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CONTENTS

08 Why Lotte Chemicals shut down its plant for the second time this year 12 Multan Madness: DHA Multan the perfect portrait of all the peculiarities of Pakistan’s real estate market?

17 17 Ten years ago Chenab Limited defaulted on its loans. Now it looks towards second act 20 Air pollution and traffic-related mobility in Pakistani cities Hassan Aftab Sheikh and Talha Wani

22 22 What does big tobacco have to do with PIA’s losses? 25 Careem tweaks its strategy once again as competition gets fierce

Profit

Why

Lotte Chemicals shut down its plant for the second time this year

The country’s sole producer of PTA finds itself chained to the fortunes - or misfortunes - of the textile industry

By Mariam Umar

t is generally assumed that if one is the owner of a large plant in Bin Qasim Port - which one has spent a lot of funds on and installed ‘state-of-the-art’ machinery at - that, at the bare minimum, one would like to keep this plant open. But if one’s plant chiefly manufactures a singular product, and demand for that product dwindles: then what? That is the predicament that Lotte Chemical Pakistan Limited (Lotte Chemicals) finds itself in. The year 2023 has not been kind to the company; indeed, recurring suspensions in plant operations have become a defining

feature, painting a tumultuous picture for the company. On October 17, 2023, Lotte Chemicals once again announced to the Pakistan Stock Exchange (PSX) that it was temporarily suspending operations at its plant from October 18 to October 29. The reason cited? “Lower downstream demand and the need for effective inventory and production management.” But October 30 came and went, and the expected resumption of plant operations never materialised. Instead, the company declared an extension of the suspension until November 12, once again attributing it to “decreased downstream demand”. Cumulatively, plant operations have been

suspended for twenty-six days. There has been no subsequent communication on the PSX about whether operations have recommenced. This is only the second time operations at the plant have been suspended. Previously, on March 14, 2023, the company had announced a shutdown from March 15 with no specified reopening date. Operations resumed on May 1 after a considerable 47-day hiatus.

The supply chain

otte Chemicals keeps blaming “low downstream demand”. Before understanding what is happening with demand, let’s explain downstream

industries, which refers to the goods or services that arise further along in the supply chain, closer to the end consumers or users of those goods or services. What does the supply chain look like in this case? Lotte Chemicals produces purified terephthalic acid, or PTA (we’ll get to the scale of production in just a bit). PTA is one of the primary raw materials used in the production of polyethylene terephthalate, or PET resin. This resin is used in two ways: first, to make PET bottles, which are plastic bottles used for packaging various liquids such as water, carbonated drinks, juices, sauces and oils. Second, it is used to manufacture polyester fibres, which can be further processed to create polyester staple fibre, or PSF. PSF is used in textiles, cushioning material, carpets, and non-woven fabrics. More than 70% of PSF is supplied to the textile value chain, i.e. the spinning sector, according to the Pakistan Credit Rating Agency Limited (PACRA)’s Polyester report of February 2023, The remaining PSF is supplied to the PET packaging industry. Now, saying Lotte Chemicals simply produces PTA is a bit of an understatement. It is in fact the sole domestic producer of PTA in Pakistan. The company began its life in 1996, when ICI Pakistan Ltd decided to construct a PTA plant, with the plant becoming operational in 1998. The plant business separated from ICI in 2000, and was bought in 2008 by AzkoNobel, and then in September 2009 by Lotte, a a South Korean conglomerate (hence the name change to Lotte Chemical Pakistan Ltd.) That plant has the capacity to produce 520,000 tonnes of PTA annually. Which is just as well, as Pakistan’s total demand for PTA stands at roughly 700,000 tons annually, according to Rao Aamir Ali, a senior analyst at Arif Habib Limited. The remaining 200,000 tons of PTA is imported. That means Lotte Chemical’s market share domestically is 100%, while its overall market share stands at around 70%. Since its inception, Lotte Chemicals has focused on meeting Pakistan’s PTA demand. However, if domestic demand slows down, Lotte Chemicals exports to other countries, as its product meets international quality standards and is well accepted by customers in Asia and the Middle East region. Similarly, Lotte Chemicals also imports from Asia and Middle East: specifically, paraxylene (PX), which is one of the two key raw materials along with crude oil required to make PTA. That means the price and production on PTA depends on the cost prices of these two (imported) materials.

Lotte’s financials 2013-2021

s expected of a sole producer, Lotte Chemicals’s revenues have generally increased. The only times revenue declined were during the period 2014-2015 and in 2020, due to Covid-19. In 2014, a 16% drop in revenues occurred, mainly due to lower PTA prices. The reduced PTA margin against PX, higher energy costs, coupled with inventory losses due a drop in price of PTA at year-end, led to

a decreased overall profit margin. Moreover, the company had to bore outward freight charges as export sales increased, resulting in increased distribution and selling expenses. Consequently, the company’s net loss doubled to Rs 1,100 million as compared to Rs 498 million in the previous year. The year 2015 again brought challenging conditions for the local polyester industry due to increased taxation, higher energy costs, and reduced textile exports. This strained PSF producers who were facing tough price competition from inexpensive imports, particularly from China. Moreover, the PET industry saw reduced demand due

CHEMICALS

to bottle industries adopting cost-cutting measures with lighter bottles. All of this culminated into a 3% decrease in sales volume for Lotte Chemicals, as compared to 2014. However, at the end of 2015, the domestic PSF industry successfully levied duties on Chinese PSF producers, which contributed to Lotte Chemicals’ turnaround in 2016. That year, the anti-dumping duties and better boosted Pakistan’s domestic polyester industry. Consequently, there was a notable 15% surge in PTA demand, leading Lotte Chemicals to attain an unprecedented domestic sales record of 492,192 tonnes. Over the next few years, Lotte Chemicals witnessed a steady rise in revenue, barring a substantial 36% decline in 2020 attributed to global lockdowns that affected PTA demand. Consequently, the company underwent a 54-day plant shutdown, causing a 14% reduction in production and a 12%

decrease in sales volumes. The gross profit margin tumbled to 6.8%, while the net profit margin plummeted to around 5% in 2020. However, the gloom was fleeting as 2021 heralded resurgence for Lotte Chemicals, fueled by heightened demand and improved prices. That resulted in a remarkable 72% surge in revenue, and an impressive 11% gross profit margin in 2021.

Gloomy predictions in 2022

espite the improvement in revenues and margins noted in the 2022 annual report for Lotte Chemicals, heightened inflation significantly impacted consumer behavior. This resulted in a decrease in consumer spending, with individuals prioritizing essential goods over luxury items such as

textiles. Consequently, domestic demand for PTA in 2022 declined by 6% compared to the previous year. In fact, the 2022 annual report foresaw a tough road ahead in 2023, due to sluggish global economic growth, hinting at an imminent global recession. The report predicted the prevailing shortage of foreign exchange in Pakistan presented significant obstacles in fulfilling downstream customers’ PTA demand, thereby further complicating operational dynamics.

The year 2023: downstream industries wobble

nd then 2023 happened. The textile industry was hit by the double setbacks of dwindling exports and operational setbacks. The initial nine months of the year witnessed a stark decline in textile exports compared to the previous year. This downturn forced several companies to either temporarily shut down or scale back their operations. Notably, textile industry entities like Shahzad Textile Mills Limited and Elahi Cotton Mills Limited announced temporary closures in October alone, mirroring the industry’s distress. According to Ali, Lotte Chemicals had to suspend plant operations for the second time in nearly seven months, due to declining demand in the downstream industry. “Lotte Chemicals is a producer of PTA which is a raw material of the PET and textile industry. The textile exports have witnessed a decline of 16% year-on-year to $13.33 billion during the ten months of calendar year 2023,” said Ali. Echoing similar sentiments, Waqas Ghani, senior analyst at JS Global said, “The lacklustre volumes persist predominantly because of sustained weak demand within the textile and PET segments.” “Lotte’s PTA is primarily used in the polyester segment which is expected to continue facing sluggish demand in the coming times. This anticipation is rooted in the ongoing challenges within our major textile export markets, the EU and the US, grappling with demand issues stemming from notably high inflation and decreasing consumer purchasing power,” highlighted Ghani. Just like the textile industry, demand within the PET industry has also declined. According to a PACRA rating report of Pakistan Synthetics Limited (a player in the PET industry), the tough economic environment has reduced the purchasing power of the consumer and had a negative impact on the food and beverage segment.

