CONTENTS
10 10 News in Numbers 12 Will Airlift be able to provide a public service and still make money? 17 Plunging rupee deepens profit declines at Abbott Laboratories
18 18 TPL Insurance seeking up to Rs1 billion in foreign investment 20 The spectacular decline of Hubco 30 Despite rising demand, Lotte holds off on capacity expansion
33 33 Large-scale industry continues to contract, agriculture shows promise 34 Rising prices help Aisha Steel continue growth trajectory 41 Why Jeffrey Sachs is wrong about Reko Diq
welcome
Continued myopia on energy policy Long term policy planning is hardly something that the government of Pakistan is known for. Indeed, the shorttermism is what often lands the country in some of the biggest messes we currently contend with. However, the consequences of that myopia are most vividly brought to light (no pun intended) in the energy sector, where the government’s failures to plan are made evident to every Pakistani, every day, as they flick the switch in their homes to turn the lights on, knowing there is a very high likelihood that the lights will not turn on. There is a reason why even the most hardened of libertarians will admit that they want enough government to “keep the lights on and the water running in our faucets”: because the functioning of utilities like electricity and water are among the most basic of government responsibilities. And yet, while matters are better than the (literal) dark days of 2008 through 2013 with respect to the provision of electricity at least (load shedding is still bad, but better than it used to be back then), the choices made by the government reflect the kind of myopia that Pakistan can simply no longer afford. Take, for instance, the Nawaz Administration’s supposed success in one of their biggest stated goals when they came into office in 2013: increasing cheap power generation in Pakistan. Backed by loans under the China Pakistan Economic Corridor (CPEC), and a blindingly fast rush into coal-fired power generation, the Nawaz Administration succeeded in their goal: power generation capacity in Pakistan increased by 50% during their 5-year tenure, and nearly all of that was
cheaper than the weighted average cost of power production that existed in the country before. But at what cost? The people of Punjab and KhyberPakhtunkhwa are choking, many of them to death, every single day for three months of the year. The nation’s most densely populated region is unable to breathe, at least in part because of the addition of that much coalfired power generation capacity. What good is the electricity to run your store or your factory when you have no clean air to breathe? We understand, of course, the logic behind why the Nawaz Administration did what they did: coal is the cheapest source of electricity they could deploy at the speed they needed to. But the structure of the electricity grid is a choice that has repercussions for three decades or more. Speed and cost should not be the only parameters by which we judge success. There can be considerable debate about what other parameters to include to determine energy policy. But one would hope that breathable air would be a criterion we can all agree is a vital – and non-negotiable – consideration.
Farooq Tirmizi Managing Editor
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Muhammad Faran Bukhari l Taimoor Hassan l Abdullah Niazi l Ahmed Jamil Bilal Hussain l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
FROM THE MANAGING EDITOR
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The amount of foreign direct investment that flows into Pakistan in any given month fluctuates substantially, which is to be expected: these are discrete projects that foreign investors are putting their money into, and as such, the amount of money that flows into the country can ebb and flow depending on the nature of the investment being contemplated. However, there are nonetheless some trends that are visible in the data that we present above, which goes back to 1997, or the beginning of the second Nawaz Administration. The first of these is the fact that the Musharraf Administration’s track record on attracting investment into Pakistan remains unbeaten, though this is at least in part due to global macroeconomic factors that were considerably more favourable back then than they are now. The second is that the third Nawaz Administration was able to lift the levels of foreign investment above those of the abysmal levels of the Zardari years, but still nowhere close to the Musharraf era. CPEC was supposed to be the game-changer with respect to investments into Pakistan, but it is not remotely visible in the investment numbers.
News IN NUMBERS
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This chart is one that usually spark considerable derision and disbelief among those who see it: the official unemployment rate of Pakistan, which has – at least since the early 1980s – never surpassed 8.5% and usually remained within levels that, at least in developed economies, would be considered full employment. This, of course, is considered hogwash by most Pakistani drawing room commentators, and while we at Profit are usually dismissive of drawing room commentary, there may be some truth to the perceptions of unemployment. The problem gets down to definitions: an unemployed person is one who is actively looking for work and has not found it yet. A very large proportion of the Pakistani labour force consists of what the Pakistan Bureau of Statistics calls “contributing family workers” which accounts for an astounding one-third of all employed persons in Pakistan, including well over half of women in the labour force. Are these people unemployed or are they employed? That is certainly debatable, but there is no question that the official unemployment rate deserves an asterisk next to it.
News IN NUMBERS
Will
AIRLIFT be able to provide a public service and still make money?
Public transport is a necessary good, but with the government unable to satisfactorily provide it, how is the private sector filling the void?
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By Syeda Masooma
uses make sense. Global warming has you down? Run a high class public bus system and you have the answer. Need jobs? Buses need conductors and drivers as well as white collar workers in the transit authority. Cars are expensive? Just take a bus! Crumbling infrastructure? Reduce cars through buses and go easy on the roads.
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But somehow or the other, even though they make all of this sense, buses also face great flak. The speedo buses in the Punjab, for example, caused murmurs and discontents after Shehbaz Sharif’s face was plastered on to every last bus. “What about health?” whispered the uncles, and who would fix the education system? Were buses the government’s priority or just something to tout come election time? The reality is that buses are an important mode of public transport, and a subsidised provision of the gov-
“Top 20% of the market in Pakistan is being looked after by Uber and Careem, bottom 20% are being taken care of by Bykea etc. The 60% in the middle is still there. Then there are quite a few under-served [geographical] areas in Pakistan, even within metropolitan cities like Lahore. Even public transport cannot get to those areas that easily. That is where we are beginning” Syed Mehr Haider, Executive Director at Airlift
ernment. A general misconception seems to be that public projects should be profitable. Quite to the contrary, they are loss making machines from the get go. The iconic London buses, a more expensive option to the tube, lose money like nobody’s business precisely because they are supported by the government as a public good. The good that a solid system of public transport does cannot be understated. But with jangla bus narratives abound and subsidies being removed from metro systems, there seems little urgency in Pakistan to adopt a robust system of public transport. And much as all history has been witness to, when the public sector fails, the private sector steps in – and somehow makes money along the way. In Pakistan, the sensational, genre bending, ride hailing start-up, Airlift Technologies, has big plans for the country’s transportation sector. With the required funding to oil the wheels available for at least some of those plans, Profit sat down with Airlift’s Executive Director, Syed Mehr Haider, who talked at length about these plans, what they may mean for public transportation in the country, and how the Airlift team is going to make money apart from external financing.
The master plan
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f you do not know who you are looking for, you could walk in and out of the Airlift offices without giving a second thought to Usman Gul. In the middle of sharply dressed, suited up corporate types, he is a tame, rather inconspicuous presence. But this Lahori boy armed with an undergraduate
degree from Denison University, has worked as an analyst for MasterCard’s Leadership Development Program, and as Senior Manager at the largest food delivery company in the United States, DoorDash. He is also the brain behind Airlift. Upon his return to Pakistan from a successful education and professional careers in the states back in 2018, Usman enrolled in INSEAD Pakistan for his MBA in August, where he first came up with the idea for Airlift. During his time there, as part of a small team, he developed a core operating thesis on the basis that ride sharing can be a lot more efficient for all parties involved if only the size of the vehicle is increased. So consumed did he become with the idea that he dropped out of the MBA degree to pursue his thesis as an actual business venture. With his career in the states over and little help on his side, Usman was still just thinking about assembling a team when it assembled itself. With the exception of one person, Ahmed Ayub, all the members of Airlift’s core team cold emailed Usman Gul and expressed their desire to become part of his initiative. These include Awaab Khakwany, Muhammad Owais, Zohaib Ali, and Meher Farrukh – all students of the Lahore University of Management Sciences. Syed Mehr, the company’s Executive Director, attended Aitchison College before going on to the University of Toronto, and has significant experience in the Silicon Valley that spans almost a decade of managing human resources and business development with companies like PLOS, Esurance and AugmentCare.
Put together, this cohort with international education and experience now feels proud to have brought it all back to Pakistan. “This startup is Made in Pakistan. Our talent is all Pakistani. There are many companies from all over the world that have come to Pakistan and have worked very well. But our concept is that we are a Pakistani company that is going to go all over the world. Media channels from all over the world, including DealAsia [DealStreetAsia Magazine] or MENAbytes, have covered this story comprehensively. Ours is a Lahore-based company and its name is in San Francisco, India and will soon be everywhere” he says. Going back to the origins of Airlift, Haider is quick to refuse any credit for the beginnings of the startup. “This is not my idea. I am part of the team. The company began six to eight months ago when Usman Gul realized that Pakistan needed [such a service].” “Initially when the company started, it was getting very nominal number of rides per day. But then in only a matter of days, the trajectory got so good that the number of rides increased to 500 and then to 1,500. The growth was insane,” Haider says.
The hook(s)
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n fact, it was the sort of growth that normally has companies scrambling to keep up with demand and follow a trajectory without losing their heads along the way. But Airlift seems to have kept a steady head. In the first round of funding, they raised $2.2 million from the Fatima Group and Gobi Partners, and Indus Valley Capital. The people
TECHNOLOGY
involved who put their trust in Airlift include Atif Awan, a former senior executive at LinkedIn, and Ali Mukhtar, the managing partner at Fatima Gobi Ventures. The second round, however, really put them on the block with a mammoth $12 million. This is the largest funding ever received by a Pakistani startup. “The numbers that we had for the business project were so amazing that we landed investment for our business” says Haider. “The question is how to look at this investment and what benefits it holds. For one, we have set a great example for the startup ecosystem in Pakistan. We have a lot of startups in Pakistan, and our ecosystem is also growing day by day, but a VC fund in First Round Capital is the sort that invests in startups like Uber. Now an institutional investor of that level has shown interest in Pakistan, which is a big deal for Pakistan and for the startup ecosystem here.” “Secondly our user base is 47% women, and that is another thing we are proud of. Usually women are not comfortable with mass transport systems, primarily because of security issues. We have a strong tracking system for the drivers and buses, and are especially happy to see women’s trust being built in our service.” But the real attraction is the money. You can get on an Airlift bus at any of their stops, and get off on the other end of the city, all in Rs 50, with the comfort of air-conditioning to boot. And a short term unsustainable price as it may be, people are shifting to Airlift in hordes – including the 47% women they are so proud of. While almost all new ride-hailing services entrants in Pakistan are aiming, or at least claiming, to provide transportation for women and to make their services cost effective and safe, Airlift is the first and the only one to have also come with the tag for a “cleaner and greener” service. “When you ask me where this cleaner and greener Pakistan idea came from, it was always our mission to take on several issues. We want to provide transport to areas that are not yet being served by other businesses or public transport, we want to make it comfortable and
trustworthy for women, and we want to do so in an environment-friendly way,” says Haider, who has previously said innumerable times on camera that "for every bus of Airlift, there are 10 [traditional] cars on the road.” The latest Memorandum of Understanding (MoU) that the company signed with the Ministry of Science and Technology also includes a clause of them bringing the first ever battery powered buses in the country.
