Issuu

welcome

'Vodoo' Economics, Habib Metro bank and a noodle We were spoiled for choice this issue of Profit when it came to deciding what our cover story would be. It’s a good problem to have, if I must say so myself. The first contender on the list, my personal favourite, is our piece (Meiryum Ali on page 16) on the renegade school of thought called Modern Monetary Theory. To put it simply - and simplistically, robbing all nuance the theory says: government needs money to spend? Just print more money! Not an unheard of idea, actually. But one that you hear few people above the age of 13 spouting. The nascent but burgeoning number of ‘adult’ economists advocating it, however, is what makes it interesting. And in economist Dr. Asad Zaman, former PIDE boss, we found our MMT crowd in Pakistan. The man makes a passionate case, like all recent converts to new religions do. Hear him out. Why isn’t this our cover story? Well, the Managing Editor threw a fit. A dangerous idea, he said, - with the certainty of the character in a post-apocalyptic film who turns out to be right at the end - and we shouldn’t even grace it with space in the magazine, what to speak of making it the cover story. The compromise I made with him? We featured it in this issue, without make it the cover. After all, what good is a publication if it can't encourage discussion and debate on unconventional ideas.

The other contender for the cover story was our feature on Habib Metropolitan Bank. It’s a solid, well-researched feature. The problem? It’s a really boring bank. It’s an interesting read, of course, don’t get me wrong; we always write engaging pieces for our readers. But how interesting can you make this bank? Do read Farooq Tirmizi's feature (page 10) to see what I mean. What we finally settled on was the death of Maggi. How Nestle’s PR team handled the Maggi fiasco nextdoor in India is a textbook case of how-not-to-doPR and we assume many a heads have rolled there. Ironically, the victim turned out to be Maggi itself in Pakistan, while the Indian counterpart is up-and-running-again. It appears that in the game of Chinese Whispers that social media has become, Pakistani consumers stopped buying these noodles. Or so it was thought. Our story (Hassan Naqvi on page 22) reveals that this was the mere final nail in the long overdue coffin and there were other factors at play as well. We in the business journalism world are tilted more towards financial institutions and macroeconomics and don’t give marketing issues the attention that they deserve. That is a wrong we hope to right in future issues. Expect to see more of the FMCG sector in Profit in the future.

Babar Nizami

ExecutiveEditor

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Taimoor Hassan l Abdullah Niazi l Meiryum Ali Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) 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 EXECUTIVE EdITOR

News IN NUMBERS

Pakistan’s air freight connectivity, as measured in ton-kilometers shipped by air, has declined dramatically since peaking in the mid-1990s. Some of this might simply be due to the fact that significant amounts of transit cargo no longer goes through Pakistan and instead goes through Dubai and the Gulf Arab states now.

Pakistan’s shipping connectivity – which is an index that measures the frequency, the tonnage, and the number of linkages to other ports – has remained largely stagnant over the past decade and a half as Pakistan’s ports lag behind even as Dubai, Salala, and Muscat continue to thrive despite worse geographic locations than Karachi and Gwadar.

IN BRIEFS United Brands Ltd (UBDL) announced that its board of directors have inprinciple approved the merger/amalgamation of its associated entity, IBL Operations Pvt Ltd. No specific transaction price was announced, though given the fact that the merger involves two related companies, there are unlikely to be any significant hiccups.

Ten banks have come together to invest

Rs500m

in creating the Pakistan Corporate Restructuring Company Ltd to engage in distressed debt investing in a bid to use the power of the private sector to revive moribund state-owned assets.

The owners of Fatima Fertilizers used the company to see permission from the Walled City of Lahore Authority (WCLA) to hold a corporate dinner at the historic Lahore Fort’s Royal Kitchens. Instead, they illegally conducted a wedding ceremony there. It does not appear that anyone tried to hide the fact that they held the wedding ceremony at the heritage site, and the above screen grab from Instagram suggests.

Prime Minister Imran Khan inaugurated Pakistan’s largest skills development programme titled ‘Hunarmand Jawan’, designed to fund vocational training for

100,000

young people across the country in skills that can be used to launch their career

“We are correcting things on the economic front that went wrong in the past. Pakistan had a trader-led import and consumption-driven economy in the past. Uncontrolled imports, under-invoicing, unsupportive tariff structures, and an irrational exchange rate led to the economic disaster.” Abdul Razak Dawood, Advisor to the Prime Minister on Commerce, Trade, and Investment

ICI Pakistan informed investors that NutriCo Morinaga, a subsidiary of ICI Pakistan has commenced commercial operations of Morinaga infant and growing up formula products at its manufacturing facility in Sheikhupura, Punjab. The facility possesses the capacity to produce 12,000 tonnes of the formula products per year.

The Federal Tax Ombudsman (FTO) has accused customs officials and law enforcement agencies of incompetence and negligence for not being able to combat smuggling and sale of Iranian petroleum products in Pakistan. Smuggling of untaxed products remains a large and ongoing problem for the broader economy, including such sectors as tobacco.

The goods transporters’ strike entered into fourth day, as all movement of cargos across the country remains suspended.

The government claims it has ben able to reduce the deficit of state-owned power companies by

The truckers are striking against increases in penalties and fines on motorways and highways across Pakistan, arguing that they are excessive and unfair.

over the past three months, largely as the result of increasing electricity tariffs, but also by investing in the nation’s creaking energy infrastructure

Rs229b

Even as the United States and Iran appear to signal a keenness to avoid further conflict, oil and gas ship owners are bracing to pay a price for the war of words that culminated in rocket strikes in Iraq over the last week — higher insurance bills.

