However, despite these difficulties and challenges, labour share of income can still be imputed using different techniques. One such estimation is done by the International Labour Organization (ILO). The data used in figure 1 above comes from the ILO’s modelled estimates. These estimates can vary from year to year depending on the methodology used. For example, I have the most recent ILO numbers and also one from a couple of years ago. The most recent numbers show a higher wage share (higher by 5-6%) for the same year than the previous data! Which numbers do we trust then? But more importantly what does this say about the imputation exercise itself? As a general thumb rule we can go with the most recent data set. Further, we can assume that the data for each year may not be reliable but the overall trend may be reflective of the actual situation. Like all other social sciences, economic analysis is also constrained by the information available. We just have to make do with what is available rather than what we wish was there! We can see in the figure 1 above that there is a slow upward trend in the wage share and that it mostly moves between 45% to 50% range. This kind of stability is not unexpected. Wage share’s upward trend post 2008 could be because of increased welfare transfers to the poor after 2008 (BISP and all). Welfare transfers to the workers are counted in their total earnings. It could also mean that the successive increases in the minimum wage levels have contributed towards an upward pressure on real wages despite poor implementation. Note how the wage share rises during the two periods of slow economic growth (2009-2012 and post 2018)) but falls when the economy grows at a higher pace (2013-18). One possible reason could be that when economic growth

is slow the profits earned by the firm take an immediate hit, while wages adjust more sluggishly. Similarly, during periods of high growth profit share grows more quickly than wages do. However, one would have to dive deeper into the data to ascertain what’s really going on here. We won’t do that today. Figure 2 below shows the growth of wage share with the growth rate of real GDP below. Wage share growth rate is shown on the left axis and real GDP is on the right axis.

in the growth rate of wage share and there does seem to be a (weakish) link between wage share growth rate and economic activity. However, it is not possible to say whether GDP growth rate causes wage share to grow or vice versa. We would again have to dive deeper into the data to ascertain the causal link here. In summary, today we tried to learn how studying distribution of national income can be helpful in understanding how the economy behaves. We realised that this distribution may hint at conflict over output between the work-

Figure 2: Growth rate of Wage Share with Real GDP Growth Rate One can see there is a lot more volatility

ers and the capitalists. This conflict has other consequences than just impacting the economy but we will take those up in a future article. n

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Can’t pay the bills with ‘experience’ A look at the pay structure - and lack thereof - for junior associates at Pakistan’s elite law firms By Meerub Amir

“N

o, when I say nothing, I don’t mean next-to-nothing,” says S, a junior associate at a prestigious law firm in Lahore, speaking on the condition of anonymity about his salary at the firm. “The next-to-nothing guys are still lucky enough to be able to cover their fuel costs. Me, I’ve had to mooch off my folks, even for petrol.” “Look, I’m not running an episode of Suits in my mind. I live in the real world. I’m not comparing my salaries with what my classmates at university in the UK are now making,” he said. “But the next-to-nothing guys aren’t even making a legal minimum wage. And I am not making any wage at all.”

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“The guy who serves tea at the office, nice fellow; we all play cricket in the street behind us whenever we get free early. I hope he gets a raise, specially with his wedding coming up in a couple of months. I’m just saying that between the two of us, he’s the one earning a wage, not me, with my fancy degree that my folks paid through the nose for.” S is not alone. Consider M, a fresh graduate of the law program at LUMS, working at a similar top firm. It’s a nine-to-nine workday for him, the lulls in between which he squeezes in his work as a research assistant for a previous professor. But it doesn’t stop there. He works as an InDriver driver at night after work and on any Sundays he has free time. Three jobs just to be able to have a roof over his head. Despite the fact that he had paid a total of almost Rs 60 lakh for five years of law school, his seniors deemed him unable to con-

tribute sufficiently to his workplace and therefore, he earned Rs 5,000 less than the minimum wage mandated for unskilled workers– even though he is very much a skilled professional: a junior lawyer in Pakistan. M, however, seems to have internalised this scheme of things. When asked whether he felt exploited by the partners at the firm, he defended them, by saying they were kind to him. An example of the aforementioned kindness? His water geyser broke down last week, which he obviously couldn’t pay to fix. “So the seniors let me shower at the office.” The eminence of wage exploitation in law firms became a prominent topic of discussion earlier last month when junior associates and lawyers began revealing the disproportionate nature of their remunerations at leading law firms on social media. Quoting an average of 10 hour work days, sometimes seven days a