The feasibility
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he promises and principles Airlift is championing are well and good, but it would be unwise to get side-tracked by the image a company is trying to build. Besides, there are only so many windmills one can tilt at, and in the modern world of business, you need to roll your sleeves up and ask how you are going to make money, while staying true to the message you are preaching. Haider believes that even with traditional buses, traffic congestion will see a massive decrease. “That will not only solve traffic congestion but also carbon emission, the two major issues in Pakistan. Keeping that in view, we are a team that believes very strongly in a progressive Pakistan, we hope to resolve several issues at the same time.” Airlift is not yet decided on the approximate ETA of battery powered buses at the moment, but they do know how they are going to navigate the market in the meantime. Their starting point is not those who already travel on the scantily available and overcrowded public transport, but those with means of either their own vehicles or other available services like Uber and Careem. “The top 20% of the market in Pakistan is being looked after by Uber and Careem, the bottom 20% are being taken care of by Bykea etc. The 60% in the middle is still there. Then there are quite a few under-served [geographical] areas in Pakistan, even within metropolitan cities like Lahore. Even public transport cannot get to those areas that easily. That is where we are beginning.” Airlift seems intent on an almost scientific business model. At least according to Haider, the percentages he gave here were not shots
The real attraction is the money. You can get on an Airlift bus at any of their stops, and get off on the other end of the city, all in Rs 50, with the comfort of air-conditioning to boot. And a short term unsustainable price as it may be, people are shifting to Airlift in hordes – including the 47% women they are so proud of 14
in the dark, but actual, hard data that Airlift has stored in detailed reports on Pakistan’s transport sector - numbers that have helped the startup to show potential to investors, which make them confidential data and research for Airlift as well. If the target market is “middle and upper-middle socio economic strata”, then the fare of Rs50 might be misleading. However, if you consider that it is only payable by cards at the moment, or bank cash deposit options, and that Airlift customers either need to have a debit or credit card or at their disposal or deposit cash in the Airlift Account which is then accordingly updated on their accounts, things get into perspective. These payment methods, at least for the time being cater only to the banked population or those with the know how of how bank accounts may operate, and not necessarily those who work on daily wages. In addition to this, they also need smartphones and stable internet. This fare is also not likely to stay at a blanket rate of Rs50 for much longer, like Metro for instance. “For now we are using cards system, debit cards and credit cards. But we are also exploring other opportunities and down the line we will introduce more. For now the price is also only 50 rupees, irrespective of how long the journey, but that is the introductory price. With the passage of time, we will also refine distances and other factors, and introduce distance-based pricing. But even then it will be comparatively less than other ride-hailing services,” explains Haider. On the drivers’ side, the company is not willing to divulge much at the moment, except that their communication takes place with transport managers instead of directly with the drivers, and that they are offering a uniform rate to these managers and then leaving them with the job of finding the required resources. Airlift General Manager Hurrieyeh Iftikhar said, “We ensure that the transport managers are following pilot on-boarding protocol. This helps us ensure due diligence in the process.” Haider added, “The numbers are confidential at the moment but down the line I will be happy to share. For now I can tell you that we deal with suppliers and customers, our suppliers being the transport managers. We have a uniform package, I cannot share that with the media at the moment, but these transport managers follow our detailed questioning and screening process themselves and then for the drivers. We question people before we make them transport managers and then they follow our guidelines for drivers. They also fulfill our insurance and other quality demands and we also make sure that they follow those. But the model and money matters, we will hold on to
that for now”. There is also another factor, that with fewer vehicles out there, there are also far fewer captains. And with buses, you do not have the problem of people feeling like their cars are being overworked or misused. Set routes and a simpler app platform makes things much simpler on the captains end, and lower numbers indicates a difficulty for captains to organise. There is also no near-draconian ‘incentive’ system that would make those driving the buses work inhumane hours. With all the good and the positive that team Airlift plans to bring to Pakistan’s transport sector, their arrival, operations, and future trajectory are still cause for worry for some, especially their competitors. Profit interviewed CEO of Roshni Rides, Hanaa Lakhani, a while ago, and she had a lot to say about what is going wrong with Airlift. She said that Airlift even though cheaper is a model for men, its funding is a ‘celebrity play’ and the startup is “burning [money] just to keep its brand presence” while running empty buses. She also pointed out that Airlift’s technology is glitchy, and their tracking capabilities do not work. Each of these questions were posed to Syed Mehr Haider, who maintained his cool and even managed a bit of cheek. “First of all, Roshni Rides, thank you for your feedback,” he said. “Our technology is ever evolving and we try to resolve every customer’s concerns, and every query and complaint is being addressed on a daily basis. Our tracking capabilities are top-notch, but if any of our customers believes that it should be improved, we take that seriously and try to incorporate their suggestions”. “Within a short span, our technology has improved massively and it is still constantly improving. The numbers that we have in such a short span of time are proof of that. But to answer her claim exactly, I would say that our company’s formula is based on customer feedback. I and other team partners also sit in our on buses and talk to customers to get their responses. Then there is also the rating system on our app. We take feedback very seriously. There is also the helpline people can call. We can also send us direct email and we have a team that is following that very vigilantly. So whatever your concerns are, please share them with us and we are more than happy to try and improve upon them.” On the question of whether Airlift is more suited to male customers, Haider reiterated that half their customer body was already comprised of women, and that their tracking and security protocol is geared to constantly make the service more safe and comfortable for female passengers.
Funding round
Seed round
$12 million
$2 million
The total amount of capital raised by Airlift in its Series A round of venture capital funding, the highest ever by a Pakistani startup
The amount of money raised by Airlift in its seed funding round, just a few months prior to its Series A funding round
“I believe that our services are as much for women as they are for men because in Pakistan one of the biggest concerns is security and harassment, which does not give women that level of comfort with mass transport. In our model, we have proper check and track systems and we have proper databases for drivers. We also have a control room that monitors their movements. Even before they start driving to a certain location their movements are being tracked. Their customers [passengers] can also track where the buses are how long will it take for them to reach the pickup point and then throughout their journey” he explains. “I will give you an example. If there is a lady working in Gulberg, and she gets off from work at 5:00, previously she might go to the bus station and wait for the bus which might or might not come at all. That is a huge concern. With our app, she can track the bus and know when it will arrive. Her seat will also be booked and confirmed. So there is also no chance of the bus being already filled without any seat available. All of this lends a higher comfort level for women, making Airlift as good an option for them as it is for men.” Responding to Roshni’s jibe that brand presence was more important to Airlift than financial efficiency, Haider was candid. “We do have the funds now to explore several avenues and to cater to different customers. Both [operational efficiency and brand presence] go hand in hand. You need to have an efficiently run business and brand presence at the same time. However, with us it is not like we are only focusing on just being there. In Karachi and Lahore we are getting very positive response, and our utilization rates are very high. In fact sometimes our buses get overbooked, but as I said before that in Airlift your seat is confirmed, and it is a demand-based model so if such a thing happens and a bus gets overbooked we do also have the capacity to send another bus at the same station at the same time.”
What about the public sector?