In the chemicals industry, other chemical companies have also been grappling with plant shutdowns in 2023. Take for example Sitara Peroxide Limited (Sitara Peroxide), which also suspended plant operations twice in 2023. Sitara Peroxide suspended plant operations for 49 days from January 13 to March 2 owing to economic downturn, maintenance delays, and unresolved import issues. However, this resumption of operations did not last long. From July 7, Sitara Peroxide witnessed recurrent shutdowns spanning weeks and months. Issues with raw material availability and the need for extensive maintenance work led to multiple interruptions, totaling over 100 days of suspended operations. On November 7, 2023, Sitara Peroxide announced plant operations suspension for another 30 days.

The financial hit to Lotte Chemicals

rofit reached out to Asif Saad, who was previously CEO of Lotte Chemicals between January 2008 and April 2014. He said, “These kinds of continuous process chemical plants shut down only for two reasons – a breakdown or a planned maintenance shutdown. If they are shutting for any other reason this means there is a problem with demand for PTA and they are piling up stocks and unable to sell. This is terrible news for Lotte Chemicals because their fixed costs will not be covered and losses will increase if the plant stays shut.” [Saad would certainly know: during his tenure as CEO, Lotte Chemicals faced three plant shutdowns, in 2010, 2012, and 2013 respectively. In 2010 and 2013, opera-

tions were suspended due to overhauling of the plant which is carried out periodically for maintenance purposes. In 2012, an 11-day outage was caused by a sudden shutdown of a supplier’s manufacturing facilities.] Things are certainly not looking good this year. In the first quarter of 2023, plant operations were suspended for 17 days, causing a 20% drop in production volume and a 6% decline in sales compared to the previous quarter. The reduced availability of PTA due to foreign exchange constraints led to producers curtailing operations. Despite this, demand remained resilient due to Ramadan, and revenues increased by 9% due to increased PTA prices, generating a gross profit of Rs 4,439 million. Moving into the second quarter, plant

operations remained suspended from the previous quarter, extending through the entire month of April and recommencing only on May 1. This prolonged halt stemmed from sluggish downstream sales and unavailability of raw materials exacerbated by the prevailing economic conditions. Consequently, the extended suspension took a toll on both production and sales volumes, culminating in a staggering 45% drop in revenue compared to the preceding year. Consequently, the gross profit dwindled to Rs 2,000 million. In the third quarter, while plant operations were not halted, sales and production volumes were significantly lower; demand had been affected by high energy costs, exchange rate volatility, and inflation. This resulted in a 20% decrease in revenue compared to the previous year, and a lower gross profit of Rs 3,417 million. So, inflationary pressures, soaring energy expenses, currency constraints, high operational costs: will things look up for Lotte Chemicals anytime soon? Hardly: Ali told Profit that the government’s recent hike in gas prices from Rs 1,100 per mmbtu to Rs 2,400 per mmbtu, is set to inflate input expenses for Lotte Chemicals. Coupled with this, the global PTA margin remains meagre, standing at approximately $100 per ton. And downstream industries persistently show a noticeable dip in demand. Lotte Chemicals is beholden to both global and domestic external factors beyond its control. Things will have to change swiftly, or the company might have to prepare for a third plant shutdown - not of its own making. n

Multan Madness:

DHA Multan the perfect portrait of all the peculiarities of Pakistan’s real estate market? 12

By Shahab Omer

rouble is brewing in Multan. Over the past six years over 9000 acres of the historic city situated between its two largest roads, Bosan and Mattital, have seen the rapid development and progression of the Defence Housing Authority. Yet the DHA Multan project is proving to be less of a dream and more of a nightmare for a number of investors that have bought plots in the housing society. In the past year, prices of plots have fallen by as much as 50% in some areas. So how did a flagship project by DHA in a large city like Multan end up seeing such dramatic price fluctuations? The prices are less a reflection on DHA Multan and more of an issue that can be explained by the peculiarities of the real estate market in Pakistan. Very briefly put, when DHA Multan was initially launched in 2017 it was heavily marketed in cities outside of Multan. That meant everyone ranging from overseas Pakistanis to people from Lahore, Karachi, and Islamabad looking for real estate investments wanted in on the project. Because of this initial hype the prices soared. But as people started wanting to get a return on this “investment” they realised something drastic: nobody that actually wanted to live in DHA Multan was willing to pay such high prices for plots. Suddenly the bubble burst and the prices have just been declining and have finally now reached a stage of stability. How did this come to be? To understand the story of Multan we must first understand the story of the Defence Housing Authority and how it operates all over the country.

A brief history of reliability

here is an air that surrounds the Defence Housing Authority. Real estate is a strange beast in Pakistan. It is by far a go to aspirational avenue for investment for much of the country’s rising middle class. And it isn’t housing or commercial projects that are so much the main focus of peoples’ investments as residential real estate. Owning a “plot” is considered a safe place to park your money. And there is no safer plot than one in DHA. Without getting into the intricacies of why Pakistanis invest so heavily in real estate and whether or not that is a good idea, we can safely say that real estate investments have worked out for money. We compiled an index to show average returns across these asset classes in Pakistan since January 1, 1999 through the end of June 2020. What we found was that real estate was the third-best performing asset class available to ordinary Pakistanis, behind the stock market and gold. Read on: Why (and how much) Pakistanis overinvest in real estate The problem has been that as a result far too many have tried to become real estate developers in the hopes of becoming rich. This has led to a number of very typical scams within the real estate market in Pakistan. You see, starting a real estate project is not cheap. What many “developers” do is that they begin marketing a project when at times they have not even acquired the land for the project let alone start any development. They sell people files, certificates, and all manner of marketing gimmicks that make them think they are buying a plot in the future when in fact they are at best placing a bet on the success of said project. Once they’ve collected this money they start the actual land acquisition and development process, but since this starts late many of these projects request NOCs and other approvals after they have already taken money from people. If a project gets stuck in the approval stage all of that money they collected is then frozen indefinitely. And these are just the barebones of it. In many cases these developers tell blatant lies that are nothing short of entrapment. In this sense real estate is a dirty business particularly because many people often have their life savings tied up in such projects. And in this messy environment DHA is supposed to offer some relief. The authority has a reputation for being clean, organised, and (almost) fraud-free. It

COVER STORY

doesn’t hurt that they are also associated with the Pakistan Army and have many serving members of the army as part of their administration. The exact legal status of the Defence Housing Authority is an interesting question. The first and the oldest DHA in Karachi was initially a private housing society formed in the 1950s. It was abolished and replaced with the Pakistan Defence Officers Housing Authority during General Zia’s regime under a presidential order which also imposed a management structure on the body. Similarly in Lahore what is today DHA started off as Civil and Defence Housing Society in 1973 before it was renamed as Lahore Cantonment Co-Operative Housing Society (LCCHS) and was registered with Punjab Government in March 1975. The Lahore High Court later entrusted the powers of the LCCHS to Commander Lahore Corps In 1991. The society was subsequently converted to DHA Lahore in 1999 through a Provincial Ordinance. After these two DHAs were formed in Lahore and Karachi around the same time, DHA was federalised and formally created as an independent legal entity in 2004 by an act of parliament. The original idea for DHA was to provide a body that would create housing solutions for retired and serving army officers and the families of shuhada. The 2004 act of parliament made DHA a self-governing body but with some checks and balances. This means that DHA is an autonomous body and runs itself as a company. In turn, individual DHA projects in different cities are also not run from one central head office. However there is overarching control by the armed forces. According to the spokesperson for DHA Lahore, Major (Retired) Wahid Bukhari, DHA undergoes external audits. In fact, the audit responsibility for DHAs falls under the Welfare and Rehabilitation Wing (W&R) of the Army. During these audits, a wide range of questions is asked, and subsequently, the audit reports are submitted to the Ministry of Defence to account for the total expenditure, profits generated, and losses incurred. When asked about the allocation of profits earned from DHAs’ real estate businesses, Major Bukhari, while partially answering the question, explained that in 2003, when DHA was transformed into Self-Governing Authorities through a bill in the National Assembly, it was decided that a portion of the profits generated by DHA would be allocated for the welfare of the families of martyrs (shuhada), and Army employees would be provided with land. The families of martyrs receive land free of cost, while Army employees receive rebates. Additionally, various developments, including the construction of underpasses, roads, and infrastructure within DHAs, are funded by DHAs themselves from their own resources.