These big lawyers want no change either. They know law is a service based on face-value and so even if they (lawyers) take 10 cases a year they can make up to Rs 10 crore, some of which is given to their clerks, some to cover fixed costs, some to junior lawyers, and a majority to themselves Dr Ikram Ul Haq, Advocate Supreme Court and Partner at Huzaima & Ikram

week, junior associates said they were barely paid minimum wage for their contributions. This piece is about the wages at leading law firms in the country and not the single-lawyer small outfits which form the bulk of the manner in which law is practiced in the country. It is necessary to point out that the term “leading law firm” is not used loosely but refers, throughout this piece, to the category of Pakistani law firms with international accreditations and rankings on the Legal500 and on the Chambers and Partners. However, in conversations with Profit, as well as through their own opinion pieces in newspapers, the senior partners of these firms seemed to reassure us that there were actually good reasons for these almost exploitative underpayments. For instance, according to Abdul Moiz Jaferii, senior partner at HWP Law, junior lawyers are underpaid because law firms simply can not afford to pay them. According to Waqqas Mir, senior partner at Axis Law Chamber, the nature of exposure and learning provided by firms compensates for the absence of a minimum wage. To a senior associate at ABS, the nature of payments received poses logistical restraints to payments. And to Feisal Naqvi of Bhandari Naqvi Riaz (BNR), the cyclical payments and inexperience of junior lawyers made them difficult to reward, as written in his article, “Lawyering and its discontents”. Overall, Profit recognized three overarching categories of reasonings: the size of the market for legal services in Pakistan, the nature of payments and unaffordability, and the inexperience and inefficiency of junior lawyers. In line with the legal industry’s embedded culture of seniority, we will begin by verifying these reasonings first.

I. Size of the market

ne of the underlying arguments surrounding this debate is that there is inadequate demand for legal services in Pakistan. Intuitively, this makes sense. Consider not only the costs and inefficiencies associated with the country’s judicial system but also the alternative avenues available for conflict

resolution. A large majority of the cases filed in court, from civil litigation matters of land grabbing, to corporate cases of financial transactions can be resolved or achieved through either implicit payments to third parties or through out of court arbitration, amongst other ways. This, according to some members of the legal fraternity, means that not only are legal services undervalued but there are also very few people and organizations willing to take the legal route and pay for the service. Therefore, since the size of the pie is small to begin with, the portion cut out for junior lawyers has to be even smaller. However, Profit did a small exercise to assess if the legal services market is actually as miniscule as is famously insinuated. The financial reports of five top companies listed on the Pakistan Stock Exchange, namely: Fauji Fertilizer, Habib Bank, Mari Petroleum, Millat Tractors, and Indus Motors reveal an aggregate of Rs 1.6 billion spent on legal and accounting services. Even if we were to assume that half of this amount spent by these five companies is spent on accounting and audit reports, the remainder is still a substantial figure of around Rs 844 million for only five companies – which does not necessarily make for a small pie. There are some caveats to this approach, most prominently that this ballpark figure does not reveal whether the Rs 844 million is being paid to one, five, or twenty law firms. Instead, this exercise only helps encapsulate the overall size of demand for legal services. As law firms have numerous branches of legal practice and specialization, it is common for businesses to hire more than one law firm for their tasks. Resultantly, the amount of money a company pays for legal service does not necessarily equal the amount of money a particular firm earns.