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ut it is not just the competition that has something to say or cause to worry because of Airlift. Their brand presence and forward thinking in the EV department means that there is apprehension among certain circles that are questioning whether or not this should exclusively be the government’s responsibility, and the dangers of allowing the private sector to take the lead on this. While Airlift’s MoU with the federal government has done little to ease these fears, Haider’s response to Profit might. He dismissed the fears related to a private company taking up a public service with regards to Airlift, clarifying that the only way a private company would be able to take this responsibility is to privatize the entire sector. “We are working hand in hand with the government, complimenting their transport services and not as a replacement. Our goal is to revolutionize the mass transit system in Pakistan, and with the kind of funding we have right now, we are obviously exploring more avenues as well.” But can a company funded externally and not dependent on their revenues for their continuity or profits be trusted to provide an efficient service? “The ultimate goal and objective for any business is profit, and it is for us too. But the question is how to approach that? We are still exploring it,” Haider says. “For now, our primary focus is on growth, and now that we have the required funding, our growth and profit targets can go hand in hand. Plus, expansion does not mean losses or inefficiency if you are getting positive results from the market. I cannot disclose the exact financial details, or even whether we are breaking even yet or not, but I will be able to do so in a short while once we have streamlined our processes, business model and matters related to fare and revenues.” n
TECHNOLOGY
Plunging rupee deepens profit declines at
Abbott Laboratories
The government’s decision to continue allowing the import of drug raw materials from India appears to have helped stabilise the otherwise suffering industry
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bbott Laboratories is feeling the crunch in Pakistan as the plummeting rupee takes the company’s profit margins down with it. Gross margins declined by 5 percentage points, down to 31%, in the three quarters of calendar year 2019, largely due to losses the company had to book on the falling exchange rate for the Pakistani rupee
PHARMACEUTICALS
against the US dollar and Indian rupee, according to a research report by Topline Securities, an investment bank and brokerage firm. The declining profitability numbers at Abbott have until now been almost completely ascribed to the Rs2.4 billion foreign exchange losses that the depreciation of the rupee have cost so far this year. It also does not help that the exchange rate has increased cost pressure from inflation that has sent utility prices shoot-
ing up. The company has lost a total of Rs3.5 billion in total on exchange losses since the beginning of 2018. The company’s total revenues stood at Rs30.4 billion in the 12 months ending September 30, 2019, up marginally from the 2018 calendar year number of Rs29.7 billion. Profitability for the company, however, has taken a beating. Net income has declined from a peak of Rs4.2 billion in calendar 2017 down to Rs1.4 billion in
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the latest 12 months for which financial data is available, a more than two-thirds decline. The company has been quite clear in their declaration that its business model does not give it any wiggle room to hedge its foreign currency exposure. Add to this the fact that being an American company, they insist upon maintaining certain quality measures on the materials they are importing, and a continued unstable dollar-rupee exchange rate could have spelled disaster for Abbott Laboratories. Abbott is not alone in being dependent on imported raw materials: close to 75% of the raw materials and active pharmaceutical ingredients (APIs) used by the Pakistani pharmaceutical industry are imported, according to the Abbott management. And about 60% of the imported raw materials come from India. Recent tensions between India and Pakistan – which flared up in February 2019 and have not subsided materially since – had caused some concern among analysts and observers that Pakistan’s production of pharmaceutical drugs would be negatively impacted if the government’s trade embargo on imports from India were allowed to hit the industry. Yet it appears that the government’s jingoistic nationalism has its limits: the government has continued to allow the pharmaceutical industry to import raw materials and APIs from India, which has helped stabilise the industry in what has otherwise been a highly testing time. The Indian pharmaceutical industry is among the largest in the world, and one that has become an integral part of the supply chain of pharmaceutical companies in the United States and Europe as well as those around the world. Indian manufacturers have been able to establish a reputation for high quality and low cost for the raw materials and APIs that form the key ingredients for many of the most commonly used drugs around the world. While the government of Pakistan has sought to help encourage import-substitution as a policy as a means of trying to reduce the trade deficit, the pharmaceutical industry is likely to remain an exception to that attempt. Being located next to the world’s largest producer of pharmaceutical raw materials means that Pakistan is unlikely to ever develop a local industry that will be cost competitive against India. Aside from the trade-related issues, the pharmaceutical industry faces two other challenges, the first of which is unique to the industry, and the second of which is one that is being faced by the economy as a whole. The pharmaceutical industry-specific issue is the pricing policy set by the Drug Regulatory Authority of Pakistan (DRAP), an agency that is part of the federal health
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ministry. DRAP dictates the extent to which pharmaceutical companies can raise their prices for each drug, and it does so using a relatively blunt instrument. All drugs in Pakistan are divided into just two categories: essential and non-essential. For drugs that DRAP deems essential, the industry cannot raise prices by more than 70% of the inflation rate – as measured by the consumer price index (CPI). For non-essential drugs, companies are allowed to raise prices by the full inflation rate. About 60% of Abbott’s drugs are in the “essential” category and the remaining 40% in the “non-essential” bucket, according to research from Topline Securities. Needless to say, the inability to raise prices in accordance with rising costs – particularly in situations where so much of the costs have increased due to rising import costs and the collapsing rupee – is a policy that is deeply unpopular among drug manufacturers in Pakistan,
including Abbott. The second challenge facing the industry is one that has hit the economy as a whole. For all the sighs of relief over the recent stability in the exchange rate, the government’s recent move to require companies to record the computerised national identity card (CNIC) numbers of all those engaging in transactions over Rs50,000 has caused a sharp slowdown in sales. While the government deferring implementation to February next year has caused some stability, it may soon enough be shattered. In this regard, the company will be banking on some of their new drugs keeping their profit margins up. Topline analysts state that Abbott have launched four new products, out of which one product related to treating diarrhea has been very successful and is considered as one of the top ten new launches in 2019. Other products such as the seasonal mosquito repellant ‘Mospel’ is also responsible for revenue generation up to $2 million in 2019. n
TPL Insurance seeking up to Rs1 billion in foreign investment Capital injection to be used to finance strategic initiatives and expansion plans, according to the company’s management
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PL Insurance, Pakistan’s sixth largest non-life insurance company, is close to securing a Rs1 billion investment from international investors, an investment which would
allow the company to invest in expanding its operations and key strategic growth initiatives, according to the company’s management, which stated this at an analyst briefing on November 26. “The management refrained from commenting on the details and timelines of the
transaction, but they did hint that the process is in an advanced stage,” wrote analysts at Next Capital, a securities brokerage firm and investment bank, in a note issued to clients shortly after the briefing. The investment would represent a nearly 25% stake in the company, according to management. TPL is one of the smaller insurance companies in Pakistan, and is newer than most of its larger rivals. The company is a subsidiary of TPL Corporation, which is best known for owning TPL Trakker, a service that allows vehicle owners to install tracking devices on their cars and other vehicles so that they can track them in case of robbery or theft. The insurance business started off as an off-shoot of that core business and has since sprung up into becoming a business in its own right. Despite being relatively small in the overall non-life insurance market, TPL Insurance is the third largest insurer of automobiles in Pakistan, with a retail customer base that exceeds 300,000 users. The company has been an innovator with respect to the use of technology for distributing non-life insurance products in Pakistan, and management has been keen to highlight the potential of technology in helping the company gain a lead in what is a significantly under-penetrated insurance market, even by regional standards. Non-life insurance premiums account for just 0.3% of the gross domestic product (GDP), the total size of the economy. By comparison, peer economies in Asia and Latin America have insurance penetration rates closer to 1.6% of their respective GDPs, on average. Mature economies like those in North America and Europe have even higher penetration rates of 6.8% and 3.3% of GDP respectively. And within non-life insurance, TPL is
strongest in a relatively smaller segment of the market. Of the total non-life insurance market, fire insurance accounts for about 39%, with auto insurance accounting for about 20% of total premiums. While TPL does compete in the fire space, its competitive advantage is in auto insurance. The Pakistani auto insurance industry is significantly smaller than its potential. According to the Pakistan Bureau of Statistics, there are approximately 17.3 million vehicles in the country. Of those, just 650,000 are insured. That lack of insurance penetration is surprising, considering the fact that the law requires that all vehicles be insured for at least Rs200,000 worth of damages. More surprising is the fact that the law is a pre-Partition law, the 1939 Motor Vehicle Act. The insurance cap is set to rise from Rs200,000 to Rs500,000, according to TPL’s management, though it is unclear as to when the government is expected to implement that change. For the third quarter of 2019, TPL Insurance saw its net premium revenue increase by just 0.4% compared to the same period last year. However, the company’s management stated that they believe that even such a minor increase represents an achievement, given the difficult operating environment. For the first three quarters of the year 2019, net premium revenue was down about 9.9% compared to the same period last year. The declining value of the rupee has caused a sharp decline in new car sales, typically the strongest channel of distribution for the company with respect to new policies. TPL Insurance has approximately a 70% renewal rate each year from its existing policy-holders, meaning it has to keep on finding new customers to keep itself from losing premium revenue each year. TPL’s big innovation in Pakistan’s insur-
ance industry is its app, which it uses not just to allow people to buy and track their policies – as well as pay premiums – but also to track driver behaviour and dynamically adjust underwriting risk for each individual customer using location data and adjusting for a variety of factors. The company utilises artificial intelligence (AI) to determine the risk associated with each individual driver who has enabled the telematics insurance feature on their app. Unusually for an insurance company, TPL lets users track their own information and see what the company used to determine whether they were higher or lower risk than the broader insurance pool. Unlike most of its larger competitors, which tend to pursue the institutional market as their core business – large companies that offer cars to their employees as a perk – TPL Insurance targets the retail business, going after individual car-owners rather than the larger companies. Its history as a company that provides security services lends it considerable credibility among care owners who know it is a reliable security company. Among the initiatives the company announced is a bid to try to expand into that retail market segment using a strategy initially used by the telecom companies: allowing people to prepay their insurance premiums using scratch cards that they can buy from ordinary retail outlets and activate using their cellphones and call centers. In addition to the auto insurance market, the company is also expanding its presence in the growing agricultural insurance market, where it insures both crops as well as livestock. The product is largely distributed through banks, which tend to have better relationships with farmers than independent insurance companies. The company does not yet make money from its agricultural insurance business. n
INSURANCE
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By Farooq Tirmizi
ENERGY
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t is not every day one can characterize a company that made Rs11.9 billion in profits last year as struggling, but there is no denying it: Hub Power Company (Hubco), Pakistan’s largest independent power producer (IPP), is in big trouble. Its base plant – which accounts for just over 80% of its power generation capacity – is effectively shut down, with a load factor of less than 1.3% in the third quarter of calendar year 2019, the most recent for which data is available. Load factor for a power plant refers to the proportion of a plant’s maximum power generation capacity that was actually utilised in a given period. Revenue declined by a staggering 41.9% during the financial year ending June 30, 2019. And while net income for the company is relatively stable, the year 2019 was the first time since 2000 that Hubco did not pay out a dividend. To make matters worse, things are bad for Hubco even as the broader power generation sector continues to recover from the 2018-19 recession. During the third quarter of calendar 2019, power generation across Pakistan increased by 3.9% compared to the same period last year, according to data from the National Electric Power Regulatory Authority (NEPRA). But power generation at Hubco’s main plant declined by more than 90% during that same period.
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This is clearly a period of significant pain for Hubco. So why is the company doing so badly in a sector in which it has historically been a dominant player? And what is the management’s plan to fix the problem? The problem for Hubco is the same it has always been: the company has consistently chosen the wrong fuel for power generation, and not used its good years to plan for much needed overhauls. And it has a habit of foolishly believing the government of Pakistan’s most outlandish promises, taking into consideration the letter of the law without regard for the political sustainability of that which the government has promised the company.