How your typical DHA project works (including Multan)

ow here is the situation you have. Projects by DHA in Lahore, Karachi, and Islamabad have expanded quite a lot. Lahore, for example, is now on to its ninth phase of DHA where development has taken place and people are using it as a residential area. They have also done extended projects such as DHA Rahbar, which itself is on its fourth phase. In fact, DHA represents a whopping 25% of Lahore. What was initially 34000 kanals has now been stretched to cover a whopping 3 Lacs 12000 kanals. And the way DHA goes about its business in these cities is exactly what it does in other regions too. The first thing they do is identify land on which a housing scheme can be built. Once this is done, the authority’s land acquisition department makes quick work of identifying the owners and trying to buy the land from them. In this case they offer owners either cash or the opportunity to own DHA plots once the land is finally developed. Once the land is acquired DHA starts a process known as balloting. In this they begin by listing what price they think a plot is going to be. For example, in the case of DHA Multan, the price of a plot for 1 Kanal was kept at around Rs 50 lakhs. Once this price is announced they then hold a sort of lucky draw whereby people that register for the balloting are allotted plot numbers. As soon as these are allotted DHA also gives the person that receives the ballot a schedule of development charges — these are to be paid over a few years. The idea is to carry out the development of infrastructure using this money. In the case of DHA Multan the charges for development were Rs 21 lakh for a one kanal plot. Now, when a project like this is ongoing there are a number of people that are part of the bidding process. There are those, of course, that hope to buy a plot early at cheap price so that by the time it is developed and ready they can hopefully build a house on it and live there. Then there are those that wish to invest in this DHA and simply buy the plot with the intention of flipping it to a buyer that wants it eventually. In most cases, the average plot goes through at least a few hands wanting to invest at different stages. But the eventual goal is for the price to settle at a range where potential homeowners will buy the plot and build there. This is where things get a little dicey. Because of the initial set of people buying plots in DHA Multan, there was very little representation from the people of Multan.

For Multan but not of Multan or by Multan

HA Multan is a particularly ambitious project. The project has wider avenues than any other DHA in the country and was heavily marketed not just in Multan but also in places like Lahore and Islamabad. In fact, DHA Multan, which is not the same as DHA Lahore but a separate project with a separate management, even opened up an office in Lahore. This was because it was presented by property dealers and the management alike as a great investment opportunity. The hype immediately helped the project take off and there was a lot of interest from outside Multan. According to Riaz Wattoo, one of the bigger real estate agents in the region, when DHA Multan was launched, over forty percent of the investors were overseas Pakistanis, around forty percent were from across the country, and only fifteen to twenty percent of the investors were from Multan itself. “The crucial point was whether the priority of DHA Multan was local investors from Multan or overseas Pakistanis and other investors. I do not hesitate to say that DHA Multan prioritised local investors and focused on satisfying them. The market situation was such that DHA Multan was often referred to as a chapter of DHA Lahore. This was why, when the project started, many property dealers and agents operating with DHA Lahore encouraged their investors to invest in DHA Multan. It is noteworthy that the dealers from DHA Lahore and Islamabad have a large network of investors who trust them, partly because those who invested through these agents in DHA Lahore never faced a loss. With this confidence, investors started investing in DHA Multan,” he explains. But there were issues. Most of the investors were coming from outside Multan and rightfully expected that DHA Multan would operate similarly to how they had seen DHA operate in other large cities. The first problem, however, was that the hype possibly caused an artificial ballooning of the prices. In Multan, one of the more up-market housing areas is Gulgasht colony, which is fully developed. Over here a one kanal plot can cost around Rs 1 crore to Rs 1 crore and 20 lakhs. In DHA Multan, a one kanal plot was initially priced at Rs 60 to 70 lakhs with around Rs 20 lakhs on top of this as development charges. But the DHA management was quick with development and the place started taking shape. As time passed by and more investors from Lahore and other areas started coming in the prices kept increasing and one kanal plots were being traded as high as 1 crore and 60 lakhs in 2022. But this was around the time that the bubble was about to burst. At the five year

mark, a number of the initial investors wanted to exit. The project had developed enough that people living in Multan and wanting to shift to DHA Multan would want to buy the plots. What they found at this point was that there were no buyers willing to engage them at these rates. Quickly the prices started falling. Anyone considering moving to DHA Multan was also thinking of skyrocketing construction costs. So the rates started falling. As of now, a one kanal plot in DHA Multan is priced at around Rs 75 lakhs — a fall of more than half the value it reached a year ago. And other things were going wrong too. As Wattoo explains, the entire project was plagued by problems and the investors wanted out. “A major issue arose when DHA Multan’s administration could not cater to these investors properly. Neither did DHA Multan have a verification system like Lahore, nor was the property transfer system complete enough to appear transparent. As a result, investors from Lahore, Islamabad, and Karachi began to withdraw due to this mismanagement.”

When investors panic

nce again, if you bought a plot in DHA Multan with the intention of building a house on it you shouldn’t be too worried. The value of your property is around as much as you paid for it and development work is going smoothly and at a good speed. But if you wanted to make a quick buck then we’re afraid the situation is a bit bleak for you and your best bet right now would be breaking even — essentially no different from what would have happened if you had kept your money locked away safely in a bank’s current account, that does not offer any mark-up. One investor, preferring to remain anonymous, revealed that they invested in three plots within DHA Multan back in 2017, with a commitment to paying annual quarterly instalments for the development of each plot. They recalled the high optimism and favourable real estate conditions in 2017, which encouraged many to invest quickly. “Being from Islamabad, I was persuaded by a DHA property agent to invest in Multan. I perceived no risk, given my familiarity with DHA’s operations in Lahore, Islamabad, and Karachi, where I had previously invested profitably in Lahore’s DHA projects. My visit to DHA Multan further convinced me of its promising future, leading me to book three plots of one kanal, ten marlas, and five marlas, respectively. However, the post-2018 elections period, coupled with the impact of COVID-19 and shifting political and economic landscapes, gradually cast a shadow of risk over my investment.” When the investor was asked about the risks to his investment, they informed that there

were already reports suggesting that the market situation of DHA Multan was not improving and investors were trying to withdraw their capital. The investor admitted that he had paid some but not all of the development instalments for his three plots. “In fact, most investors never plan on building a house on their plot, or even keeping the plot till the society is completely developed. For most the idea is to sell the plots for a profit, and therefore, many investors choose not to pay the instalments of development charges on time, and only pay them in full when they are about to sell the plot. Investors generally prefer not to spend more money from their pockets. They intend to pay the development charges from the money received from the buyer at the time of sale. But right now, the prospect of profit is far-fetched; I would be lucky if my plots even get sold. Due to the declining market, many investors have either not paid any development charges to DHA Multan or stopped after paying some instalments.” As a result, investors are receiving multiple threatening calls from DHA Multan, warning that their allotments would be cancelled if they didn’t pay the development charges, which they considered an injustice. “In 2017, the price for a one kanal plot ranged between Rs 55 lakhs to Rs 65 lakhs, and Rs 21 lakhs in development charges were due. And given the current market conditions, there seems to be no interest in buying these plots, and i do not have the money to pay the development charges. And even if I did have the money, it would be stupid of me to put it here,” explains another investor. On the other hand, Colonel (Retd.) Sarfraz Nazar, Director Marketing of DHA Multan, speaking to Profit, denied the allegations and clarified that “it is not our practice to make threatening calls to people about cancelling their bookings.” The Director of Marketing stated that many people were allotted plots in 2017. At that time, the development charges for a one kanal plot were Rs 21 lakhs, which investors were supposed to pay through quarterly instalments over a year and should have completed the payments by 2021, but many investors did not do so.