In a world that worships innovation, one financial institution is happy to continue to stick to traditions By Farooq Tirmizi

abib Metropolitan Bank has one of the fastest growing deposit bases among middle market banks in Pakistan, a branch network that has been rapidly expanding beyond its Karachi base, the leading market position in trade finance, and is led by a CEO who has previously led Standard Chartered Pakistan and Barclays Pakistan. One would expect Habib Metro to be thought of as among the most dynamic banks in the country. And while it certainly posts stellar numbers, the bank nonetheless has a reputation for being decidedly old-fashioned. This is no accident: the reputation for being old-fashioned relationship-focused bankers is cultivated by design by the bank’s

owners, and shapes virtually everything about the bank. Habib Metropolitan is the smallest among the three “banks named Habib” in Pakistan, named after Habib Esmail, the founder of Habib Bank Ltd, the bank that is now the largest in the country. It is owned by the descendants of Habib’s third son, Mohammedali Habib (as opposed to Bank AL Habib, which is owned by the descendants of Mohammadali’s elder brother Dawood Habib). Its deposit growth over the past year (18.1%) is significantly higher than the market average of 7.6% for the 12 months ending September 30, 2019, the latest period for which complete financials are available. Like most other banks, however, Habib Metro appears to do most of its lending to the government, plowing much of its deposit growth lazily into government bonds. What little money it does lend to the private sector is

mostly in trade finance, where admittedly the bank has an outsize market share. The problem with a bank so heavily reliant on (heavily collateralised) trade finance and government bonds? It ends up with a low appetite for credit risk, which may sound like a good thing until one considers the fact that managing credit risk is the entire point of the existence of a bank in the first place.

History of the bank

abib Metropolitan Bank started life in Pakistan as Metropolitan Bank in 1992, one year after the government of then Prime Minister Nawaz Sharif decided to allow private sector players to re-enter the banking industry in Pakistan. Consider the context at the time. In 1973, of the five largest banks in Pakistan, four were

BANKS

privately owned. By January 1, 1974, all five were state-owned, with the federal government nationalising the private banks in what was anything but a friendly transaction. The Habib family were among the biggest losers, having lost Habib Bank, which was then the largest private sector bank in the country. That nationalisation drive was the result of the populist leftist government of Prime Minister Zulfikar Ali Bhutto, who came into office in 1972. He lasted until 1977, when he was overthrown in a military coup, led by General Ziaul Haq. In theory, Zia was more market friendly than Bhutto, but he liked state control a whole lot more so he never really reversed nationalization. His immediate successor, Benazir Bhutto was not exactly much better than her father. It was not until Nawaz Sharif became prime minister in 1990 that the government began privatisation and deregulation. The Habib family always had a greater share of their wealth abroad than the other Pakistani wealthy families. They owned banks in several countries around the world – mostly focused on trade finance – with the headquarters in Zurich, a bank known as Habib Bank AG Zurich. That bank continued to operate in Pakistan as a foreign bank and was therefore left largely untouched. However, it was a tiny bank and at the time, foreign banks were under far more restrictions than they are today. So when, in 1991, the government allowed private sector players to enter the banking market again, the Habib family decided to try their luck again at a domestically incorporated bank. The Dawood Habib branch of the family was first to take the plunge, incorporating Bank AL Habib in 1991, and the Mohammedali Habib branch of the family felt that there would be too much confusion if there were all of a sudden three banks named Habib and so they decided to name their bank Metropolitan Bank. To lead the bank, they chose a veteran Pakistani banker named Kassim Parekh, the Bantva Memon gentleman who had originally joined Habib Bank in 1948 as a 17-year-old boy and had continued to rise through the ranks both in the Habib family and nationalised

“You have to follow the money flow. Commodities dealers in Karachi are trading with cities up country and we don’t want to miss that leg of the transaction” Sirajuddin Aziz, former CEO of Habib Metropolitan Bank era to become president of Habib Bank in 1984, a position he retained until 1988. Soon afterwards, in September 1989, Parekh was appointed Governor of the State Bank of Pakistan, where he served for just under a year. In 1992, when the Habib family were setting up Metropolitan Bank, he was invited to join as Chairman and CEO of the bank. Parekh, known in the industry as “Kassim bhai”, duly began building up the bank, but clearly had absolutely no drive left in him to recreate the national powerhouse that he once ran at Habib Bank, or even anything like it. And why would he? After all, he took over Metropolitan Bank at the age of 61, having already worked for over 41 years, and having served as the president of then the second largest bank in the country as well as the first Memon to serve as the State Bank Governor. What could he possibly achieve at Metropolitan Bank that would be even a shadow of his existing achievements? And so, he set about what sounds like one of the laziest growth strategies of any Pakistan bank still in existence. The branch network was heavily concentrated in Karachi, the country’s financial capital, and lending was focused entirely on trade finance (more on why that is lazy later). At the time he left the position of CEO (he remained chairman of the bank until June 2016) in April 2008, only 19% of the bank’s branches were outside Karachi and Lahore. By 2006, the Mohammedali Habib side of the family had enough confidence in their

In 1992, when the Habib family were setting up Metropolitan Bank, he was invited to join as Chairman and CEO of the bank. Parekh, known in the industry as “Kassim bhai”, duly began building up the bank, but clearly had absolutely no drive left in him to recreate the national powerhouse that he once ran at Habib Bank, or even anything like it 12

brand name to realise that more banks named Habib would not necessarily be a problem in the Pakistani market. Consequently, they integrated the old Habib Bank AG Zurich’s Pakistan operations with Metropolitan Bank, and the combined entity came to be known as Habib Metropolitan Bank. Unlike other bank mergers in Pakistan, this one was not necessarily a big deal. No cultural issues or any other integration mess because really, it was basically one bank with two legal entities anyway. Parekh served as CEO for 16 years and finally decided to step down as CEO in April 2008, when he was replaced by Anjum Iqbal, a Citibank veteran.