The first among IPPs
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he Hub Power Company was the very first independent power company set up in Pakistan, first incorporating in 1991, a few years before the World Bank-backed IPP policy was established in the country in 1994. The bank had been pushing the government of Pakistan since 1985 to establish an IPP policy – allowing independent power generation companies to sell electricity to the national grid – rather than relying on the state-owned electric utility companies to continue expanding their power generation capacity. The problem for Hub, however, was that it chose oil, among the most volatile of commodities in terms of price, and one for which
Pakistan has almost always relied on imported supplies for the bulk of its consumption rather than domestic production. As a result, the price the government-owned power transmission and distribution companies had to pay to buy electricity from Hubco fluctuated wildly, something that the government previously had no experience in. The main plant – a 1,292-megawatt (MW) furnace oil-fired power plant located in Hub, Balochistan – began operations in March 1997, and almost immediately ran into problems with the Water and Power Development Authority (WAPDA), which at the time was still responsible for the nation’s energy infrastructure. Part of the problem was timing: March 1997 was just one month after then-Prime Minister Nawaz Sharif had taken office for the second time, following the dismissal of the second Pakistan Peoples Party (PPP)-led government of Prime Minister Benazir Bhutto, on allegations of corruption. Even though the IPP policy was a World Bank initiative that was first contemplated under the Zia Administration, it was easy for the second Nawaz Administration to portray the policy as being overly favourable to power companies at the expense of the government and electricity consumers. Payments to Hubco from WAPDA were frequently delayed and disputed, even though the government had signed agreements with the World Bank’s International Finance Cor-
“Our overall capacity will touch 3,700 MW maintaining our lead as Pakistan’s largest IPP with a very sizeable market share in the country of over 20%. Along with our water initiatives, we will transition the company from being an IPP to an IWPP [independent water and power producer]. Finally, we are the only IPP continuously growing our capacity and have a combined $4 billion investment in the power sector of the country. All these initiatives will inshallah drastically improve our bottom line” Habibullah Khan, chairman of Hub Power Company poration (IFC) to prevent precisely that sort of thing from happening. Indeed, Hubco was the first IPP that the World Bank – through the IFC – ever invested in anywhere in the world as a debt and equity investor. The purpose was to give the other local and foreign investors security: a refusal by the state-owned utility companies to pay for the power generated by Hubco would constitute a default on the government of Pakistan’s sovereign debts to the World Bank itself. But since when has the government of Pakistan ever let a commitment to international organisations and investors ever stop it from refusing to pay its bills? And then there was the problem of the guaranteed rates of return, which were written into the contracts for Hubco. Presented in an uncharitable manner, it can certainly look like a giveaway to the foreign investor-backed companies, even though there was a good reason for the contracts to be designed the way they were (and continue to be).
The structure of IPP contracts
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or much of the history of the human consumption of electricity as a form of energy, the company that delivers electricity to your home is also the company that generated it in a power plant in some industrial part of the city and maintained the power transmission lines that brought it over from that industrial area to the city, and the distribution lines that then spread it to every home and business in the city. But in developed economies – particularly the United States – there began a trend in the 1970s to try to diversify energy sources. In 1978, the United States Congress passed the Public Utility Regulatory Policies Act (PURPA) as a response to the 1973 energy crisis, which created the regulatory mechanism to allow IPPs as a means of making the US energy
grid more responsive to supply and demand. The problem that PURPA was trying to solve for was this: electric utilities that set up their own power plants want to have as much of them utilised as possible. That makes those plants good for the base load, which is the minimum level of electricity needed at all times by all homes, businesses, and industrial units throughout the grid. However, utilities have very little incentive to set up their own power plants to handle peak loads, which happen both seasonally (summer generally requires more electricity due to air-conditioning needs) and each day (daytime energy consumption is generally higher than nighttime). The energy crisis of 1973 exposed that problem of incentives, and energy shortages prompted the US government to seek a solution where the utilities’ own power generation capacity could be supplemented by independent power generation companies that could sell electricity to the utilities.
ENERGY
“Hubco has taken advantage of the 2015 power policy, CPEC, and the upfront coal tariffs by making a cluster of investments including: i) a 46% stake in China Power Hub Generation Company (CPHGC); ii) an 8% equity in Sindh Engro Coal Mining Co; iii) a 60% stake in Thar Energy Limited; and iv) a 38.3% stake in ThalNova Energy.” Muhammad Daniyal Kanani, research analyst at EFG Hermes
As with many economic mechanisms around the world, the US model then served as a template for energy projects around the world, and Hubco in Pakistan was the very first time an IPP was set up in a developing country. In order to understand how Hubco gets paid, therefore, it helps to understand the change that PURPA brought about, and that the 1994 (and subsequent) IPP policies in Pakistan have tried to replicate. The biggest problem with electric utilities is that they are natural monopolies: in any given city or metropolitan area, it is impossible to have more than one utility. You cannot have more than one company build a set of electricity lines that come to your house; it would just be too expensive to do so. That means that governments heavily regulate electricity prices to consumers to prevent companies from abusing their natural monopoly power. The creation of IPPs, however, created a second constituency that would be subject to the threat of the natural monopoly power of utility companies, albeit this time it would be another set of companies. Nonetheless, any investor setting up
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an IPP has a problem: in most places in the world, there is only one company – usually government-owned – that can buy the electricity that they produce. And while they can come up with rules and contracts that govern that relationship, at the end of the day, if there is only one buyer for my product, I need some guarantees that they will actually buy the product. This is why IPP contracts are constructed on a “take or pay” basis: the electric utility – in Pakistan’s case, WAPDA, and now the Central Power Purchasing Authority (CPPA) – either has to buy the power generated by the IPP, or else pay them some amount that would compensate for at least the cost of the infrastructure that the IPP set up to generate electricity. Power tariffs paid to IPPs – which are different from the tariffs that ordinary consumers pay to utility companies – therefore have two components: power charges and capacity charges. The first of these is the simplest to explain: the state-owned utility companies pay the IPP a rate for each kilowatt-hour (kWh) of electricity they buy from it, which includes
the cost of fuel as well as a fixed profit margin for the IPP that would cover the full cost of the capital it took to set up its infrastructure. If the IPP is operating at a high enough capacity, this rate would be the only thing that the utility needs to pay the IPP. The second component of the IPP’s tariffs are called capacity charges: if the IPP’s power plant is available for production, but the utility company either does not need to or decides not to buy the electricity from the IPP, then the utility company needs to pay the IPP a “capacity charge” to pay for the cost of setting up the infrastructure and keeping it available for the utility. This is the “or pay” part of “take or pay”. Built into both of these components is a fixed profit margin for the IPP, which can be set as either a fixed return on equity (ROE) or fixed internal rate of return (IRR), two different measures of profitability. In the case of Pakistan’s IPP policy, which is meant to be attractive to both domestic and foreign investors, the fixed profit margin is set in US dollars, and adjusted every year for US-dollar-denominated inflation (as measured by the consumer price index in the United States).
Under the IPP policy of 1994, Hubco was entitled to receive an IRR of 17% in US dollar terms, and adjusted for US inflation. This number can certainly sound like quite a lot, especially when one considers the fact that IPPs in the US receive a 10% IRR, which is not always adjusted for inflation. Nonetheless, investing in Pakistan is considerably riskier than investing in the United States, and hence a higher IRR was needed by the government to be able to attract investors into the country’s power sector. And this number is somewhat misleading: a 17% IRR does not mean than the government is allowing a 17% profit margin on each unit of electricity. When a plant is operating at above 60% capacity, the profit margin for the company is usually no more than 4-6% of total revenues. In other words, a 17% IRR does not mean that if the government is buying electricity at Rs10 per unit, that the IPP is making Rs1.7 per unit in profits. When the system is working well, it means that the IPP is making anywhere between Rs0.40 and Rs0.60 in profits. But of course, as you can see, it is easy to portray this as an excessive giveaway to the IPPs at the expense of ordinary consumers, which is exactly what the Nawaz Administra-
tion did during their second tenure in office.
suaded that the profit margin was too high.
The dispute and WAPDA deal
The Zardari-Nawaz heyday
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he Nawaz Administration balked at having to pay Hubco the rates that had been negotiated under the 30-year Power Purchase Agreement (PPA) between WAPDA and Hubco, which was signed in early 1997. As a result, the government frequently came close to defaulting on its obligations to the company (technically, it did, but Hubco and the World Bank were in negotiations with the government and therefore, never formally triggered the default clauses.) The dispute lasted for five years during which time Hubco almost never got paid on time. It was not until the Musharraf Administration took office – and began reviewing the previous government’s activities – that the dispute was eventually resolved, though it took three years even under that supposedly business-friendly administration. In 2002, the government signed a revised agreement with Hubco, which reduced the IRR Hubco was entitled to from 17% to 12%. Even President Musharraf and Prime Minister Shaukat Aziz, it seemed, were per-
“We are working to find a solution with government as our [power purchase agreement] PPA expires in 2027 for the base Hub unit (1,292MW). [Currently], capacity payments have to honoured even with zero load based on the PPA.” Habibullah Khan, chairman of Hub Power Company
U
nder the Musharraf Administration, Hubco was used mostly as a peaker: the power plants that are used to manage peak loads of electricity for the national grid, and not part of the base load, the power plants that are running all the time because they provide the electricity that is being used all the time. It was in 2008, towards the end of the Musharraf era and the beginning of the PPPled Zardari Administration, that the status of Hubco changed. September 2007 was when oil prices reached $100 a barrel for the first time since the early 1980s. Oil prices rose through all of 2007 and through the first half of 2008. This made oil-fired electricity extremely expensive, and one would think that this would be bad for the nation’s largest oil-fired power plant. Fortunately for Hubco, there were two things happening at that time that would end up working heavily in the company’s favour. The first of these was the fact that Pakistan was beginning to run low on natural gas after the Musharraf Administration’s bonanza of giving away natural gas to any constituency that asked for it without regard to the full economic cost of extracting the gas and without regard for the fact that the country has finite reserves where the biggest fields were already nearing depletion even when they administration came into office. That meant that the gas-fired power plants owned by the government itself were unable to function on natural gas in the manner that they have been able to over the past decade, particularly since the Musharraf Ad-
ENERGY
ministration had promised a higher priority to natural gas consumption to the captive power plants owned by export-oriented textile mills, as feedstock for fertiliser manufacturers, and even to compressed natural gas (CNG) fuel stations for vehicles. The government’s power plants have the ability to run on either furnace oil or natural gas, so when they could not run on natural gas, one would think that they could simply be converted to running on furnace oil. The electricity generated would be expensive, but at least the government would not have to shut down its power plants. Unfortunately for the new administration, they were about to find out just how little the Musharraf Administration had invested in the nation’ energy infrastructure. The government’s power plants produced reasonably priced electricity on natural gas because natural gas has historically been an absurdly cheap fuel. When forced to operate on oil, especially expensive oil, the inefficiency of those power plants became abundantly clear. The government simply could not operate those plants without having to offer absurdly heavy subsidies on the electricity it would then sell to consumers. And so, in came the IPPs, led by Hubco. The base load of the country’s electricity grid between the years 2007 and 2018 was handled effectively by the hydroelectric power plants at the massive dams at Tarbela and Mangla, and by the oil-fired power plants owned and operated by the IPPs. The IPPs were also using expensive furnace oil, but at least they were using it more efficiently – in some cases, up to three times more efficiently – than the government’s own power plants. (You might ask: why did the government just not invest in fixing its own power plants? Dear reader, why do you ask such silly questions? Really? The government of Pakistan, act
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And so, in came the IPPs, led by Hubco. The base load of the country’s electricity grid between the years 2007 and 2018 was handled effectively by the hydroelectric power plants at the massive dams at Tarbela and Mangla, and by the oil-fired power plants owned and operated by the IPPs. The IPPs were also using expensive furnace oil, but at least they were using it more efficiently – in some cases, up to three times more efficiently – than the government’s own power plants in a rational manner? Seriously, where have you been?)