What will DHA do about this?

nd this is what it all boils down to. An official from DHA, who preferred to remain anonymous, has disclosed that in response to the current market conditions, DHA Multan recently issued a specific type of advisory letter. This advisory letter contained a warning, emphasising that plot prices should not drop below a certain threshold. The primary objective behind this action was to provide reassurance to investors that their investments were secure, and they

had not incurred any losses. From a technical standpoint, the current plot prices in DHA Multan closely align with DHA’s official rates. The aforementioned official pointed out that the major disruptors in the property market were property dealers who were causing turbulence in DHA Multan’s market. Major Bukhari, the spokesperson of DHA Lahore also affirmed this and clarified that regulating plot prices was not within DHA’s purview. DHA announces the official plot prices and adheres to the prescribed rates. However, once the plots enter the open market, property dealers often manipulate prices. In this industry, there are significant players with substantial investments who initially create a market decline narrative, purchase at lower prices, and subsequently generate hype in the market to sell at higher profits. This of course is a heavy handed if temporarily successful approach to the matter. Even an entity like the Defence Housing Authority is beholden to market forces and cannot browbeat prices to be what they want. The reality is that the investors that put their money in DHA Multan actually had nothing to do with Multan which is why the prices have fallen to what they are. The real method that DHA seems to be following other than attempts to stabilise the price by force is to encourage people from Multan to build in the society. The more a housing project develops and becomes lived in the more its value increases. According to Colonel, DHA Multan has introduced several waiver schemes during this period. For instance, if someone is late in their payments and wants to deposit the payment, no surcharge will be levied. “We offered a surcharge waiver scheme to people this May. Even today, we have a waiver that if someone pays their complete development charges to us now and takes possession of their plot, and completes construction of their house by December 2024, they will be reimbursed 100% of the development charges. People are availing of this scheme. We have divided this scheme into three stages. If someone builds a grey structure, they will get a 30% refund. Similarly, if someone renovates their house, an additional 30% will be reimbursed, and if someone resides in this constructed house for two months, they will be reimbursed the full 100% of the development charges.” On top of this, they are introducing other incentives to encourage building. “In the current market scenario, investors are uncertain about their next steps,”says Wattoo. “This has led DHA to introduce incentives like the 100% development charges waiver, aiming to motivate more people to construct homes and populate the area, in turn, revitalising the market. Conversely, this also presents a golden opportunity, as the low plot prices now are expected to rise over time.” n

COVER STORY

Ten years ago

Chenab Limited defaulted on its loans. Now it looks towards second act

Once one of the country’s largest and proudest exporters, the Chenab Group is looking to chart its course back to the top with the backing of its largest creditor, HBL By Zain Naeem

his is the story of a rise, a fall, and possibly a second act. Over the past fifteen years the Chenab Group has faced a gamut of challenges. Once one of the largest exporters in Pakistan, and owner of the popular ChenOne stores locally, they faced consistent losses as the country’s textile industry suffered in the aftermath of the 2008 energy and financial crises. Many waited and watched to see when Chenab and its owner, Mian Muhammad Latif, would call it quits. However, either completely through an act of inertia or through sheer determination, somehow the vertically integrated textile exporter clung on. And now an opportunity may just have presented itself from unlikely quarters. The company has been given some quarter to breathe thanks to its lenders. Amongst them, HBL was Chenab’s biggest lender. And now the bank is spearheading the restructuring of the company’s Rs 10 billion overdue debt to the banking sector. There seems to be belief within HBL that the Chenab Group will succeed in turning their company around. Where does this faith come from? It might have something to do

TEXTILES

with the company’s origins and its history.

Big dreams

e start off in Toba Tek Singh. With a young man and a big dream. Mian Latif was the son of a leading cotton industrialist. Latif’s family had come to Toba Tek Singh back in 1883 and were agriculturalists. In small towns like Toba Tek Singh, land-owning farmers realised cotton was an important crop for the ruling British Empire. And for much of his childhood Latif saw as his family’s fortunes grew. Within the tiny agricultural community, cotton farming and ginning were lucrative businesses. Mian Latif’s family were large landholders in Toba Tek Singh, a district roughly halfway between Faisalabad and Multan. But as a young man Mian Latif’s ambition lay far beyond Toba Tek Singh. In the 1970s many of Punjab’s large rural land holding families were making a transition: moving their main source of wealth away from farming the cotton – and other crops, such as sugar – and towards setting up the industrial units that would process and sell finished goods. And for this purpose Mian Latif, along with

three of his brothers, set his eyes on Lyallpur. The city had still not been dubbed Faisalabad when Mian Latif first started establishing a business there in 1973. At the time the city was still developing and far from the industrial hub it is today. But Latif had a belief that his family’s future lay in manufacturing textiles rather than just farming and selling cotton. Remember, the 1970s were marked by mass nationalisation. The independence of Bangladesh in 1971 also meant Pakistan lost many of its industrial units and there were no exports to speak of. Latif set about establishing a production unit which could not only manufacture but also export. The company started off by producing textile goods for the local market. In 1985 they began exporting goods starting from the Far East from where they moved to Europe and then USA, eventually exporting goods to around 42 countries.

Events leading up to the crisis

o understand the downfall of the company, it is important to understand the time leading up to the crisis. In 1999, when Gen Musharraf

took power in a military coup, the Chenab Group was still a lower middle-market business in terms of size. And ChenOne at the time only had three stores, though its fourth store opened up in Karachi that year. During the Musharraf Administration, however, as the government privatised the banks and encouraged private sector lending, particularly for industrial growth projects, the Chenab Group started expanding aggressively. For the financial year ending June 30, 2001, Chenab Ltd, the group’s main publicly listed company, had revenues of Rs340 crores. Over the next six years, the company more than doubled its revenue, ending the financial year 2007 with Rs816 crores in revenue, which represents an average annual growth rate of 15.7%. At one point in time, the company was making $30 million worth of exports on a monthly basis and employed 12,000 people. That growth, however, was fueled largely by debt. In 2001, the company had just under Rs70 crores in long-term debt. By 2007, that number had ballooned to Rs332 crores, a nearly five times increase. Yet cash flows were not keeping pace: Chenab Ltd’s net income in 2007 was just Rs7.5 crores, even less than the Rs13 crores it had earned in 2001. Yet the group kept expanding, particularly its retail chain, which opened up more stores throughout urban Pakistan, particularly in the smaller metropolitan areas of Punjab, where it took to developing not just its own stores, but large shopping malls and complexes under the name ChenOne Tower. The first ChenOne Tower opened in 2005 in Multan, followed by another in Sargodha, which finally opened in 2009. At the same time, even though the company was growing, stiff competition from China and India was being faced. These countries were providing subsidies to the textile industry while Pakistan had no such programme for its own industry. Not at the same scale, at least. In domestic terms, the finance costs were already ramping up as interest rates were being used to address inflation which were also being translated to higher energy and labour costs. Even though profitability was down, it was expected that as the conditions would improve, the company would be able to rebound.

The crisis sets in

he year 2008 was supposed to be a stellar year, in terms of sales, for the company as it had already forecasted sales of more than Rs. 800 crores for the year. The company was able to earn revenues of Rs. 850 crores but it was the first year in decades that the company made a loss. The cause for this was two events. First of all, the country started to see wide scale gas

and electricity load shedding which forced production to slow down and created an added pressure on the costs being incurred. In addition to that, the assasination of Benazir Bhutto saw the whole country shut down. With railway lines and road infrastructure being impacted, exports stopped with containers waiting at the ports for days. Between 2007-8 Pakistan was hit by the global recession. The textile industry faced challenges due to high energy costs, rupee depreciation vis-à-vis the US $ and other currencies, and a high cost of doing business. As a result, there was a reduction in the number of textile mills operating in the country from about 450 units in 2009 to 400 units in 2019. This decrease has simultaneously seen the domestic demand for cotton dip in the country. The ethos of the company became a haunting call as the company was not able to follow through on its promise of commitment. Rising costs and fall in revenues were already having an impact on the company. However, something much more damaging was also taking place. Clients were not getting their orders and the trust that had been built bit by bit over years came crashing down in a matter of days. Latif himself explains the situation thusly. “The trust we had built with the clients is built inch by inch. When it comes down, it comes down in meters.” The loss of brand name and image for clients was going to have a devastating impact on the future revenues of the company and would have a long lasting effect. The period from 2009 to 2014 saw the company face consistent losses. The inertia built into the system saw sales of Rs. 900 crores in 2009 decline to only Rs. 220 crores by 2014. As the losses started to accumulate, the equity of the company turned negative in 2011 and stood at minus Rs. 400 crores in 2014. In real terms, the company saw a loss of Rs. 730 crores in a span of 5 years which comes to around average annual losses of Rs 150 crores per year. The impact of losses had a two fold impact on the company. At one hand, the company relied on taking on more debt in order to fund its working capital requirements in order to carry out some form of manufacturing. Even though orders had fallen, still the company needed to make sure it could retain some form

of exports to the clients who had still stuck with the company. The company hit its lowest point when, in 2014, it announced that it would not be able to pay back its debt obligations which led to many of the creditors filing recovery proceedings against the company. As the case proceedings started, Latif still felt that his dream should not die. Even in the darkest times, he had the belief that given the right support and resources, his dream will become reality once again. In 2017, the Lahore High Court asked winding up proceedings to be initiated against the company in order to allow the banks to sell the assets of the company and get back some of their money. This would have felt like the end of a journey that started 43 years ago. Latif still persevered and fought. The case was litigated to the fullest extent and in 2021, the court reversed its winding up orders. The company was going to be allowed to operate once again.