The Anjum Iqbal years

njum Iqbal has the kind of resume that one would expect bank owners to drool over. He started off in Citibank’s Pakistan operations and quickly rose through the ranks. He headed Citi’s corporate bank in Pakistan, their investment bank in Turkey and Venezuela, before heading up their entire operations in Turkey and Africa. He then topped off his Citi career in London, leading emerging markets lending and all commercial lending in Central and Eastern Europe, Middle East and Africa. But again, the Habib family made a mistake in choosing the man way too late in his career. Iqbal, a 1975 graduate of the Institution of Business Administration in Karachi (then Pakistan’s only real business school), had been working at Citi for more than 33 years when he was tapped to be CEO of Habib Metropolitan. Having lived a comfortable life in London for the last several years, did they really think he would have the stomach to take their bank through a turbulent democratic transition and the worst financial crisis in its history? If they did, they were dead wrong. Under Iqbal’s tenure, deposits grew at a rate of 9.5%, which sounds impressive until you realise that inflation during that period was

running at about 15.4% on average, and even the banking industry as a whole grew by 13.7% per year on average. He lasted barely three and a half years on the job and his only lasting legacy is that under his tenure, the majority of the bank’s lending tipped over from the private sector to the government. Following his departure in December 2011, he was promptly kicked upstairs to become the CEO of Habib Bank AG Zurich’s operations in Britain, in what we understand is mostly an emeritus position. That is when the family brought in Sirajuddin Aziz, another seasoned banker with about 35 years of banking experience. This was a better decision than the previous two picks, but that is not saying much.

Going north: Sirajuddin Aziz accelerates branch expansion

irajuddin Aziz took over as CEO of Habib Metropolitan Bank in December 2011 and of the three people who had held that position until that point, he is the only one who came in with a plan of action. Aziz began his career in 1977 as a fresh graduate of the University of Karachi. He applied for jobs at several banks, including Habib Bank. In fact, one of his interviewers was Kassim Parekh, the man who would become his boss several decades later. But on that day in July 1977, at least, Aziz was not going to become an employee of a bank named Habib. Instead, he took an offer from BCCI, made to him personally by the bank’s founder, Agha Hasan Abedi. Aziz appears to be absolutely awestruck by Abedi, even to this day, even after all the revelations of the crooked and criminal dealings by that bank. Aziz stayed with BCCI till the very end, serving as its country manager in China just before the bank’s collapse. He then joined the new management of a new bank being launched

in the recently deregulated Pakistani banking market: Union Bank where he stayed until 2001, when he moved to Bank Alfalah. He was appointed CEO of Bank Alfalah in 2005, a position he retained until late 2011, when he was given the top slot at Habib Metro. At Bank Alfalah, he led that bank’s meteoric rise from a small bank to becoming the sixth largest bank in the country. Aziz’s strategy began with a simple premise: Habib Metropolitan Bank was widely regarded as one of the best lenders to Karachi’s exporters for their trade finance needs. It understood their credit profile better than most other banks. Why not, then, lend to their supply chain as well? It is not a bad thought process and would have worked well as a growth strategy for Habib Metropolitan, especially since the bank had very little presence outside of Karachi and Lahore. In an interview with Bloomberg soon after he was appointed to the job, Aziz said: “You have to follow the money flow. Commodities dealers in Karachi are trading with cities up country and we don’t want to miss that leg of the transaction.” To that end, Aziz embarked on a strategy of carefully selecting where to open up Habib Metropolitan branches, focusing on small industrial and agricultural clusters, especially in the rapidly urbanising parts of Punjab. (When I first met him in mid-2012, the way he described each city he wanted to open a branch in and why – including many small towns I had never heard of – suggested that the man knew the Pakistani economy better than most people I have ever met.) In retrospect, perhaps this should not have been surprising. After all, he had been wildly successful in growing Bank Alfalah to becoming one of the largest banks in the country in just six years. Over the course of his tenure as CEO, virtually all of the growth in the branch network has come in those small but rapidly growing towns.