II. The unaffordability of law firms

nother more compelling, but equally difficult to verify claim by senior partners is simply the unaffordability of law firms to pay their

junior associates. It is imperative to note that in his conversation with Profit, Jaferii clarified that unaffordability stemmed from the nature of payments and not the overall amount received. He explained, “law firms receive cyclical payments instead of constant payments, as pointed out by Feisal Naqvi as a result of which attempts to keep overheads as low as possible need to be made.” Naqvi elaborates on this in his article as well. Apparently, the litigation fees paid to law firms in Pakistan are paid on a lump-sum basis, meaning that the entire payment is received before the case begins and therefore, as the overhead costs increase, the amount taken home by the senior counsel decreases. It would be a fair assumption to make that these lumpsum payments that Naqvi was referring to were specific to the business model of his own law firm, BNR. But that is not necessarily the case. Trying to understand all the income streams of law firms is like playing with a Matryoshka doll. The lump sum and cyclical payments referred to above, therefore, are only one of the many wooden dolls in a very extensive stack. Lets look specifically at Naqvi’s firm. To assume BNR is potentially unable to fairly compensate its junior lawyers because they are not recipients of an unimpeded revenue stream is not only an incorrect statement, but also one that is unfair. This is where we introduce you to a retainer agreement. A retainer agreement is a work-for-hire contract wherein an advanced retainer fee is paid by a client to a service providing firm to reserve their services for any future requirements. This means that not only is it paid on a monthly basis, but it is also paid regardless of if any work is carried out by the firm and without the firm sustaining any overhead costs. Interestingly, not only does Naqvi’s law firm BNR have a retainer agreement, but more importantly, they have it with META, formerly known as Facebook Inc, with a fixed monthly income of approximately Rs 1.5 crore. Additionally, senior partners at law firms are also advocates of the Supreme and High

Yes there’s a lot of conversation that needs to happen in the legal profession but a lot of it is far more important than a young lawyer’s career trajectory. We must discuss that there is a consequence to lying in court, a consequence to delaying cases for years… Abdul Moiz Jaferii, Partner at HWP Law

courts of Pakistan, which command high representation and consultation fees. Profit was able to quantify and specify the amounts by reaching out to some clients who had hired such lawyers for either their Supreme or High court cases. Resultantly we found that in 2020, a very popular senior advocate charged a minimum fees of Rs 50 lakhs, a figure that is likely to have increased substantially since, while a former attorney general’s minimum fees is currently set between Rs 1.5 to 2 crore per case. According to BNR’s secretary, the hourly consultation fees for the firm’s senior partners - Feisal Naqvi, Uzair Bhandari, and Iftikharuddin Riaz - is set at a minimum of Rs 50,000 per hour for a fresh case of arbitration at the civil court. Moreover, when Profit spoke with over 10 junior lawyers currently working at Pakistan’s leading law firms, they all disagreed with the claim that their low salaries were associated with the problem of high costs and low revenues. One of them explained why he believed there was a disproportionate relationship between the inflow and outflow of cash at his firm. “My firm quotes $ 250 USD (Rs 69,218) per hour– yes, you read it right, to foreign clients for us junior lawyers working on the project. We don’t even get paid Rs 69,000 per month let alone per hour, so where does that money go?”. Lets build on this information. If one of these top law firms has three senior partners, each of whom take up a minimum of two Supreme court cases per year, even this could guarantee a minimum baseline figure of Rs 1 crore coming into the firm. Additionally, if that firm also has a retainer agreement, that guarantees a fixed monthly revenue without any simultaneous costs. Foreign clients such as the World Bank Group, International Finance Corporation, and Saudi National Bank - all of whom work with Haidermota & Co Advocates - are not only likely to pay a fees higher than Pakistani clients, but are also receptive to hourly billable charges as was revealed by the junior lawyer. The absence of verified, exact figures is due to the fact that the law firms we are