So, what went wrong?
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ell, for starters, not much was right to begin with. There is no reason why IPPs cannot be used as the base load, but using oil-fired power plants to serve as the base load while giving away cheap gas to miniscule – and less efficient – power plants owned by the textile mills was a gross misallocation of resources. It worked for 10 years because the government has continued to pump in money into the system in the form of formal electricity subsidies at unsustainably high levels and then three “one-off” injections of capital into the energy system as a means of clearing the intercorporate “circular debt” that piled up because the government could not actually afford the energy being produced and did not want to force consumers to pay for it. What went wrong with the energy grid and why will be the subject of a future feature story in Profit, but suffice it to say that the 12-hour rolling blackouts in major cities (and
near-complete lack of electricity in the rural areas) should have been a hint that something major was wrong. So when the Nawaz Administration came into office in 2013 for the third time, items one, two, and three on their agenda were to fix the electricity grid in the country. The prime minister’s plan was simple: if the problem was that there was not enough electricity and the electricity that was being produced was too expensive, then the way to solve both problems at the same time would be to add lots of additional power generation capacity that used a much cheaper fuel. And given the electoral constraints of their fiveyear term in office, the PM wanted it all done fast. The strategy the government chose was this: incentivise – using promises of stupidly high fixed profit margins (around 27% IRRs) – the production of electricity using coal-fired power plants. Coal is among the cheapest fuels in the world, and so coal-fired power would bring down the weighted average cost of producing electricity. And if lots of such plants were built fast, the weighted average cost would come down faster.
The upside was that the strategy worked: In the five years that the Pakistan Muslim League Nawaz (PML-N) was in office, Pakistan’s power generation capacity jumped by 50%, from 24,000 megawatts to 36,000 megawatts. Nearly all of that addition was coal-fired power plants. The downside, of course, is that almost all of Punjab cannot breathe for two months a year due to the smoke that is caused at least in part by the massive coal-burning power plants that have been set up all over the province. One of the changes that the government implemented as part of its strategy to bring down the weighted average cost was to ensure that the cheapest fuels were used first in the order of priority for which electricity the state-owned utility companies would buy. That meant that furnace oil-fired power plants – like Hubco’s main plant – were no longer the desired plants, and went from being base load to barely even being peakers anymore. Oil went from accounting for 36.3% of all electricity produced in Pakistan in fiscal year 2013 to just 7.4% in fiscal 2019. Along with that shift in fuel came a decline in Hubco’s fortunes.
How to turn it around
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s a result, Hubco went from receiving nearly all of its revenues from tariffs received for electricity produced to having nearly half of its annual revenues coming from capacity charges, with its main plant sitting effectively completely idle for most of the year now. The company’s management is well aware of the fact that while capacity payments are something they are entitled to legally, they cannot rely on capacity payments as a sustainable business model. “We are working to find a solution with government as our [power purchase agreement] PPA expires in 2027 for the base Hub unit (1,292MW),” said Habibullah Khan, chairman and largest shareholder of Hubco, in a statement to Profit. “[Currently], capacity payments have to honoured even with zero load based on the PPA.” It is clear, however, that the company’s ownership at least recognises that just because the company is entitled to something does not mean that it should not try to ease the government’s burden to the extent possible. “To ease the circular debt strain on the government we have offered two options,” said the chairman. “The first one is to convert two units (300 MW each) into coal power units through a conversion process. Alternatively, we can also convert all four units at Hub to coal and supply K-Electric, with
One of the changes that the government implemented as part of its strategy to bring down the weighted average cost was to ensure that the cheapest fuels were used first in the order of priority for which electricity the state-owned utility companies would buy. That meant that furnace oil-fired power plants – like Hubco’s main plant – were no longer the desired plants, and went from being base load to barely even being peakers anymore which we have already signed a memorandum of understanding, subject to government approval of our terms.” Why convert just two units to coal-fired power when converting all four is an option and would yield cheaper electricity? Because the first option would leave open other possibilities, including Hubco converting from being just a power company to becoming a company that is both the electricity and water business. “We would further consider the other two units to convert for a desalination water plant, working with both the federal and provincial governments, to mitigate the current water shortage in Karachi, which is currently 600 million gallons per day,” said Habibullah Khan, adding that the company was still undertaking analysis to determine whether such a desalination business would be financially viable and cost-effective. The company’s water initiative – if successful – would be able to supply up to 50 million gallons per day of that shortfall. In addition, Hubco is exploring a separate agreement to supply 5 million gallons per day of water to the Defence Housing Authority (DHA), the military-owned suburb, in Karachi. Hubco has also offered to upgrade the transmission infrastructure to allow it to start selling electricity directly to K-Electric rather than selling to the state-owned National Transmission and Dispatch Company (NTDC) first, and then having K-Electric buy that electricity from NTDC. But the main strategy for the company is to invest heavily in coal-fired power plants. “Hubco has taken advantage of the 2015 power policy, CPEC, and the upfront coal tariffs by making a cluster of investments including: i) a 46% stake in China Power Hub Generation Company (CPHGC); ii) an 8% equity in Sindh Engro Coal Mining Co; iii) a 60% stake in Thar Energy Limited; and iv) a 38.3% stake in ThalNova Energy,” wrote Muhammad Daniyal Kanani, a research
analyst at EFG Hermes, an investment bank, in a detailed research report issued to clients on August 20. “Based on this, our overall capacity will touch 3,700 MW maintaining our lead as Pakistan’s largest IPP with a very sizeable market share in the country of over 20%,” said Habibullah Khan. “Along with our water initiatives, we will transition the company from being an IPP to an IWPP [independent water and power producer].” “Finally, we are the only IPP continuously growing our capacity and have a combined $4 billion investment in the power sector of the country,” said the chairman. “All these initiatives will inshallah drastically improve our bottom line.” The problem with coal is that while it solves the problem Pakistan was facing five to ten years ago, it has now become a problem in its own right, with its environmental impact, and increasing political scrutiny of those higher rates of return are likely to create pressure on the company’s revenues and cash flows in future years. The Hubco management clearly understand that their business – dependent as it is on the government – requires them to be more sensitive to political calculations more than most others. However, in jumping headlong into coal, the company may end up just replacing one set of political problems with another. Perhaps that explains why Habibullah Khan – the reclusive billionaire who owns the largest shares in both Hubco and K-Electric, the nation’s only privately-owned electric utility company – wants to do deals between Hubco and K-Electric instead of between Hubco and the government. A Hubco agreement to sell electricity directly to K-Electric would cut the government out of the loop as a buyer, and reduce its role to that of just regulator. In an ideal world, this would solve at least part of the company’s problem. But would it be enough? We will know in about a decade from now. n
ENERGY
NATIVE CONTENT
In Conversation with
Amir Masood Khan
President/CEO of The First MicroFinanceBank, Pakistan
About the
Karachi Vocational Training Seminar
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he First MicroFinanceBank Limited, Pakistan (FMFB-P) is the pioneer in Microfinance with over 17 years of experience in innovation and financial services delivery. The vision of the bank is to enable individuals and contribute to the social and economic well-being of society by providing opportunities to thousands of under-privileged households, especially women. In line with its mission, FMFB-P collaborated with Saeeda Mandviwalla of
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TONI&GUY Karachi, who has been in the salon industry for over 30 years, to hold a seminar aimed at showing beauty parlour owners and technicians how they can upscale their current businesses. The aim of the seminar was to facilitate the growth of these salon owners and help them gain success and build sustainable businesses. After a successful first run at the seminar, which was met which an overhwhelmingly positive response; a structured vocational training scheme
is to be formulated and taught by Saeeda Mandviwalla in order to help such women upscale their existing businesses. Q: So what is The FirstMicroFinance Bank Ltd (FMFB-P), and how did you come into existence? A: The First MicroFinanceBank Ltd, Pakistan (FMFB-P) was established in 2002 as a nation-wide microfinance bank, licensed by the State Bank of Pakistan. FMFB-P was created
The First MicroFinanceBank Limited, Pakistan (FMFB-P) collaborated with Ms. Saeeda Mandviwalla of TONI&GUY Karachi, to provide vocational training skills, mainly entrepreneurial and leadership skills, to beauty parlour owners and technicians Amir Masood Khan, President/CEO of The First MicroFinanceBank, Pakistan
through a structured transformation of the credit and savings section of the Aga Khan Rural Support Programme’s (AKRSP), an integrated development programme to pioneer the microfinance sector in the country since 1982 in Gilgit-Baltistan and Chitral. FMFB-P is the 3rd largest microfinance bank in Pakistan and has the ambition to become the leading microfinance bank in Pakistan. Q: What are your main aims at FMFB-P? A: An estimated 100 million adults, mostly women, are unbanked in Pakistan. Our aim is to provide financial solutions, through our branch network and digital channels, which are accessible, convenient and affordable to all individuals and businesses. To this end, we have had considerable success. At present, FMFB-P caters to over 1.17 Mn depositors and 465,000 active loan clients. We service a deiverse clientle from the remote valleys of Gilgit-Baltistan to the dense neig-
bourhoods of Karachi, at their doorstep. 70% of our loan clients are based in Rural Areas and approximately 35% are women. FMFB-P offers a wide-range of loan, deposit and insurance products aimed primarily at low-income clients and entrepreneuers. Q: How does FMFB-P aim to help the underprivileged? A: At FMFB-P we are committed to help an increasing number of people enter the formal banking sector. Two of the main issues faced by entrepreneurs at all levels, but especially from financially underserved areas, are a lack of access to capital to implement their business ideas and inadequate deposit and savings services to manage their money. Therefore, at FMFB-P we strive to develop financial solutions tailored to the needs of our clients. Q: Tell us more about your thoughts with regards to women empowerment and where TONI&GUY Karachi specifically fits into that A: At FMFB-P we are working particularly hard to help women achieve success. Women are severely underrepresented in our work force, leading to a loss of talent, ideas, and businesses that can uplift families and communities. We strive to achieve a future in which all women, young or old, regardless of race, ethnicity, income level or social status, are empowered to reach their fullest potential. Q: FMFB-P recently collaborated with Saeeda Mandviwalla of TONI&GUY Karachi for a vocational training seminar; can you tell us more about that? A: The First MicroFinanceBank Limited, Pakistan (FMFB-P) collaborated with Ms. Saeeda Mandviwalla of TONI&GUY Karachi, to provide vocational training skills, mainly entrepreneurial and leadership skills, to beauty parlour owners and technicians. The aim of this endeavour was to encourage women to improve their livelihoods by facilitating the growth of their businesses. This seminar took place on 23rd October at Beach Luxury Hotel, Karachi. Q: How did this collaboration come about? A: When Saeeda Mandviwalla actually went on a trip to Gilgit Baltistan in June earlier this year, she saw the work being done by the Aga Khan Development Network there, and what the women there were capable of doing if given the right facilitation and support. There she had asked if there was anything she could do out of her capacity for women. In line with its mission of providing access to formal financial services to vulnerable client segments, especially women, this collaborative
Amir Masood Khan Chief Executive Officer & President
Amir Masood Khan brings with him over 22 years of extensive experience in consumer and commercial banking with the Standard Chartered Bank, ABN Amro Bank and Royal Bank of Scotland. He has also served as the CEO of Mobilink Microfinance Bank (then Waseela), where he played an instrumental role in setting up the new microfinance bank. He joined FMFB in 2012. Amir holds a Masters in Business Administration from the Institute of Business Administration, Karachi (Pakistan). effort was initiated. The event was designed to demonstrate to the audience, some of the salon best practices that are being adopted by Ms. Mandviwalla in her field. In demonstrating this, the trainees would absorb this knowledge and use it to revamp their own business model to bring it up to par with international standards. Ms. Mandviwalla facilitated this through live demonstrations along with tips entailed in running a salon. As a part of the seminar, The First MicroFinanceBank Limited, Pakistan supported the participants via structured financial solutions to facilitate acquisition of technical capacities and business assets for the upgrading of their beauty parlors. Q: Where is the collaboration headed? A: We feel that this collaboration is not to remain merely short-lived. Rather, this arrangement aims to fully facilitate women’s business from start to finish. The formula being followed here is where FMFB-P comes in to provide women with financial support, that would ultimately allow them to access the vocational training courses being offered by Saeeda Mandviwalla. The courses vary from the education of haircare for different hair types & textures, to soft skills, to leadership and entrepreneurial skills. Q: What does the future hold for FMFB-P? A: At FMFB-P we are convinced that the only way forward is up. We are confident that we have the strategic plans, the expertise, technology and the talented staff to push ourselves to the top of the microfinance sector. In particular, I feel that our push towards empowering women will not only help us become the leading microfinance bank in Pakistan, but will also bring success, financial stability, and prosperity to families and communities all over Pakistan.