Great on the deposit side, not so much on lending

ziz said that the Habib family hired him specifically to do this job: grow them from being a middle market player focused on Karachi to becoming one of the leading nationwide commercial banks. He appears to have delivered rather well on that: under Aziz, the bank added 126 new branches, taking the total network up to 289, a 77% expansion in the physical footprint of the bank. The geographic spread is even more impressive: nearly three quarters of those new branches have been outside of Karachi and the bulk of those outside the major cities. From covering a total of 21 cities when he started off, the bank had branches in over 100 cities across all of Pakistan by the time he left the CEO position in June 2018. In order to ensure that the bank’s brand name translates well into other parts of the country less familiar with English, Aziz had the name shortened on all branding to Habib Metro Bank. What makes Aziz’s achievement even more impressive is that he more or less met the goal he explicitly set out to achieve. In 2012, he said he wanted to have 250 branches in at least 50 cities by the end of 2014. As of December 31, 2014, the bank had 249 branches in 50 cities. And that translated well into the bank’s financial results. Deposits grew at 17.3% per year under Aziz’s tenure as CEO, compared to just 13.1% for the industry as a whole. Net income has risen by an average of 11.4% per year between December 2011 and June 2018, compared to a 5.2% per year average for the industry as a whole during that same period. There were, however, some drawbacks to the strategy, which – while sound in theory

BANKS

and they ask you to post collateral for the loan, which would be fair were it not for the absurd policy that requires the client to post 110% of the value of the loan they want in cash/treasury bonds. In effect, the bank asks you to show that you have the cash that you want to borrow from them, rather than determining ability and/ or willingness to pay the loan back. For clients who have been with the bank longer, the collateral requirements are a little less stringent, but then the margins on trade finance tend to be far lower that commercial lending for other purposes. The whole point of the northern expansion was to diversify beyond

CEOs at Habib Metropolitan Bank

– did not look very sophisticated in practice. Yes, the bank knew exactly where to place its new branches in order to draw deposits, but ultimately a bank needs to know how to lend. And on that front, Habib Metro left much to be desired. While the overall asset book of the bank grew at 13.5% per year under Aziz’s leadership, the private sector loan book has grew by an average of 9.1% per year. The bulk of the growth has come from the bank plowing its money into government bonds. And even on the private sector lending side, a substantial proportion of Habib Metro’s lending portfolio is concentrated in low-margin trade finance. The bank’s management explicitly ruled out consumer lending and seemed to think that trade finance is a nice specialty to remain focused on. But when asked why so much of Habib Metro’s asset book was in government bonds, for a man who is ordinarily quite eloquent, Aziz was unable to give a straight answer. That sort of evasion – and the disinterest in lending evident from the bank’s financial statements – suggests that this bank is a onetrick pony: it knows how to attract deposits, but not how to lend them out. And at least part of the reason why the bank’s loan book did not increase substantially was because lending decisions were heavily concentrated at headquarters in Karachi. When the bank had the majority of its branch network centered in the city, that was probably less of an issue. But as the bank grew bigger and further afield, it needed to entrust more responsibility to its branch managers and regional managers, something that the senior management had identified as a problem, but was initially slow in implementing solutions. Then there is the fact that the bank sees its core business as trade finance. Trade finance is the oldest form of banking there is, but the way it is practiced in Pakistan, it is lazy, low-margin business. Here is how it works. If you are a new customer, you walk into the bank

trade finance into related areas of lending and get better risk-adjusted margins.

Islamic banking: off to a slow start

abib Metro has had an Islamic banking division since the fourth quarter of 2004, but it was a backwater that the bank’s management never paid much attention to. In August 2014, however, the bank formally gave its Islamic banking division a brand identity – Sirat (the path) – in keeping with the tradition of naming the Shariah-com-

Kassim Parekh 1992-2008

Anjum Iqbal

CEO April 2008-December 2011

Sirajuddin Aziz December 2011 - Jan 2018

Mohsin Nathani Feb 2018 to date

BRANCH NETWORK

289

The number of branches that Habib Metropolitan Bank has, a 77% increase since December 2011

pliant divisions using Arabic words that vaguely sound like religious terms. However, while other banks, both for reasons of customer preferences and regulatory relaxations, the net interest margin of the Islamic banking division tends to be higher than that of the rest of the bank. At Habib Metro, however, that is not at all the case, with the Islamic banking division’s net interest margin nearly 63 basis points lower than that of its conventional banking business. Maybe if they paid more attention to this line of business, its margins would improve, but it appears that the bank is still not entirely ready to put its weight behind it. For one thing, when launching a new brand, one would expect an advertising blitz to ensure that the brand catches one. For Sirat, Habib Metro pretty much did not even bother. This suggests that while other middle market players continue to invest in their Islamic banking divisions to grow their deposit base, Habib Metro risks being left behind.

Mohsin Nathani: the (relatively) new man on the job

irajuddin Aziz’s successor was announced in February 2018, a few months before Aziz left the job. Mohsin Nathani – then known in the Pakistani banking industry as a global banker with a career previously focused exclusively in the large multinational banks that have done business in the country – was a somewhat unexpected choice: when he had left Standard Chartered in September 2015, it was assumed that he had retired. Hence, most outside observers did not even realise he was available for the job. Nathani’s career is the kind of success

INDUSTRY GROWTH

13.1%

The average annual growth rate in the banking sector’s total deposits during the same period as Habib Metro Bank’s previous CEO

story middle class Karachiites dream of for their children. Schooled at St Paul’s and St Patrick’s, Nathani went on to attend the Institute of Business Administration (IBA) in Karachi for his undergraduate and masters degrees in business, graduating from IBA in 1987. In 1990s, Nathani started working at Citibank Pakistan back when it meant something to be at Citibank Pakistan. These were the heady days when Citi was reinventing what it meant to be a banker in Pakistan, introducing entirely new classes of lending to the country. So trailblazing was Citi’s team back then – and such a tremendous vehicle for career growth – that Nathani left in three and a half years to become head of corporate banking at ABN Amro Pakistan, a mere six years after having started his career. From ABN Amro, Nathani moved back to Citibank, but this time in roles across the Asia-Pacific region as well as the Middle East. From Citi, he moved on to Barclays in the UAE, which ultimately became his vehicle back home, when he returned to Pakistan as the country head for Barclays’ newly launched branches in Pakistan. That tenure was unquestionably a disaster, though not because of anything Nathani did: it was just bad luck and bad timing. Barclays Pakistan never really stood a chance, and within three years, Nathani saw the writing one the wall and jumped ship to become CEO of Standard Chartered Pakistan when Badar Kazmi left the job to head over to SCB’s operations in Saudi Arabia. Nathani served as CEO on SCB Pakistan for a little over three years, and then of SCB in the UAE for another year and a half before retiring – the first time in 2015. Yet sources close to Nathani tell Profit that retirement did not suit him. He was still in his prime, at just over 51 when he left