The unlikely hero

n many ways Chenab is not unique. Like many of Pakistan’s upper middle-market companies – the ones just on the cusp of being large but not quite – Chenab tried to grow too fast with too much debt during the easy money era of the Musharraf years, and crashed hard after the financial crisis of 2008, and has yet to recover since. Yet unlike some of the other financial carcasses of the 2008 crash, the owners of Chenab have continued to try to revive their business. It has perhaps been that tenacity that is now paying off. After some favourable bankruptcy case rulings in the Lahore High Court (LHC) back in 2020, the company has now found an ally in HBL. At this point, there were 22 creditors who had lent to the company. Among the biggest lenders was HBL. In such dire circumstances, HBL provided an opportunity for the company to get back up on its feet. The bank had always believed that the company, under its leadership, could fight against all odds and was willing to stand shoulder to shoulder. HBL spearheaded the effort to consolidate the total debt of the company and to restructure its short term borrowings to allow it to convert them all into long term liabilities. With assurances from the bank, the company

felt that it could regain its lost glory and attain the heights that it once had. The bank has also provided much needed backing to the ailing company. The Rs. 9.5 billion debt was restructured for a period of 14 years. The bank believed in the fact that once the company was given an infusion of fresh financing, it would be used to fund the working capital requirements of the company. This would allow the company to meet its current orders and any excess capacity could be used to further broaden its sales and profits. In addition to the banks restructuring the loan, the directors of the company gave a loan of Rs. 42 crore and 50 lakhs to the company and it was decided to sell some of the non core assets of the company in order to fund the working capital requirements.

The restructuring plan

ased on the court filings, Chenab Limited contested that it will execute a revival plan for the company and its competitors in order to turn the company around. The courts had already ordered winding up proceedings to be started against the company on the back of recovery lawsuits filed by some of the creditors. The Chenab Group felt that in order to put any plan into action, the first step was to get a stay on the winding up proceedings. Habib Bank, the largest creditor, joined together with some of the other creditors to provide some breathing space to the company. Chenab group had short term loans of

Rs. 4.3 billion while its long terms loans stood at Rs. 5.1 billion. From this, Rs. 1.7 billion was held by Habib bank followed by United bank held Rs 1.3 billion, Bank of Punjab held Rs. 1.2 billion and Askari and Allied Bank holding Rs. 1.4 billion collectively. In addition to that, the Group also owed to an additional 17 banks and financial institutions namely BankIslami, National Bank of Pakistan, Albaraka Bank, Habib Metropolitan Bank, Silkbank, Standard Chartered Bank, MCB Bank, Citibank, Faysal Bank, Saudi Pak Industrial and Agriculture Investment Company, Pak Oman Investment Company, First Punjab Modaraba, Pak Libya Holding Company, Pak Kuwait Investment Company, Orix Leasing and Orix Investment Bank, First Credit and Investment Bank and First National Bank Modaraba. The total debt of the company was going to be divided into two parts as Tier I and Tier II with both tiers having an amount of Rs. 4.7 billion each. The Tier I loan was going to be paid over 30 quarterly installments which would elapse a time period of 7 and a half years and would start from the time the proposal was sanctioned and put into place. Once the Tier I loans were paid off, the amount owed to Tier II would be paid off over a period of 6 and a half years with 26 quarterly installments. The markup on the loan was set at 5 percent per annum for Tier I initially while during this time the Tier II will accrue markup at 3 percent until the Tier I loan was paid off. Once this was done, the markup on the Tier II loan would also rise to 5 percent until all of it was paid off. In addition to that, the family also sold a

third of its holdings of 60% to an investor in order to meet their working capital needs at a rate of Rs. 15.2 per share. This investment totalled to around Rs. 35 crore of additional funding which was used towards the company and its restructuring. The company also committed to selling some of its non-core assets which were expected to raise Rs 1.4 billion which would be used to pay off some of its loans while also look to meet the working capital requirements of the company.

Looking towards the future

he company seems to have turned the page. In the last 18 months, the company has been able to earn Rs. 2.5 billion in revenue and has hired 3,000 of its former employees back. It is a blessing for the 3,000 households whose futures and hopes are now attached with the future of the company again. From the total loan of Rs. 9.5 billion, the company has already paid back Rs. 1 billion and expects to keep on track of the Agreement that has been made with the banks. This mirrors Latif’s words when he says that “We will give every drop of blood but will follow through on our commitment.” An important fact that needs to be mentioned here is that, even though the company has been following the payment plan that has been agreed upon, the company according to Latif is yet to reach profitability. The performance of the last 18 months has shown promise, but the company still needs some time before they turn profitable in the long run. In addition to that, the company is a listed company and was trading in the stock exchange, however, as it has not filed its annual accounts, it was delisted and put into the default counter. The company is correcting that by publishing some of its financial statements and the latest accounts that can be accessed are from 2021. n

TEXTILES

OPINION

Hassan Aftab Sheikh and Talha Wani

Air pollution and traffic-related mobility in Pakistani cities

Conversations about curbing air pollution are seasonal and limited to momentary solutions

rban cities in Pakistan are a hotspot for local air pollution. Around 40% of the country’s 220 million people live in cities where air pollution levels exceed the World Health Organisation’s recommended limit. This air pollution is not only limited to a certain season or source but has a perpetual bond with Pakistanis. Particulate matter (referred to as PM from here on) is one of the constituents of air pollutants. This PM, along with other aerosols produced from industries, vehicles, domestic heating or cooking, agricultural activities, and power stations can travel across boundaries. This means that a pollutant associated with a power station 100 km away from a city is able to transcend its local boundaries if the prevailing wind allows. However, the conversation around air pollution abatement strategies are seasonal. Localised, limited efforts and conversations are concentrated at pointing at the crop residue burning season (one of which happens around October/November). This leads to worsened air quality with the onset of winters due to a combination of weather conditions and the fact that our efforts assume a uni-causal explanation for smog (crop burning) rather than a multi-causal one. Recently, the Punjab government in Pakistan announced a smart lockdown in 10 districts of the province, which they claim would reduce traffic and therefore improve air quality. The

Hassan Aftab Sheikh is a climate scientist who is trained as a geologist, with a PhD from the University of Cambridge. Talha Wani is an economist who specialises in regulatory economics, with undergraduate and postgraduate degrees in Economics from LUMS and the London School of Economics.

lockdown means that educational institutions and offices will stay closed. Moreover, markets and business centres would only be allowed to open before 3 pm on Friday and Saturday. Policies such as restricting traffic in car-centric urban and sub-urban Punjab on weekends in ad-hoc and would not mitigate the hazard on most days when people have to go to work or kids to school. During 2020-22, Google released traffic mobility data in assessing the impact of lockdown measures and correlating mobility with pandemic levels. In Pakistan, the lockdown was lifted by 2021 and people were mostly commuting without any such restrictions. Similar to COVID-19 assessment, we have used mobility data from November 2021 to Oct 2022 to find any relationship of PM2.5 concentration levels with mobility. The purpose of this piece is to highlight the relation between hazardous air and mobility through a linear regression model (OLS). The results show that mobility is not naturally constrained by hazardous levels of pollution. These results paint the Punjab Government’s “smart lockdown” policy in a problematic light, as they highlight problems that would render its effectiveness limited, and question its thoughtfulness.

Measurements of Air Pollution

or the purposes of this paper, we look at PM2.5 concentration in major urban centres of Pakistan. The data for this measurement was taken from AirNow (https://www. airnow.gov/), an open source database for monitoring air pollution, and PAQI. In Figure 1, we plot the weekly average PM2.5 concentration in each major city between November 2021 and October 2022. From Figure 1, we can see that high air pollution levels are generally experienced from late Autumn to early Spring, though even outside those seasons we see undesirable levels. The reason being a combination of weather conditions and the spatial dependence of three of the four cities (barring Karachi) being located in airsheds. Other reasons may exist, but we feel as though the above two explanations are plausible conclusions rooted in fact. Furthermore, we can see that while Islamabad and Karachi have high amounts of air pollution, Lahore and Peshawar see

PM2.5 concentration often well above 300-400. Keep in mind that these are weekly averages, and on a daily level, these figures may be even higher. This is inline with what we observe, smog and visible air pollution is far more prevalent in Punjab, around Lahore and its peripheries. Figure 1. Weekly average for PM2.5 concentration (μg/m3) from Nov-21 to Oct-22 for Peshawar, Islamabad, Lahore, and Karachi.