INTERVIEW
Lotte
Despite rising demand, holds off on capacity expansion Pakistan’s leading producer of raw materials for polyester believes the industry needs to expand further before it can justify investing in increased capacity
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I
t is an industry in which it is the dominant player, and one where demand from industrial customers currently exceeds domestic production capacity. Yet Lotte Chemical Pakistan wants to wait for the purified terephthalic acid (PTA) industry to expand significantly before it invests in capacity expansion, according to its management. During an analyst briefing announcing the details of the company’s financial results for the third quarter of calendar year 2019, Lotte Pakistan’s management said that they could only justify investments in capacity expansion if they could increase capacity to 800,000 tons, up from the current approximately 500,000 tons that their plant based in Port Qasim can produce. Purified terephthalic acid (PTA) is an essential raw material used in the production of polyester fiber and polyethylene terephthalate (PET) plastic bottles. Lotte Chemical Pakistan Ltd considers itself a world-class supplier of PTA. A trendsetter in industrial investment in Pakistan, Lotte’s PTA plant was constructed in 1996/97 and started production in June 1998. The company began its existence as a subsidiary of ICI Pakistan in 1995, before being spun off as an independent entity in 2000 named Pakistan PTA. In 2008, AkzoNobel, the Dutch chemical giant bought ICI worldwide, and briefly became the parent company of Pakistan PTA. In September 2009, the company was bought by the South Korean conglomerate Lotte, following which the name of the company was changed to its present name.
Last year in 2018, the company managed to produce at more than 100% of capacity, turning out 516,000 tons of PTA, despite their declared maximum capacity of 506,000 tons. One would assume after hitting this mark, the company would want to go only forwards, and in fact consider expanding their capacity and taking over some of the share that imports hold on the PTA market. “Pakistan’s current PTA demand hovers around 800,000 metric tons where Lotte Chemical’s has a capacity of 500,000 tons and the rest of the demand is being met by imports,” wrote research analysts at BIPL Securities, a securities brokerage firm, in a research note issued to clients on November 22. “As per the management, future PTA expansion depends primarily on demand growth and downstream expansion of polyester staple fiber (PSF) and filament yarn market that are currently operating at 79% utilization level,” wrote the BIPL analysts. “Currently, the company does not have any plans for expansion, however, should the demand for PTA crosses 1 million tons, Lotte would expand by 800,000 (at an estimated cost of $400 million) which would take the cumulative rated capacity to 1.3 million tons per annum.” However, while the company is not yet ready to leap into an expansion, there does appear to be room for optimism for the PTA industry, which has seen demand increase over the past three years, particularly from textile manufacturers.
“Demand for PTA increased notably during 2015-2018 owing to improved power supply to textile customers of Lotte (75% of the total customer base). This was also reflected through improved an polymer operating rate (capacity utilization of textile customers) from 69% in 2015 to 89% in 2018. However, the operating rate is expected to reduce to 79% during the current year,” wrote Muhammad Nabeel, a research analyst at Pearl Securities, a brokerage firm, in a research note issued to clients on November 22. The reason Lotte is citing for the slowdown in demand in 2019 is the implementation of the new computerised national identity card (CNIC) requirement for buying product above a transaction value of Rs50,000, which has hampered the ability of informal traders and unregistered manufacturers to buy their product. According to Lotte, the reason they will be closing the year at under 500,000 tons of production in 2019 is that the new CNIC requirement has meant a fall in demand of PTA, especially in the Punjab, which was easily their largest market. Nonetheless, the company management of Lotte Pakistan is confident that the company would regain 100% capacity come next year in 2020. However, this is still not indicative of the expansion that the government would like to reduce the imports that are making up for the remaining demand at the moment. But with the CNIC regulations set to
According to Lotte, the reason they will be closing the year at under 500,000 tons of production in 2019 is that the new CNIC requirement has meant a fall in demand of PTA, especially in the Punjab, which was easily their largest market
take full effect in February 2020, along with the company setting aside Rs5.0 billion for GIDC provisioning, and the company’s Port Qasim plant set to be closed for maintenance for 15-20 days in March 2020, the road ahead may be not necessarily bumpy, but is also not conducive to the expansion that the government would desperately love to spruce up their numbers. Meanwhile, the company does expect margins to improve somewhat over the coming calendar year. “The management expects PTA margins to improve from existing $90 per ton to $110-140 per ton during 2020,” wrote Nabeel. The trade war between China and the United States is certainly not helping stability of PTA prices. Lotte management believes that regional prices of PTA have been unusually volatile over the past year owing to shifting expectations of the trade war between China and the United States. China controls the bulk of global PTA production, and hence the industry in China effectively sets global prices. When demand from China is expected to decline, prices for PTA would decline as well. However, if the US is expected to continue buying PTA and polyester fiber from Chinese manufacturers, then PTA prices would expect to rise. Given the volatility in US leadership on the issue – with tweets from US President Donald Trump moving markets on practically a moment’s notice – global markets have faced considerable uncertainty, optimistic one moment and pessimistic the next. That sort of mercurial temperament from the US president has far-reaching consequences for the global economy, including for manufacturers in Pakistan, such as Lotte, and investors in publicly listed companies such as Lotte and others that are dependent on global prices affected by the US-China trade war. n
CHEMICALS
Large-scale industry continues to contract,
AGRICULTURE SHOWS PROMISE
Export-oriented sectors, and agriculture supply chain, continue to see growth, with sharp declines across much of the rest of industry
I
t comes as no surprise to any observer of the Pakistani economy that large-scale manufacturing continues to decline in output. For the third quarter of 2019, the LSM index declined by 5.9% compared to the same period last year, according to data released by the Pakistan Bureau of Statistics. The variation by industry, however, revealed some interesting patterns, and suggest that there may be some positive macroeconomic news on the horizon for the coming year, particularly as it relates to exports. “A breakdown of the broader numbers revels that while the overall performance remained broadly disappointing, some improvement was seen in export oriented sectors such as textiles and leather products (growing 0.17% and 4.24% year-onyear in the third quarter of 2019),” wrote analysts at JS Global Capital, an investment bank, in a research note issued to clients on November 26. Yet the industry that saw the most rapid recovery from an abysmal last year was the fertiliser manufacturing sector, which saw production rise by 15.9% during the third quarter of 2019 compared to the same period last year. An increase in fertiliser production and sales reveals the following facts: farmers have purchasing power again and are able
MACROECONOMICS
to invest in growing their production of crops. Pakistan’s agriculture sector has had a rough few years, including an especially rough fiscal 2019. For the past 10 years, the agriculture sector has grown at a pace slower than the
broader economy, and in 2019, the sector grew by just 0.85% in real (inflation-adjusted) terms. Given the fact that the rural population growth rate is currently higher than 2%, that means that the average farmer was worse off in 2019
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than they were in the previous year. Yet rising purchases of domestically produced fertilisers by farmers is a bullish sign for agriculture. Given the fact that these purchases took place between July and September of this year, ahead of the October–December “Rabi” planting season, suggest that the Rabi harvest in April and May of 2020 is likely to be a good one compared to last year. In terms of crop value, though, Rabi is the less lucrative of the two planting seasons in Pakistan. The only major crop grown in the Rabi season is wheat, with the remaining crops most commonly grown during the season being gram, lentil (masoor), tobacco, rapseed, barley and mustard. Nonetheless, a successful wheat crop would be important to the country’s food security and economic growth. In the 2019 harvest, Pakistan’s wheat production clocked in at 25.2 million tons, about 6.5% lower than the 26.7 million tons the country was able to grow in 2017. And a successful Rabi season would set up farmers well to invest in production of the all-important Kharif season, for which planting happens between April and June. The other three of Pakistan’s four main crops – cotton, rice, and sugarcane – are all grown in the Kharif season. The overall patterns of the industrial sector, however, appear to indicate that the central bank’s policies of weakening the rupee to improve the country’s balance of payments and increase exports is working. “We would like to highlight that the quarterly performance has been in line with the State Bank’s stance that inward-oriented sectors continue to face headwinds while activity in import-competing and export-oriented sectors has picked up,” wrote analysts at JS Global Capital. Yet even as some export-oriented sectors continued to improve, the fact that a massive decrease in the value of the rupee has not caused a more significant increase in the value of Pakistan’s textile exports suggests that the industry is simply less competitive than its global rivals in a manner than have little to do with the government’s macroeconomic policies, the wailing of the crybabies at the All-Pakistan Textile Mills Associations (APTMA) notwithstanding. Among the other sectors that continue to do well include the engineering sector, which continues to benefit from the expansion in power generation capacity, even as the rest of the economy continues to remain sluggish. Other beneficiaries include the electronics sector, which may be a leading indicator in a recovery of consumer purchasing power. The State Bank of Pakistan (SBP) – led by Governor Reza Baqir – appears to be following
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a relatively strict macroeconomic correction policy, in conjunction with the prescription of the International Monetary Fund (IMF). Over the five years of the third Nawaz Administration, Pakistan had an unjustifiably strong exchange rate, kept there by the government expending foreign exchange reserves, raised through expensive bond offerings on the global market. In addition to costing the government money that it did not have, that artificially inflated exchange rate effectively subsidised imported consumption and punished exports, causing the trade balance to become even worse. Since the change of administration following the 2018 elections, the government has been in course-correction mode, particu-
larly on the external front, seeking to improve the current account balance and stabilise the exchange rate at a much lower rate than two years ago. That stabilisation exercise, however, does not come without pain, as economic growth slows down in response to higher inflation and interest rates that result from the sharply higher price of imported goods. The industrial sector of the economy is particularly vulnerable to that slowdown, since is most reliant on imported inputs as well as borrowing costs. “Going forward, we believe that while overall LSM performance could remain subdued in the immediate term, it is likely to improve once the stabilization measures start to bear fruit,” wrote the analysts at JS Global Capital.