GROWING DEPOSITS

17.3%

The average annual growth rate in the bank’s deposits between December 2011 and June 2018, the period that coincides with the tenure of the previous CEO

SCB. He still had at least one more solid, long innings left to play. And while his successful international banking career meant that he did not need to work again, he clearly wanted to. The problem with being a retired bank CEO in Pakistan who wants to get back into the game is that there are not a whole lot of options. Bank CEO positions do not open up every day, let along positions that match the career profile and character of the person seeking the position. For a person who started off his career as one of the young buccaneers who transformed Pakistani lending to then come at the later stage of his life to the oldest of old banking houses in the country, where his job is to preserve and not build, must be a surreal experience. We say “must be” because in our interview with him, Nathani did not indicate anything other than enthusiasm for the job. And while it is still early days in his tenure, he certainly seems off to a solid start, with both deposits and profits continuing to outpace the broader sector as a whole. Yet when asked to lay out the bank’s strategy going forward, Nathani said nothing new: it is the same strategy set by the owners of the bank who want nothing new and nothing different. It seems that this branch of the Habib family loves to hire capable CEOs, but sees them as mere managers, not strategists. One could argue that such an approach is unhealthy or unsustainable in the long run, but we suspect they would respond by pointing to their financial results, which are certainly hard to refute as proof of the bank’s success. n Corrections and amplification: An earlier story in a previous issue of Profit incorrectly stated that Habib Metropolitan Bank’s compliance function was struggling to keep pace with the bank’s growth. The error is regretted.

BANKS

The Modern Monetary Theory advocated by Bernie Sanders’s economic advisor has a very unlikely supporter: former PIDE boss Dr. Asad Zaman. What exactly is the theory and can he convince the government to implement it in Pakistan? What if he does? By Meiryum Ali

t first glance, there is not much that unites Stephanie Kelton and Asad Zaman. One is hyper-American – the kind of fast talking, uber confident person that responds well to rapid-fire questions on CNBC. The other is a scholarly-looking, soft-spoken Pakistani uncle, who gives detailed and sober presentations at the State Bank of Pakistan. One is the current economic advisor to United States presidential candidate Bernie Sanders. The other serves as an external member on Pakistan’s Monetary Policy Committee. One talks about restructuring capitalism; the other espouses the virtues of Islamic economics. But in one key aspect, the two economists

are very similar: they are both proponents of the controversial economic theory, the Modern Monetary Theory (MMT). Depending on who you ask, MMT is either the best idea economists have come up with in the last decade, or the worst. It is also a very American economic idea – and this is important in explaining its meteoric rise in global consciousness in the last year alone. Kelton promoted the idea in as many media outlets as she could. According to Bloomberg, Google searches for MMT more than quadrupled in 2019, in part because of Kelton’s advocacy. That she is also Bernie Sanders’ advisor has not won her good will with sections of the American right. Then, of course, the highly popular and visible leftist US Congresswoman Alexandria Ocasio-Cortez said in January 2019 that MMT “absolutely” needs to be “a larger part of our conversation” – furthering the attention that MMT received. Okay, so the world’s biggest economy is

having an existential academic crisis about a wacky economic theory – so what? Well, because a prominent Pakistani economist believes it too and has been advocating that the government of Pakistan consider its implications. Even scarier than one lone economist championing this theory? It plays to the Finance Ministry’s biases and might just end up giving them the academic fig leaf they need to pursue their wreckless policies. Zaman is no stranger to the West. He left for Boston at the age of 16 to attend the Massachusetts Institute of Technology in 1971. After completing his bachelors in mathematics, he then went on to complete a masters in statistics and a PhD in economics at Stanford University. After teaching at the University of Pennsylvania and Columbia University, he had a mild religious pivot, and spent the last few years enthusiastically discussing an Islamic approach to economics in Pakistan. Most recently, he was the Vice Chancellor at Pakistani Institute of De-

velopment Economics (PIDE), serving a five-year term ending in March 2019. Zaman is not afraid of being unconventional, or of showing unwavering belief in an idea (few economists around the world, for instance, would promote such a blatant hodge podge of religion and economics). But now, instead of defending Islamic finance, he is defending MMT – just like Kelton. When he first heard of the idea around five years ago, Zaman thought it “initially seemed really crazy”. But then, “a lot of things started to make sense.” Speaking to Profit, he said, “MMT has many different little pieces, like a puzzle. Any one of them doesn’t make sense in isolation.” And he has an audience – Zaman first gave a seminar on MMT in March 2019 at the State Bank of Pakistan, attended by the then Governor Tariq Bajwa. [Note: the SBP allowing a seminar is not an endorsement by the SBP of MMT]. He then gave his second seminar in January 2020, to a larger audience of around 60 people. Is that a worrisome development? Not particularly, but it is worth talking about.