Model

o attempt to estimate the effect of air pollution on mobility, we ran a regression which tested the effect of varying levels of air pollution on different types of mobility. We limited this test to Karachi, Islamabad, Peshawar and Lahore. This was partly due to data limitations, but also because these cities, in particular Lahore and Peshawar, are noted for having strong and lasting episodes of smog. We ran four individual regressions with a single dependent variable identifying mobility for a particular type of activity. These dependant variables were:

• • • •

Retail and Recreation Grocery and Pharmacy Parks Transit Stations The logarithm of these variables was taken to get a percentage change, rather than an absolute figure, as Google’s units of measurement were arbitrary (percentage change from a base in 2020). Our independent variable, whose effect we want to discern on the above observables, was PM2.5 concentration levels. We divided the concentration levels into “bands”. These were • Band 0 (PM2.5 concentration <50 µg/m3) • Band 1 (PM2.5 concentration 50-150 µg/ m3) • Band 2 (PM2.5 concentration 150-250 µg/ m3) • Band 3 (PM2.5 concentration 250+ µg/m3) These were treated as categorical variables with the coefficient on each in our regression being interpreted as the percentage difference in that particular type of mobility as compared to a baseline - Band 0 where we have “good” air quality. A positive coefficient

would mean that we see more mobility when air pollution is high. Vice-versa, a negative coefficient would mean we see less mobility when air pollution is high. The year of observation was taken as a control variable to deal with yearly trends e.g. COVID hesitancy in late 2021 in the immediate aftermath of the pandemic. Thus, our coefficients can be interpreted without that particular bias in play.

Results

The results are summarised below in Table 1.

highest band. In fact, mobility to parks almost halves when pollution levels are at their highest. Thus, the model suggests that there is a significant reduction in people going to parks when pollution levels are very high.

For Transit:

The coefficient for PM2.5 bands is positive and statistically significant at a 99% confidence level for just the first band. This implies that an increase in PM2.5 bands is associated with an increase in transit access for certain levels of pollution, and for higher levels, there is no discernible effect.

Discussion

For Retail:

The coefficient for PM2.5 bands is positive and statistically significant at a 99% confidence level in all but the highest band (which is statistically significant at a 90% confidence level). This suggests that an increased PM2.5 concentration is associated with an increase in people going to retail and recreational activities.

For Grocery and Pharmacy: Similar to Retail, the coefficient for PM2.5 bands is positive and statistically significant at a 99% confidence level for all but the highest band (which is statistically significant at a 95% confidence level). This indicates that an increase in PM2.5 bands is associated with an increase in people going to grocery and pharmacy shops.

For Parks:

The coefficient for PM2.5 bands is statistically significant at a 90% confidence level in the first band, and 99% confidence level in the

he most rudimentary takeaway from this exercise is that air pollution isn’t a significant factor in people’s mobility and activity. This could be for a variety of reasons. One explanation is that many of these tasks are probably essential (such as buying food, paying bills, going to offices etc), and thus are downwards sticky so regardless of circumstances people must do them (even when the air is hazardous). Another, is that smog season overlaps with times of the year where it is relatively more pleasant to engage in outdoor activities, compared to the blistering summer. Given that mobility to parks is negatively affected by air quality, and that is a non-essential activity, we believe the first explanation is more compelling. The importance of these results comes in when we look at some of the solutions proposed by the Government. In the context of these findings, the “smart lockdown” is at best irrelevant, or at worst cruel. If the lockdown is actually implemented, it would be curtailing ordinary people from essential tasks that they clearly feel compelled to do even at the expense of their health. More likely, it will be ineffective and collapse once the Government realises that these tasks are necessary and enough outroar erupts. Neither outcome is a good one. Clean air is a basic right for our health. Ultimately, gimmicks and simple-minded policies aren’t going to put a dent in the problem, rather they will probably create more problems than they solve. This is a multi-causal problem, and requires a multi-prong approach. This includes, but is not limited to, industrial regulations, congestion and emission charges (particularly on the most polluting vehicles), more public transit, fewer highways, underpasses and bridges and a movement away from car-centric cities and reckless industrial practices. Some of these solutions may be long-term, but many can be achieved in the short-term, and are likely to be far more effective than the gimmicks this Government has proposed. n

COMMENT

What does big tobacco have to do with PIA’s losses? In a new ad campaign, Pakistan Tobacco has raised very important issues, but has fumbled every step of the way in doing so

By Daniyal Ahmad

t would take something truly remarkable to elicit some form of sympathy for the Pakistan International Airlines (PIA). As an asset the national carrier is bleeding money and a drain on the exchequer. So much so that it has become a symbol of all things bad about state owned enterprises. Perhaps that is why the Pakistan Tobacco Company (PTC) released an advertisement comparing the losses made by the PIA and the ‘losses’ the government made by not collecting taxes on the illicit tobacco trade. The results were a perplexing and puzzling advertisement that left everyone scratching their heads. The first look people got of this ad was on the 30th of November in two of Pakistan’s leading newspapers — The News and Jang. The advertisement presented a stark contrast: The PIA made losses worth Rs 180 billion while taxes worth Rs 300 billion remain uncollected from the illicit tobacco trade. Naturally there was some confusion. Initially some thought that the ad might have been a highly misguided attempt by PIA to (poorly) contextualise their losses by the PIA itself. But a bit of digging revealed what anyone familiar with Pakistan’s tobacco industry would already know — this was yet another ad campaign against local tobacco companies by their international rivals.

What is with the ad?

he ad is actually quite typical of Pakistan Tobacco Company. You see, Pakistan’s tobacco market is divided between around 52 players. On the one hand there is the PTC which is a subsidiary of British American Tobacco, and on the other there is Philip Morris International (PMI). Together, these two multinationals are the biggest players in the tobacco market and account for more than 60% of the overall market. And then there are around fifty-odd local tobacco companies largely based in Khyber Pakhtunkhwa that make and sell local brands and even off-brand cigarettes. Now PTC and PMI make up a large

chunk of the market, but because they are international companies and behemoths they end up paying a lot of tax. In fact, just these two companies pay 98% of the taxes collected from the tobacco companies with the 50 local companies only only paying 2% of the tax. This is an issue that has long irked big tobacco in Pakistan. They feel that their products are more expensive because of all the taxation they face and their competitors are only in business because they evade taxes. So you know how tobacco companies are not allowed to run any ads but they still have massive budgets for marketing and communications and pretty big teams too? Their job is to focus on building a narrative that encourages these smaller tobacco companies to be taxed more. And they come up with some pretty creative ways to do this. Back in June this year an event organised by the Society for the Protection of the Rights of the Child (SPARC). The event was meant to

mark the International Day for ‘No-Tobacco.’ Yet somehow the entire event and its speakers were focused on promoting additional taxes on the illicit tobacco trade with the intention of making cigarettes expensive and “saving children”. A director of the FBR even spoke at the event. Organisations like SPARC and others often get patronage from one big tobacco company or the other. Read more: Track-and-Trace Troubles The industry comes up with creative ways to thwart their tax free competition on the regular. And that is where this particular advertisement is also interesting. The thing is, the advertisement does not mention PTC. Now that in itself is fine because tobacco companies cannot advertise in Pakistan. The problem is that the advertisement had “Behtareen Pakistan” emblazoned on it as well, which led many to believe that it was the sponsor of this particular advertisement. The thing is, no one knows what Behtareen Pakistan is.