investigating are private entities who are not required to disclose their financial statements. This makes it difficult to assess precisely the gap between what senior and junior lawyers make, as data remains primarily anecdotal. Salman Ijaz, from the law firm KhanIjaz refers to this as the culture of secrecy within the legal profession, explaining that it’s normal for lawyers working together to be unaware of each other’s monthly take home salary. However, conclusively, this problem highlighted by both Jaferii and Naqvi seems to be a very simple oversight in the business model law firms follow. Even if we were to assume that the only inflow of money in law firms was through cyclical lump sum payments, following a cost-plus model wherein the selling price of a product is determined by adding a specific fixed percentage or markup to the product’s unit cost could solve the issue of unaffordability. Perhaps hiring a financial analyst or accountant could help achieve this, but that would be an ironic recommendation to make while investigating the case of underpayment and exploitation of employees at these firms.

III. Junior lawyers bring nothing to the table

he third point of contention is the inexperience and inefficiencies of junior lawyers. This translates further into two problems: according to Naqvi, since junior lawyers are unable to save time or decrease any overhead costs, their contributions to the firm are limited making it difficult to remunerate them more generously. Moreover, according to Mir, this inexperience also means that firms spend the first few years investing resources and time into training a junior lawyer and getting them more experience in the field with very little returns. In his conversation with Profit, Ijaz explained why he believed that this alleged inexperience of junior lawyers could not be responsible for the skew in law firm salaries. Ijaz

confirmed there is a plethora of different types of tasks carried out by junior lawyers when they first begin working, from less skill based work like arranging files and securing a court date from the judge, to more skill based work like legal research and writing. In both cases, he explained, junior lawyers must at least be paid minimum wage– Rs 32,000, without question.

IV. What can be done?

nderpayment on the basis of inexperience has long been a trend in the legal industry. The Practitioners and Bar Council Rules of 1976 lay out the requirements for attaining a legal license, which includes a six month unpaid pupilage which must be completed to become eligible for a license. Jaferii claims that something similar must be reintroduced, like an apprenticeship where, unlike a formal employment contract, junior lawyers receive a fixed monthly stipend. This could help bridge the gap between their theoretical learnings at law school and the real legal practice in the industry. However, Ijaz’s support for such a scheme was layered in skepticism over its potential to be exploited with students working full time as apprentices without any wages. He recommended strict regulation. According to Mir, he worried that imposing a minimum wage would create structural unemployment in the more widespread practices like the law chambers. instead the wage flooring should be set according to the law firm’s market size. This means that the wages paid should be reflective of the proportion of the market that the law firm leverages. Moreover, in his comments to Profit, Dr. Ikram Ul Haq, Advocate Supreme Court and Partner at Huzaima Ikram and Ijaz, had a few bones to pick with the Pakistan Bar Council and the Senior Partners in question. According to Haq, “If the problem of inefficient junior lawyers is so widespread, then a structural change within the profession needs to happen where law firms provide internships to enrolled law students to make sure they have experi-

HUMAN RESOURCES

The short answer is that I do not know… I do not know if the minimum wage applied to lawyers. And assuming it does apply, I am not sure how other lawyers justify paying less than minimum wage Feisal Naqvi, Partner at Bhandari Naqvi Riaz

ence before they graduate.” He further added that the legal industry should look towards the structure of chartered accountancy in Pakistan, but the Bar Council’s sole concern is raging politics and creating more lawyers who can partake in vandalism during the riots and marches mandated by the council.

Firm vs Corporation

A firm, in business terms, is an enterprise or company that is widely associated with a partnership model. On the other hand, a corporation is a company or organization that is authorized to act as a single business entity. A corporate structure, therefore, consists of various departments that all contribute to the company’s overall mission. As an overarching solution to the presence of exploitation and underpayment in law firms, Haq suggested that an adaptation of a corporate structure has become integral in Pakistan’s legal industry– particularly in its law firms. The notion of law being a one man show must end in order for junior lawyers to be paid what they deserve, because as of now, Senior partners believe they run the show because that is how people have made them to feel. “These big lawyers want no change either. They know law is a service based on face-value and so even if they (lawyers) take 10 cases a year they can make up to Rs 10 crore, some of which is given to their clerks, some to cover fixed costs, some to junior lawyers, and a majority to themselves.” A corporate structure prevents this from happening as it recognizes the designated work for each department and allots remunerations accordingly. However, since this would also prevent partners from taking home the bulk of the money, it is unfortunately overlooked.