But first: what is MMT?

hink back to when you were a child and were given pocket money by your family. You must have wondered – what if I did not have to rely on my parents for my fixed pocket money? What if I had an endless supply of pocket money, or I could just wish for more money instead? How many more toys or ice creams could I afford then? MMT, at its core, aims to answer exactly that question: what would a society or an economy look like if money was not a constraint? What if there was an infinite pile of money that a government could rely on? Trying to answer this philosophical question is a little confusing, so bear with us. Basically, MMT upends conventional thinking in two ways. One, MMT asks us to change our understanding of what money is. Ask any student of economics in high school what money is, and they will give the standard response: “Money is a medium of exchange evolved from systems of barter”. But in reality, money is not just that. Money is, well, money, because the government is choosing to print a currency. Money does not just have value because it represents a commodity – money has value because the government recognizes it as legal tender. In a sense, money is in fact a standard of deferred payment, with the government ‘making’ money by injecting it into the system, and ‘reclaiming’ money through taxation. Essentially, the government ‘makes’ money every time it spends money.

“The deficit does have some significance, but it’s just that the government never has to pay back the deficit… We say, we can’t invest in development projects because we don’t have money. This is completely wrong” Dr. Asad Zaman, economist and former Vice Chancellor of the Pakistan Institute for Development Economics

Secondly, MMT proposes that a government’s budget is also different from conventional macroeconomic thinking. A typical household or person allocates a budget; that is, how much income they are receiving, and how much of that income they are spending or saving. In the same vein, conventionally we are taught that a government raises taxes from people, in order to spend money on different projects. If the government spends more money than it earns in taxation, it runs a deficit. According to MMT proponents, there are no budget constraints on the government because of that first point: that the government is the creator of money. This means that the government can not only run a deficit – the deficit does not matter. Instead of raising taxes in order to spend, the government makes money when it spends. In this scenario, taxation then becomes less of a tool of raising funds, and more a tool of managing excess demand or supply in a system. Instead, what is really propelling the system is deficit-based financing. It is not to say that the deficit is totally irrelevant. According to Zaman, “The deficit does have some significance, but it’s just that the government never has to pay back the deficit.” According to Dr Zaman, the US has a deficit that runs in the trillions. But fundamentally, “It’s just a number on the books”. One can see why this theory is so alluring. If there are no real constraints on the money supply, and the deficit is not a concern, then imagine the possibilities. As a New Yorker article on Kelton points out: “On MMT blogs and on MMT Twitter, adherents imagine a world built on MMT principles, in which the government provides guaranteed jobs, health care, and affordable college, and launches clean infrastructure projects to replace our crumbling highways,

airports, and bridges.” MMT has a few key caveats. The country has to issue its own currency. So the United States could implement MMT, since it print dollars, but France, which is under the Euro, cannot. (Pakistan can as well, since it issues the Pakistani rupee, but more on that later). According to Dylan Matthews at Vox: “MMTers...argue that government should never have to default so long as it’s sovereign in its currency: that is, so long as it issues and controls the kind of money it taxes and spends. The US government, for instance...can’t run out of dollars, because it is the only agency allowed to create dollars.” So if the constraint is not money, what is? Well, it is actually our resource constraint. “We say, we can’t invest in development projects because we don’t have money,” explains Zaman. “This is completely wrong.” Under MMT, the government can choose to spend money on underutilized resources, or underdeveloped sectors. The extra money will spur development, and create extra demand, which will in turn create supply, so the thinking goes. Another salient feature under MMT is the idea of a job guarantee – that the government can offer jobs at minimum wage as a right of citizenship, which is how it will be able to achieve full employment. Okay, so the deficit is not important, full employment is possible, and the money supply is increasing: at this point you might be wondering: what about inflation? What is stopping any country from becoming Zimbabwe? For an MMT proponent, inflation is not a top priority. Inflation is more a mismatch of demand and supply. Kelton believes in sustainable inflation, and that government spending is only responsible for a very small part of inflation. Instead, with accurate forecasting of inflation risk,

MACROECONOMIC POLICY

“MMTers...argue that government should never have to default so long as it’s sovereign in its currency: that is, so long as it issues and controls the kind of money it taxes and spends. The US government, for instance...can’t run out of dollars, because it is the only agency allowed to create dollars” Dylan Matthews, journalist at Vox

and prudent government spending, inflation can be managed. Inflation becomes a risk only when the economy is at full employment (because of the job guarantee), and that is when taxation comes in handy. Instead of being used to raise funds, it is used to remove excess money from circulation. Note the circularity of the logic there: the government should not have to worry about raising taxes in order to pay for its spending and instead just print the money instead. And what should it do when its money-printing results in inflation? Oh, just tax people to reduce inflation. Well, then what is wrong with taxing them in the first place to raise the money for government spending and not risk inflation to begin with? What about interest rates? Well MMT proponents also have a bone to pick with the conventional model. Traditionally, the bigger a deficit – such as in an MMT model – the more the government has to borrow, which will lead to higher interest rates. And also traditionally, the higher the interest rate, the lower the demand. But MMT folks question that relationship, and point out that in fact, demand can be somewhat insensitive to interest rate changes. Kelton argues that cutting interest rates is ineffective in a slump, as some business and customers will not invest even at very low interest rates. And according to MMT, a budget deficit does not actually lead to higher interest rates. In fact, one New York Times article noted that several money managers on Wall Street were noticing the opposite in the United States: that despite a roaring deficit, interest rates have been historically low. So what is the goal? Forget about interest rates. Instead, one could just set the interest rate at zero. An interest rate target for a government, in this scenario, is basically irrelevant. Essentially, instead of having a separate monetary and fiscal policy, under MMT you end up with just a fiscal policy – with the added bonus of never running out of money, since you can always print more anyway. Needless to say, in this scenario, the central bank no longer needs to be independent of the government.