It’s unacceptable to exploit the reputation of another corporate entity in vain, particularly when it involves drawing an illogical comparison. We are equally disappointed with the publishing paper for permitting such an advertisement without disclosing the advertiser’s identity Abdullah Khan, Head of Marketing & Corporate Communications at Pakistan International Airlines

A cursory internet search for Behtareen Pakistan yields scant results. What you will discover are two social media accounts, one on X (formerly known as Twitter) and one on Instagram. The former has a handful of followers, while the latter boasts just over ten. Both accounts were created in November of this year. However, it is only when you find them that you realise they are part of a PTC initiative to highlight the illicit tobacco trade in Pakistan It is important to note here that we went and searched for Behtareen Pakistan on both social media platforms, and that is when we found it. A simple internet search does not immediately yield these results. PIA, evidently, suffered from the same fate. The confusion is palpable. We initially also reached out to Phillip Morris (PMI), asking if they had put up the advertisement, to which they simply replied that they had no idea as to what this even was. A social media search will also reveal the fact that a lot of the country actually believes that it is PIA who put up the advertisement in an attempt to deflect attention from their own losses. It was only when we contacted PTC that we learned that it was part of an initiative that they were going to launch to highlight the significance of the gap in the exchequer that the illicit tobacco trade has created. However, beyond confirmation that the advertisement was indeed theirs and that more advertisements on the subject of the illicit tobacco trade were in the pipeline, no response was forthcoming from PTC.

The ad itself

here is nothing factually incorrect about the advertisement. While it may come from a place of self-interest, PTC has a very valid point in their concern regarding the illicit tobacco trade. Whilst we have covered the matter as part of a deeper exploration of Pakistan’s tobacco industry previously, let’s recap. Read more: Crop talk: Deadly product, cut-throat competition

How PTC diluted the thrust of their own point

irstly, fixing PIA with Rs 300 is hardly the most pressing issue that could be addressed with such a sum. Consider, for instance, Pakistan’s federal budget for fiscal year 2023-2024, which allocates a meagre Rs 97 billion for education, Rs 24 billion for healthcare, and Rs 1 billion for environmental protection. These are vital sectors that affect the well-being and prosperity of millions of citizens, and yet they receive a fraction of the funds they deserve. The provinces also handle these issues separately, but that does not absolve the federal government from its responsibility to provide adequate resources. Sticking to just better allocation for federal expenses, the federal budget earmarks Rs 480 billion for social protection. Adding just the Rs 300 billion there

could have increased Pakistan’s social protection programme by more than 50%. PTC made a valid point when highlighting the losses caused by the illicit tobacco trade, but they should have opted for a more compelling example. Then there’s the optics of linking the Rs 300 billion to fixing PIA. “The analogy employed to illustrate the point is absurd. The insinuation appears to be that by stemming the tide of illicit cigarette trade, one could offset the losses incurred by PIA, thereby eliminating the need for privatisation. Are they implying that the government should refrain from privatising PIA because it can compensate for its losses from other sources? That notion is ludicrous. If the government cannot run PIA profitably, it should privatise it, full stop. Perhaps they should have said that the extra revenue could be spent on healthcare, but that might be awkward for the tobacco industry to admit,” retorts Taimur Jhagra, the former Provincial Minister of Khyber Pakhtunkhwa for Finance. Whilst PTC might not have any stance on the privatisation matter at all, that does not absolve the advertisement from a public finance point of view because it does give a particular message. “Plugging a hole created by tax evasion is a desirable act, but how the advertisement suggests the money collected be utilised is another matter. PIA is a public sector enterprise, and the advertisement implies that the government has an obligation to fund its commercial ventures,

ADVERTISING

The analogy employed to illustrate the point is absurd. The insinuation appears to be that by stemming the tide of illicit cigarette trade, one could offset the losses incurred by PIA, thereby eliminating the need for privatisation Taimur Jhagra, former Provincial Minister of Khyber Pakhtunkhwa for Finance

regardless of whether their deficits stem from inefficiencies, leakages, or even corruption. This is a misguided approach,” exclaims Faisal Rashid, Principal Consultant (Public Finance) at Oxford Policy Management. “The advertisement conveys the notion that the government can solve one problem by creating another. The problem (operational losses of PIA) should not have existed in the first place. A more appropriate message would have been to link the revenue collected from the illicit tobacco trade with the provision of public goods, such as establishing new hospitals, or enrolling out-of-school children,” Rashid elaborates. To reiterate, PTC might not have a stance on the matter of PIA’s privatisation, however, their advertisement inadvertently sends a message. So much so that one person whose comments could not be incorporated into the piece actually thought this was an advertisement placed by someone from a labour union that opposes PIA’s privatisation. In all this, PIA too is cognisant that if Rs 300 billion were to ever be collected in their entirety then they would not be given to PIA. “It’s an indirect argument that if you tax all of the illicit tobacco trade, then you can revive PIA. It is a fanciful notion that smuggling would ever cease completely, and that the surplus revenue would be earmarked for PIA’s revival. It is

implausible to suppose that the government has no more urgent priorities for those funds, even if they achieve this goal,” states Abdullah Khan, the Head of Marketing & Corporate Communications at PIA.

A botched job

et us begin by examining how PTC failed to establish a rapport with the very company they purported to support. “The advertisement was decidedly unwarranted. Far be it from me to don the hat of a conspiracy theorist, yet it appears as though it was deliberately disseminated by anonymous entities, precisely timed to coincide with the most pivotal audit in Pakistan’s commercial aviation history. Its prominent placement on the front pages of a widely-distributed English newspaper seems calculated to ensure maximum visibility. It was a breach of professional ethics and entirely unnecessary,” expressed Khan with a note of lament in his voice. “It’s unacceptable to exploit the reputation of another corporate entity in vain, particularly when it involves drawing an illogical comparison. We are equally disappointed with the publishing paper for permitting such an advertisement without disclosing the advertiser’s identity. The purported loss figure of Rs 180 billion, seemingly plucked from thin air, is a

A more appropriate message would have been to link the revenue collected from the illicit tobacco trade with the provision of public goods, such as establishing new hospitals, or enrolling out-of-school children Faisal Rashid, Principal Consultant (Public Finance) at Oxford Policy Management

claim that warrants rigorous fact-checking,” Khan elaborated further. Khan’s remarks reveal a lot. Firstly, regarding the sensitivity that Khan alludes to, there are two aspects at play. PIA is currently undergoing two different scrutinies. The first is an audit by the European Aviation Safety Agency (EASA) to determine whether PIA will regain access to the European continent. Does an advertisement hold any weight for EASA amidst such a crucial evaluation? Perhaps. After all, it was the remarks of the former Aviation Minister, Ghulam Sarwar, that escalated the situation with EASA and ultimately sealed PIA’s fate. Under normal circumstances, PIA might have shrugged it off, but when treading on thin ice, anything that could sway public opinion becomes significant. The second examination PIA is currently undergoing is an evaluation by EY for the government’s ongoing privatisation initiative. The current economic crisis has exacerbated this problem. The legal category’s retail volume share in tobacco contracted in 2022, and is expected to continue to drop. Consequently, illicit cigarette volume sales are projected to grow. Unless the inflation is reined in, this trend will harm the national exchequer, and impact the growth of the legal tobacco industry. The country’s efforts to curb illicit trade were initiated with the Track and Trace system. However, it has yet to make a strong contribution to diminishing the illicit trade in cigarettes. This advertisement is a reminder of the issue that plagues Pakistan’s tobacco industry. “Nearly half of our economy may be categorised as informal. Thus, the formal, tax-compliant tobacco sector has a legitimate grievance in this regard. Pakistan has failed miserably to regulate the illicit tobacco trade. Despite the controversy surrounding tobacco, it remains a legal product, and the government has an obligation to safeguard the rights of the corporate sector actively engaged in the formal economy,” asserts Jhagra. PTC’s argument has merit — no one can deny that. However, they could not have chosen a more unsuitable example to illustrate their point than the advertisement in question. n