V. Why is this even important?

rom the beginning of this debate, there was an underlying attitude amongst senior partners that the conversation around junior lawyers getting underpaid at top tier law firms was

not only insignificant, but also a non-issue. When Profit spoke Mir, for instance, he expounded that the debate was elitist and that elite law firms made up a very small proportion of legal services in Pakistan. For Mir, complaints made by junior lawyers about getting paid Rs 40,000 per month stemmed from sheer privilege that needs to be revisited. When asked about the absence of a set career trajectory at law firms that would help junior lawyers manage their wage expectations, Abdul Moiz Jafferi stated, “Yes there’s a lot of conversation that needs to happen in the legal profession but a lot of it is far more important than a young lawyer’s career trajectory. We must discuss that there is a consequence to lying in court, a consequence to delaying cases for years…” While the claims of both Mir and Jafferi are important, to categorize this debate as insignificant because law firms are a niche practice or that the junior lawyers in question come from a particular socio-economic class is inequitable. To put it in legal terms, it sets a terrible precedent of exploitation amongst the top of the legal profession hierarchy, which normalizes the culture of underpayment in the rest of the industry. Senior Partner of KhanIjaz Advocate Salman Ijaz surveyed 139 respondents to gather the remuneration figures at over 40 of Pakistan’s leading law firms. The data is compiled in this spreadsheet and it largely confirms the claims of wage exploitation.

Minimum Wage

Let’s be clear. The term wage exploitation does not simply mean a junior is not paid according to what he/she deems sufficient, rather it is used in comparison to the minimum wage set for unskilled workers released by the Employment Federation of Pakistan. Profit reached out to Feisal Naqvi of BNR for clarifications on the matter of the applicability of the minimum wage in the legal industry. Naqvi replied stating “The short answer (to this question) is that I do not know… I do not know if the minimum

wage applied to lawyers. And assuming it does apply, I am not sure how other lawyers justify paying less than minimum wage.” He was further able to confirm that BNR now offers starting lawyers Rs. 40,000 and above. In his comments to Profit, however, Salaar Khan, Associate Partner of AJURIS, explained that the absence of a minimum wage was just the tip of the iceberg. According to Salaar, many regulations, such as the Provincial Shops and Establishment Ordinances and Acts which provide for how long a work week must be, the rules around sick leaves and so on are also not applied to law firms despite their applicability. He explained that the problem was fundamentally of a disinterest in enforcing these regulations, including the minimum wage, as is depicted in the informal nature of employment in law firms where sometimes even a formal contract is not used for junior associates and also in the absence of any supervision by the Bar Council– which as Salaar explained, under the Legal Practitioners Act does have some responsibilities in this entire matter. The truth is, that the irony of hiring a law firm for matters of labour exploitation would be glaring unless these practices are improved. As of now, legal practice in Pakistan remains exclusive and inaccessible to women across all socio-economic backgrounds owing to its deeply patriarchal structure. Further barriers to entry imposed by the absence of a minimum wage or fair remuneration only make matters worse and lessen the already few opportunities available to young Pakistanis for upward financial mobility. Conclusively, although law firms are privately owned entities, a unanimous recognition of the merits of introducing transparency in their financial structures would aid great improvements in the ecosystem. Dr. Ikram’s comments on moving towards a corporate structure is one way to achieve this, but greater regularization of the legal fees and maintaining the sanctity of the contract could also be helpful steps in the right direction. n

HUMAN RESOURCES