Rising prices help
Aisha Steel continue growth trajectory
Company continues to invest in expansion as it seeks to grow into export markets in addition to its current strong position in the domestic market
I
n a macroeconomic environment where government spending on infrastructure is slowing down most businesses are scaling back their investments, one would expect steel manufacturers to be struggling to stay in place, but Aisha Steels, one of Pakistan’s largest steel companies, appears to have managed to keep its revenues growing, despite the odds. For the financial year ending June 30, 2019, the company managed to increase its revenues by 7.0% compared to the same period last year, rising from Rs18.9 billion in
fiscal 2018 to Rs20.2 billion in fiscal 2019. A 7% increase in revenues during a time when inflation has hit double digits may not sound like much, but considering the declines in most other related industries, the growth registered by Aisha Steels is quite respectable. And the news for the first quarter of fiscal 2020 is even better: for the quarter ending September 30, 2019, Aisha Steel’s revenue doubled to Rs6.2 billion from Rs3.1 billion during the same period last year. However, the company did swing to a loss of Rs204 million in the most recent quarter compared to a profit of Rs121 million during the same
AYESHA STEEL MILLS quarter last year. The reason for the shift in profitability was almost entirely due to a rise in borrowing costs, which saw the company’s interest expenses nearly triple. Aisha Steel has also borrowing significantly as part of its Rs8 billion capacity expansion project. During the fiscal year, the benchmark Karachi Interbank Offered Rate (KIBOR) rose from 6.93% to 12.97% as the State Bank of Pakistan raised interest rates in a bid to slow down rising inflation. As with many industrial businesses, the steel industry has been affected by the trade war between China and the United States, which has caused the prices of many industrial commodities – steel among them – to fluctuate according to the vicissitudes of the trade dynamics between the world’s two largest economies. Prices of hot rolled coil (HRC) steel, for instance, declined from $570 per ton in July 2018 to $480 per ton in December 2018, before recovering to an average of $503 per ton during the first half of 2019. Aisha Steel produces two main products: cold rolled coil (CRC) steel and galvanised (GI) steel, with CRC steel accounting for approximately two thirds of the company’s production and sales. CRC steel, especially in the form of thin gauge sheets, the kind that Aisha Steel produces, is commonly used in the construction industry for structural or non-structural items such as columns, beams, joists, studs, floor decking, built-up sections and other components. GI steel is used in both construction as well as building steel pipes. Aisha Steel produces CRC with an average thickness of just 1.3 millimetres, according to data released by the management at an ana-
lyst briefing. The thickness of the steel affects the price a company is able to charge per sheet, since the price is set by weight. However, despite being able to weather the storm in 2019, Aisha Steel is not immune to the headwinds facing the broader steel industry, not least of which is the cheaper imports from industrialised economies. “The country’s demand for flat steel stands at approximately 1.1 million tons as against domestic production capacities of approximately 1.7 million tons. Despite this, in fiscal 2019, imports of CRC and [hot-dip galvanised coil] HDGC steel clocked in at 296,000 tons and 207,000 as against 236,000 and 288,000 in fiscal 2018, respectively,” wrote analysts at BIPL Securities, a brokerage firm, in a note issued to clients. Insiders in the steel industry believe that the reason imports are able to compete against local production is due to dumping by foreign producers. The two main local manufacturers – Aisha Steel and International Steels – have sued foreign producers in local courts and have won 60 of the 65 cases they have filed for anti-dumping protections. The government recently imposed a preliminary 13.94% anti-dumping duty on steel imported from Russia and Canada, which could have a negative impact on imports from both of those countries. In addition, Aisha Steel has filed a lawsuit against imports from South Korea as well. Judging by the company’s recent track record – along with the protectionist mood in Islamabad – the company is likely to win its case against imports from South Korea as well. Nonetheless, the import market remains quite strong. During the first four months of the
fiscal year ending June 30, 2020, steel imports have already crossed 100,000 tons and are on track to exceed even last year’s total, despite the anti-dumping duties imposed by the government on imports, suggesting that imported steel is significantly cheaper – or higher quality – than local steel. During fiscal 2019, Aisha Steel also underwent a rebalancing of its geographic footprint, losing ground in the northern half of the country and gaining market share in the southern half of the country. Part of that decline in share may be due to expected increases in competition in the northern part of the country as new steel mills come online. Meanwhile, steel companies are seeking to lobby the government to remove regulations that they believe negatively impact their business. Among those is a statutory regulatory order (SRO) issued by the government – SRO 641(i) of 2018 – that prohibits steel companies from selling CRC directly to pipeline manufacturers and instead requires them to go through dealers and wholesalers. While historically this regulation has not had a material impact on the steel industry’s revenue, it may end up hurting the industry from February 2020, when the government’s regulations requiring all businesses to record the computerised national identity card (CNIC) number of all parties that conduct transactions greater than Rs50,000 go into effect. That regulation is widely expected to negatively affect the ability of many dealers and wholesalers – the vast majority of which are not necessarily registered taxpaying businesses – to continue to do business, which in turn could reduce steel industry sales. n
INDUSTRIALS
Pakistan:
The Economy of an Elitist State
I
By Abdullah Niazi
n 1999, Dr Ishrat Hussain was nearing the end of a two decade career working for the World Bank. Already having made quite a name for himself as a not just a talking head, but a serious, sober, economist that spent time thinking about bigger picture issues, he embarked on a mission to examine a major gap in Pakistan’s economic history. There was much very readily data available on GDPs, and growth rates, and all manners of indicators and calculations regard-
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ing how Pakistan’s economy had been doing in a post-colonial world. In fact, not only did this data already exist, there was also an entire host of newly minted Asian and African states experimenting in the aftermath of the litany of independence gained after the horrors of the second world war. There were also numerous, ponderous, rigorous, and boring analyses of all these numbers and graphs available. What they would tell you could be starkly different, because Pakistan has somehow had both surprisingly good and abysmally regressive numbers in terms of economic progress. This was the gap for Dr Ishrat Hus-
sain. How do you explain these paradoxical numbers? For him, the answer lay in looking towards socio-political factors. What was the reason that despite an impressive rate of growth, very few people actually felt any of the benefits from this growth, as indicated by factors such as quality of life and low individual growth rate. The mind automatically wanders towards the idea of income inequality, and the solutions venture towards ideologies that come with their own baggage. Most economists would either stay away from such ideas like the plague or back them just for the sake of it. But what all economists would do is stay away from analys-
ing the political economy - meaning they would want to stay away from diluting their economic analysis with unscientific factors. In America, Economics is making a rapid progression towards being considered a STEM discipline. Economists take great pride in producing largely theoretical works rather than politically, socially or ideologically driven ones. And in an increasingly data oriented world, this kind of research has become more desirable. But what theoretical analyses do have in terms of singularities, they lack in terms of practical application. How can you think of decoding the economy of a state like Pakistan without considering the modalities of space and power? How can you hope to imagine the circumstances that have led us here, without looking towards the implications of post-colonial narratives, religion, culture and new media? Things are never so black and white, and with Pakistan, they are an entire spectrum of colours. So even though he is a very serious economist, holding a Master’s in Developmental Economics from Williams College and a PhD in Economics from Boston University, he knew that he would have to get his hands dirty in the world of political science and public policy to find these missing links, and answer the burning questions that held him and the entire nation captive. What followed was a class history of the Pakistani economy, using theoretical frameworks provided by gigantic scholars such as Hamza Alvi, and the result was Dr Hussain’s 1999 work, ‘Pakistan The Economy of an Elitist State.’ The title pretty much says it all, but the deconstruction of socio-political factors that goes down in the book was an impressive one. Since the publication of that book, Dr Hussain has gone on to serve in high office in the past twenty years, observing at close quarters the progress of the Pakistani economy in the 21st century. His ringside seats have included stints as Governor of the State Bank of Paki-
“Pakistan has achieved relatively high growth rates in income and consumption since independence. Foriegn aid and external borrowing made it easier to avoid hard policy choices and trade-offs. Frankly speaking, Pakistan has lived beyond its means for the last two decades, and has been fortunate in bridging the gap between domestic savings and investments through heavy reliance on foreign savings and current income transfers from abroad” stan, and as part of the government’s economic management team. He also had a view from the cheap seats, working as an independent researcher during his time as Dean of the Institute of Business Administration (IBA) in Karachi. He was also employed by American think tanks and spent much time looking at, observing and analysing trends in the Pakistani economy. The final frontier was his induction in the federal cabinet last year, where he still serves as Adviser to the Prime Minister on Institutional Reforms and Austerity. With another two decades of diverse experience under his belt, Dr Ishrat Hussain has now come out with a second edition of his 1999 book, ‘Pakistan The Economy of an Elitist State.’ While it has been published by Oxford as a Second Edition, it is more like a second volume. For anyone that has read a copy of the 1999 edition, this is not a textbook, and is not being published with minute additions. In fact, it takes a close look at how the Elitist Economy has continued to thrive in the 21st century, with a telling chapter on the period from 2000-18 that is truly the crux of the problem. In the original edition, one could point towards political turmoil, military dictatorship, and international instability as factors contributing to a necessary upholding of the didactic structures of power that were behind this