ADVERTISING

Careem tweaks its strategy once again as competition gets fierce Once a clear leader in the ride-hailing market, Careem is finally trying to fight back By Nisma Riaz

ide-hailing platform Careem has realigned its strategy with the launch of a price bidding option for customers, as competition in the ride-hailing industry gets fiercer with the entry of Russian Yandex-group backed Yango in the country. Careem already faces stiff competition from inDrive, also a Russian origin company. Matters are not helped by the entry of Bykea in car-hailing. Both companies allow users to bid fares and offer them more control over pricing. Yango also offers these rides at discounted prices. Which is why, in a recent announcement, Careem launched Flexi Ride, in the company’s new bid to allow for more user flexibility. Careem has kept the original model of automatically generated fares without the bidding option intact in all categories. What is Flexi Ride? The Flexi Ride feature might be a new offering by Careem, but it is not a new concept in Pakistan. This feature allows commuters to set their preferred price at the time of booking, with an average fare initially displayed. Users on the Careem app can only bid fares 15% over or under the displayed average fare, while users on Bykea and InDrive do not have any range restrictions. The rest of the process remains the same, where the user’s offered price is sent to multiple drivers, who either accept the fare or offer counter bids. When an agreement over the fare is reached, a driver is assigned, commencing the journey. Careem’s justification for having a 15% upper and lower cap for bidding range is to prevent users from offering exploitative fares to Captains and keeping the prices fair. The new offering was piloted in Faisalabad and Multan in September, where it received a positive response, according to the company, prompting its launch in Islamabad and Rawalpindi in November. The company plans to expand to other cities like Lahore and Karachi soon. Imran Saleem, General Manager Ride Hailing at Careem Pakistan told Profit, “We launched Flexi Ride because we saw an appetite for it in the market based on surveys and

TECH

routine connect sessions with the Captains and customers. While the early adoption rate is promising, we will continue to monitor and see how it progresses.” The company refused to share the exact adoption rate but informed Profit that the new feature has gained positive traction. Flexi Ride is currently available in three categories of rides, including Flexi GO, Flexi GO Mini, and Flexi Bikes. GO Premium remains unchanged, and maintains the existing variable price marketplace model. While Careem did not disclose the commissions charged to Captain, it was confirmed that commissions under Flexi would be lower than in the original non-bidding fare model. Recently, there have been complaints that Careem captains can not earn enough from rides, as they are charged hefty commissions between 30% to 40%, as claimed by Captains. This means that from every Rs1,000 that a driver earns, anywhere between Rs300 and Rs400 will go to Careem. In conversation with Profit, Careem has denied that it ever charged commissions that high. A Careem representative said that the company’s maximum commission charged to drivers was 25%, which has now been reduced to 10-15% in some cities. Careem was forced to charge high commissions, as investors demanded more profitability from Careem’s parent company Uber. Competitors such as inDrive took advantage of the situation, and started with no commissions. Now, Careem appears to be forced to adopt the same route by introducing a similar offering and lower commissions for drivers.

Recently, Careem had also announced that it would resume bonuses and incentives for its drivers, in a bid to prop up the supply of drivers which had fallen since the pandemic. But why would commuters, especially ones opting for the smaller GO and GO Mini cars, continue using the original model when Flexi exists? Should Careem not have discontinued the previous billing model in GO and GO Mini cars because customers and captains alike have greater incentive to opt for the new price model? A Careem captain, who requested to stay anonymous, disclosed that the company is using several incentives for captains to adopt the new model. “Careem is charging less service fees from Captains on Flexi Rides,” he shared, confirming that high commissions might have been part of Careem’s troubles. With the new offering, Careem’s own commissions might suffer, but the company will have to succumb to market demand, especially in today’s highly competitive ride-hailing landscape. The captain also told Profit that in a briefing session for captains prior to the launch of Flexi Ride, a Careem spokesperson said, “The idea behind keeping both the Flexi (fixed) and marketplace (variable) models operational is, to account for factors that influence the cost of the ride. This way Captains have liberty to take rides on the marketplace model during peak hours, whereas, customers who prefer the original model due to any factors, such as having multiple stops or longer journeys, but want a cheaper and smaller car

can also opt for it.” It is safe to say that this new feature was launched to cater to more price sensitive customers, who prefer having control over the fares they pay. It is also safe to assume that Careem was urged to introduce this new feature in order to retain its market share in a highly competitive market, so that it does not lose its user base to alternatives like Bykea and InDrive. In an interview with Profit in 2022, Bykea’s CEO Muneeb Maayr said, “We are rolling out a hybrid between immediate matchmaking that we do today and a bid offer that inDriver does.” He added: “In a recession, we feel that the hybrid of both of these is going to be something that the market is going to accept. It is going to both allow drivers to

send offers and even allow customers to send bids, even if they are low bids, especially the customers that want to save money and want to wait after bidding for low fares.” Bykea assumed that movement might not stop, but commuters might have lowered expectations of quality and time. In essence, Bykea relied on the premise that the decline in disposable income, attributed to escalating inflation, coupled with the essential need to commute for work or school, will prompt individuals to trade waiting time for ride costs. This strategy seemed to open the door for the inclusion of less expensive, lower-quality vehicles, further reducing overall prices and positioning Bykea to seize a larger market share. Something similar might be in the play for Careem as well.

Careem Pakistan seems to be shifting its focus away from segments which are not related to ride-hailing. Just over two months ago, the company withdrew its electronic money institution (EMI) licence from the State Bank of Pakistan (SBP), ending its plans to launch a mobile wallet. Careem’s food delivery service also is nowhere to be seen, hinting that the food delivery segment might have succumbed to food delivery platform Foodpanda’s mammoth presence. Instead, changes at Careem, such as the introduction of Flexi rides, come on the back of a $25 million investment for the Pakistani market. The lower commissions on rides means that Careem’s focus has come back to ride-hailing. It has cash and is ready to spend it to regain its market share in car-hailing. n

Competition appellate tribunal appoints a new chairman, here is why that is important

Gridlock expected to clear as tribunal resumes operation after 7.5 years and 212 pending cases By Ghulam Abbas

he Federal Government has finally appointed Justice (Retd) Mazhar Alam Miankhel as the Chairman of the Competition Appellate Tribunal, marking the tribunal’s full functionality after a hiatus of 7.5 years in the last decade. Justice Miankhel, a former Chief Justice of the Peshawar High Court and a retired judge of the Supreme Court, will serve a three-year term following approval by the federal cabinet during its Wednesday meeting. With 212 pending cases, the Competition Appellate Tribunal’s revival is a crucial step towards addressing legal bottlenecks that have plagued the competition landscape. Over the past decade, due to its non-functionality, concerned entities resorted to High Courts, resulting in 140 petitions seeking alternate remedies. What purpose does the tribunal serve? The Competition Appellate Tribunal (CAT) in Pakistan is a specialized forum that handles appeals against decisions of the Competition Commission of Pakistan (CCP). The Competition Commission of Pakistan is the country’s competition regulatory authority responsible for ensuring fair competition and preventing anti-competitive practices in the market. The Competition Appellate Tribunal was established under the Competition Ordinance, 2007, to provide an avenue for parties to appeal

decisions made by the Competition Commission. Its role includes hearing and deciding appeals against orders, decisions, or determinations of the Competition Commission. The tribunal operates independently to ensure a fair and impartial review of competition-related cases.

The cost of inaction

ver the last 7 years, the competition commission of Pakistan has faced extreme challenges in doing its job. With over 550 cases and inquiries unresolved, and over 68 billion in fines stuck in a legal limbo, the commission has had its role undermined by players from all the sectors of business. One big reason for this prevailing legal stalemate, has been the absence of a chairman in the Competition Appellate Tribunal. With an active tribunal not able to listen to complaints, companies have found themselves at the doorstep of the Competition Appellate Tribunal, as a mere delaying tactic to avoid legal action against them. Profit has previously reported on the cases of Mezan Beverages and Atlas Honda Cars, just to name a few who have been able to diverge from legal action because of the tribunal. Another high-profile case awaiting the Tribunal’s attention is the sugar cartel case, involving a substantial Rs. 44 billion penalty imposed by the CCP on the Pakistan Sugar

Mills Association and its member sugar mills. The resolution of such cases is anticipated to bring clarity and efficiency to the affected industries at large.

What is expected to change?

he Competition Commission of Pakistan (CCP) expressed satisfaction with this new development, emphasizing that a functional Tribunal would expedite decisions in pending cases. Delays in resolving appeals had previously hindered the implementation of vital CCP orders across diverse sectors such as sugar, cement, fertilizer, telecom, banks, and consumer goods. Justice (Retd) Miankhel’s reputation for judicial integrity and standing aligns with the legal requirements for the Tribunal’s Chairman. According to the law, the Chairman must be a former Chief Justice of a High Court or a retired judge of the Supreme Court. Additionally, the Tribunal comprises two technical members with expertise in international trade, law, economics, finance, and accountancy, ensuring a comprehensive and knowledgeable approach to competition-related matters. As the Competition Appellate Tribunal resumes its operations under the leadership of Justice (Retd) Miankhel, stakeholders are optimistic about the expeditious resolution of pending cases and the Tribunal’s vital role in fostering fair competition within the Pakistani business landscape. n

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