What does that look like in Pakistan?

ake a breather, because there is a little more theory to digest. We have understood what it could look like in the United States, but how on earth could this possibly be applied to Pakistan? The first big difference between Pakistan and the US, is that since the US prints dollars, it can print arbitrary amounts of money without risk of inflation, and therefore can run arbitrarily high trade deficits as well. Every other country needs to run current account surpluses to earn dollars, to use for imports and reserves. This, as Zaman puts it, is a global trading system that is asymmetric, where countries have to increase exports to ever be able to run a trade surplus. This is a problem for a country like Pakistan, which has always found it challenging to increase its exports. This entire system, as far as Zaman is concerned, is “very silly indeed”. The other problem is that MMT works for a closed system – that is, a government cannot have liabilities in foreign exchange. That is because under MMT, Pakistan is the sovereign issuer of the rupee, and therefore can print as much of it as it wants (and under MMT rules, will not go bankrupt). However, the government can not print other countries’ currencies, and a portion of Pakistan’s debt and debt repayments are in dollars. At this point you are probably thinking MMT is just not for us. But actually, Zaman believes MMT can still offer some solutions to a dollar-starved country like Pakistan. Since actually achieving a trade surplus is not possible, and foreign exchange reserves are a concern, the trick is to implement MMT in such a way that it does not upset the balance. Besides, Zaman said, “Pakistan’s foreign exchange situation is not so critical anymore.” (This is despite the most recent SBP Quarterly Report suggesting otherwise). The first step is to get a handle on the exchange rate. If the government generates extra money, but also keeps the dollar undervalued,

then import demand increases, and Pakistan’s balance of payments worsens. Instead, over value the dollar, and keep it higher than the equilibrium, thereby creating a transparent tax on imports in dollars. There is still excess demand for imports, because of the excess money supply, but the balance of payments will actually be strengthened. While in the short term this will be negative, in the long run, viable import substitution might actually happen. Secondly, deficit spending can be encouraged. Under MMT, the deficit cannot create a balance payments problem as long as it is the domestic currency. What Zaman wants is strategic, targeted government spending on currently underutilized sectors of the economy. For him, that includes a massive injection of money into the education sector in order to improve human capital. This would be in the form of 30-year education loans that will be provided by the private sector, but backed by a sovereign guarantee. Next, similar to the job guarantee idea abroad, Zaman suggests providing productive jobs to people in Pakistan. Not only will employment rise, but extra demand will be generated and also extra products. These jobs would cater to the bottom of the labour pool, which is currently an ‘underutilized resource’. This includes community service, basic literacy training, planting trees, green conversion projects and preservation of forests. The rise in jobs of course will lead to extra demand, but can be managed as long as “sufficient additional resources are directed to relevant sectors where excess demand will be generated.” And like his fellow MMT supporters in the US, Zaman is not too fussed about inflation. Relative inflation will take place and is to be welcomed, since price mechanism will kick in, signalling excess demand that will generate a response in supply. Through MMT, the possibility of self-financing mega projects in Pakistan actually becomes a reality. Zaman envisions debt-financed roads, and public-works programs. Pakistan could create eco-cities the way China has. The government project for small rural business “Eik Hunar Eik Nagar”, could be rapidly expanded.

“Faced with these circumstances, a government may decide that defaulting on its debts is the best option, despite its ability to create more money. That is, government default may occur not because it is inevitable but because it is preferable to hyperinflation” N. Gregory Mankiw, economist and chairman of the United States Council of Economic Advisors Tourism could actually be developed. Zaman also proposes a ‘nudge’ to the private sector under MMT. Because of the current system, high interest rates are actually a threat to growth because the private sector prefers investing in insurance or real estate instead of ‘real investments’ like the ones listed above. Instead, Zaman proposes the government nudge the private sector to introduce directed lending programs, aligning their incentives with long run social prosperity. So in short, this is what MMT in Pakistan could look like: we can spend money by recognizing that if a development project is viable, we can ‘borrow’ from future revenues and ‘create’ and invest money today. As long as Pakistan can manage its foreign exchange liabilities, and its domestic demand, Zaman sees no reason for why this model can not work. Zaman’s version of MMT is not as much a rebellion against traditional macroeconomic theory, as it is a political stance against the International Monetary Fund (IMF). For him, “we are still colonized by the IMF.” Zaman believes that the role of the IMF is to make sure the richest countries of the world make some of the poorest countries in the world pay interest payments on debt and reparations. “The IMF is in the business of austerity and they impose it on poor countries, thereby keeping their economies enslaved to rich countries.” For Zaman, MMT could offer a way to escape from this trap.