“The three imperatives that should influence the governance of this country are: 1) Restore confidence in the country’s institutions - government, legislature, judiciary, universities, etc. 2) Initiate and sustain technological change and manage the transition to a modern economy and society. 3) Foster stability and trust in social and cultural relationships between various segments of the population. The implementation of the above goals is intertwined and should be looked at collectively rather than individually or sequentially”
titular Elitist Economy. With the past 20 years up to offer on the table for dissection, one can see clearly that there is more to this hold than necessity or unexpected situations. This is not to say that Pakistan in the 21st century has not had military dictators of political instability, but it has had a more holistic set of experiences as a State, including successful democratic transfers of power. And with a military dictator and three different political parties taking on the task of reforming the Elitist Economy, there is concrete evidence that it has a mighty grip that will be incredibly difficult for Pakistan to wrench itself free from. Another interesting factor of this book is Dr Ishrat’s own current position. While he supports at length the current, ‘practical’ measures being undertaken by the government, as he must considering he is part of the cabinet, the new additions in the book are not simply a defence of the current government. In fact, if one feels that the writer is doing this, they must not be considered anything more than his honest, professional opinions - something he has been providing his entire life as a seasoned economist, honestly to the best of his abilities. This is true even more so because the book is to some extent also an indictment of the current government, in so much that it is an indictment of all governments that have come and gone. All the people that have upheld the structures of power, that have inflicted the violence of class divisions and the tyranny of influence on the millions of people inhabiting the space bordered by this state - an elitist state, with an Elitist Economy. At the core of it is the original problem that has always plagued the country: delaying things. The great playwright and wit, Oscar Wilde, was in debt and broke at the end of his life. As he lay dying at a friend's house, sipping on champagne, he said his haunting last words, “alas, I am dying beyond my means.” Pakistan has been living beyond its means for the past two decades according to Dr Ishrat Hussain, one only hopes that it is not dying beyond them also. n
BOOK REVIEW
Why Jeffrey Sachs is wrong about
Reko Diq The Columbia professor does not appear to have delved into the context behind the Balochistan fiasco
I
t started with the usual leftie / “anti-imperialism is the ultimate moral good” crowd. An article written by American economist Jeffrey Sachs provocatively titled “How World Bank Arbitrators Mugged Pakistan” on the website Project Syndicate started doing the rounds. That blog entry then got picked up by Pakistan’s newspaper of record Dawn, and all of a sudden many more people across the country were sharing it on social media as the gospel truth. The problem with the piece, unfortunately, is that Jeffrey Sachs has absolutely no idea what he is talking about. Sachs, a professor at Columbia University in New York, has written a number of critiques against development financial institutions – some valid, most vulnerable to criticisms themselves – and has generally made no secret of his opposition to just about everything done by the World Bank. The core of Sachs’ argument is the following: the Supreme Court of Pakistan ruled against a foreign mining company, which then decided to ignore that court ruling and instead went to the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) and managed to get a favourable ruling from that international arbitration panel. If that were the extent of what happened, Sachs would indeed by correct that the World Bank “mugged” Pakistan. Unfortunately, it is abundantly clear from Sachs’ piece that his research relies almost exclusively on Google searches, a very cursory understanding of publicly available documents, and a very selective reading of the facts. A more complete picture would reveal that – far
COMMENT
from being an aggressor – the Tethyan Copper Company (TCC) is the aggrieved party here, and the government of Pakistan was clearly in the wrong. Sachs correctly notes that the story begins in 1993, when the Anglo-Australian mining company BHP Billiton, one of the largest mining companies in the world, secured an exploration licence in Reko Diq, Balochistan. An investigation by Herald in September 2017 indicated that the initial exploration agreement was signed with what appears to have been undue haste, and not all provincial government departments were able to weigh in on the agreement. But while procedures may have been missed, the underlying economics of the transaction agreement do not appear to be unfair. For instance, the main bone of contention was that the Balochistan government was obligated to pay for 25% of the costs of the exploration and eventual development of the mine. There is a very simple reason for this: the Balochistan government wanted a 25% stake in the equity of the project, over and above the royalties and taxes it would have received anyway from the project. BHP argued – correctly, in my view – that if the Balochistan government wants a share in the profits of the project over and above other levies it would already be getting, it should pay for that share like any other investor. The economic nationalists might argue that the land and resources belong to Balochistan and they should get something for that. Yes, they should. Those are called royalties and taxes, which the mining company would be
paying for the privilege of being able to extract minerals from the ground underneath Balochistan. If the provincial government wanted anything more, it would have to be treated like any other investor. And BHP offered a reasonable deal: the government of Balochistan obviously did not have the money for the exploration or development of the area, so BHP said that they would cover the costs in the form of a loan to the Balochistan government, payable only if a profitable mining operation were to start in Reko Diq. The interest rate BHP charged Balochistan on that loan was also entirely reasonable: the London Interbank Offered Rate (LIBOR) plus 2%. For context, the federal government of Pakistan currently borrows at LIBOR plus 4% or more. In other words, the government of Balochistan was being offered a loan at a rate even the federal government of Pakistan could not borrow at. Next comes Sachs’ assertion that BHP’s sale of its stake in the exploration of the Reko Diq area to a joint venture of Chilean mining company Antofagasta and Australian mining company Barrick Gold was legally questionable and challenged in court soon after it happened. That assertion elides a very important detail: how soon after the transaction was it challenged? And when exactly did it become a big issue that was taken up by “public-interest litigation”? Sachs is silent on the matter. But for those of us who covered the story, it is difficult to forget how and why it all happened. The opposition to TCC and their Reko Diq project started in late 2009 and began to truly pick up steam in July 2010. What hap-
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pened then that caused this massive uproar and supposedly “public interest litigation” to take place? Well, TCC discovered actual gold and copper and began preparations for mining. You see, nobody cared about Reko Diq or what happened to that exploration licence when people did not know if there was any gold or copper there. Yet once it was proven that there was wealth to be made at Reko Diq, every so-called “expert” came out of the woodworks to “prove” exactly how “extractive” the agreement TCC had with the Balochistan government was, and why the deal should be scuttled immediately. The media firestorm that happened was sudden, swift, and had the looks of being well-coordinated. Front-page opinion pieces masquerading as news stories were published in The News by reporters who had neither covered the economy nor the Balochistan government. The story caused the media firestorm to become a hurricane: a ridiculously sensationalist front page story on November 3, 2010 by Shaheen Sehbai: “$260 billion gold mines going for a song, behind closed doors“. The story was so poorly researched that it is not even worth refuting, but it had the desired effect: the media and the judiciary – then led by populist Chief Justice Iftikhar Muhammad Chaudhry – was convinced that the deal was a bad one for the government of Pakistan, and hardly anyone made the requisite inquiries as to why the media firestorm was created in the first place.
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Oh, and Sachs appears to have missed one very crucial detail: In December 2010, shortly after the media frenzy against TCC started, a miraculously well-timed “counterproposal” was submitted by the Metallurgical Corporation of China (MCC), a Beijing-based state-owned company. How unbelievably convenient for them to have been ready with a proposal right when the fate of TCC’s mining licence was being litigated in the highly ill-informed court of public opinion! Once the media trial started, the actual trial in the courts was not far behind. It did not matter to anyone that TCC had invested $220 million in exploring the area and determining the scope of the mineral deposits. It did not matter to anyone that the company was proposing to invest $3.3 billion into Balochistan, the most impoverished part of the entire country, in what would be the largest single project investment ever in Pakistani history. And crucially, it did not seem to matter that the Balochistan government would get a 2% royalty and a 25% share in the profits and the federal government would receive income taxes at 35% of the company’s income. All told, the federal and provincial governments would walk away from the project with 52% of all cash flows from the project for the entire time it would exist. All for doing absolutely nothing. No, absolutely nobody cared about that. People began to get really concerned about the extent to which the Balochistan government’s paperwork on the project was incomplete, or
that TCC had engaged in lobbying efforts to try to change the province’s outdated – and highly dysfunctional – mining laws. Guess what the big change TCC lobbied for was: the company that does the exploration of a region should be given an automatic right to mine the field, unless the government could prove wrongdoing on the part of the company. What on earth is wrong with that? Why would anyone explore a field unless they had a guarantee that they could mine it if they found something? For every six fields a mining company explores, only one ends up having anything worth mining in it. If the company were prohibited from mining even that one, why would anyone bother to even explore? Can I say with absolute certainty that TCC did everything exactly according to all government rules? No. Can I say with a reasonable level of certainty that the company was acting in good faith and that the project would have benefited the people of Balochistan? Yes. That, more than anything else, is why the ICSID ruling is not a “mugging” of Pakistan by the World Bank. It is merely a tool that the company is using to get the government of Pakistan to take it seriously and stop using flimsy bureaucratic excuses to cheat it out of a licence that – by rights – should belong to TCC. What good is the so-called wealth of a country if it is buried under the ground and it has no means of or expertise in getting it out? n By Farooq Tirmizi
COMMENT