Not convinced? Do not worry, neither are these people

olonization theories aside, a lot of people have issues with this theory. First, the Americans: liberal macroeconomist and Nobel laureate Paul Krugman, Chair of the Federal Reserve Jerome Powell, billionaire Bill Gates, and former IMF chief economist Kenneth Rogoff. Just last December, the conservative American economist Gregory Mankiw, published a paper titled “A Skeptic’s Guide to Modern

Monetary Theory”. It begins with a disclaimer: “Perhaps after forty years in the profession, I am too steeped in mainstream macroeconomics to fully appreciate MMT”, but still, he tries. First, he questions the assumption that under MMT there is no default risk associated with government debt. He writes that the expansion in the monetary base will increase bank lending and the money supply, which will lead to hyperinflation. “Faced with these circumstances, a government may decide that defaulting on its debts is the best option, despite its ability to create more money. That is, government default may occur not because it is inevitable but because it is preferable to hyperinflation,” the paper reads. He also questions the MMT assumption that there is little link between inflation and an increase in money supply. In fact, he says: “This assertion overstates the case against the mainstream view. In U.S. decadal data since 1870, the correlation between inflation and money growth is 0.79.” He also explains a little about inflation: “Inflation tends to rise when output and employment exceed their natural levels.” This is because price setters do not aim to maximize social welfare, they want to maximize profits. An MMT economist could fix that problem by using government price guidelines or price controls. But Mankiw argues: “the complexity of the economy and the history of price controls suggest that this solution is not practical.” That final sentence could also be applied to Pakistan: are Zaman’s views – that we can adequately control inflation and foreign exchange reserves and spend money strategically – actually practical? Does the Pakistani government have enough resources to be able to manage such an economy, or the regulation to ‘nudge’ the private sector at its will? One Pakistani economist based in the United States, who did not wish to be named out of respect for Zaman, nonetheless emailed Profit a two-page rebuttal expressing their concern with the theory. Dubbing MMT in Pakistan “an absolute nightmare”, they wrote that the central bank does not have “as much independence from the vagaries of politics” in South Asia as a whole,

and in Pakistan in particular. “Our CB governors are appointed and shown the door without much due process, have historically been non-monetary economist types… problems at the Reserve Bank of India with Raghu[ram Raja] and Urjit [Patel] are even better examples of these issues. We’ve already had many bouts of double digit inflation due to political influence in the conduct of monetary policy. Allowing the CB to print money as part of its policy is just going to make this even worse.” they wrote. As for the underutilization of resources, a key tenet of MMT, they wrote: “it is true that the Pakistani economy has a lot of capacity. But is monetary policy the constraint hindering increase in productivity? Probably not, given that a lot of the economy is in the shadows. Our productivity is low probably because of all sorts of other constraints including missing financial markets (such as a futures market), marginalization of women in terms of labor force participation, and so on.”

So what’s next?

o be clear, at no point is the State Bank of Pakistan at all advocating such a radical approach to macroeconomics. Of course, we could not implement it even if we wanted to, what with the IMF bailout conditions. But the idea is still out there, despite heavy resistance. At the end of the MMT seminar at the State Bank, several members of the SBP seemed quite skeptical, and lobbed questions at Zaman. Many kept coming back to the same point: concern about inflation or hyperinflation, particularly in food supplies in Pakistan. When asked about the push back, Zaman smiled, and said it was inevitable. “It is a pretty new concept, you have to be willing to experiment.” As a somewhat contrarian economist, he is also perhaps used to the pushback. Perhaps due to his own religious bent, he frames the fight about MMT as a battle between good and evil. That kind of unwavering belief and determinedness in a theory may suit Zaman well. But the implications such a theory might have for Pakistan are still a little up in the air. n

MACROECONOMIC POLICY

By Hassan Naqvi

t is an iconic brand. At least two generations of Pakistanis have grown up with it. But Maggi noodles – the brand that introduced many Pakistanis to the concept of convenience food – has been shut down in Pakistan, with sources inside Nestle, the company that owns the brand and manufactured the product, confirming to Profit that they will no longer be marketing the instant noodles in the country. “Yes, we discontinued Maggi by the end of 2018. The divestment is part of Nestle’s strategy to manage its multi-product portfolio,” said one official at Nestle who declined to be identified because he was not authorised to speak on the matter. Nestle Pakistan has made no public announcements about the matter, and Maggi noodles remain listed as a product on the company’s website. However, the product is conspicuously absent from the 2018 annual financial statements of the company. There was no explicit mention of a discontinuation: it was just listed as a product offering on the 2017 report, and not listed on the 2018 report. When it was first launched in Pakistan in 1992, Maggi was the only brand of noodles in the country and had a complete monopoly for the first year of its production. And while Unilever quickly launched its Knorr brand of instant noodles in 1993, Maggi was the market leader and, for the most part, remained so for the next two decades. Over the past four years, however, Maggi went from being the market leader in its category to being almost completely wiped out from the country. Sources inside the company confirmed to Profit that the current stock of Maggi in stores is all that is left. Once it is gone, there will be no more. Needless to say, there are some consumers who are bound to be distraught. “Maggi was my childhood romance,” said Ahmed Abbas, an ardent foodie, who works as an accountant at Royal Swiss, a newly constructed luxury hotel in Lahore. “I grew up eating Maggi two minutes instant noodles and I badly miss them. It used to be the part of our afternoon snacks and occasionally for school lunch break.”

FMCG

“No, the two aren’t connected. Maggi noodles were being produced in Pakistan in our Kabirwala factory and there is no linkage between the Maggi products manufactured in India. We would also like to point out that in India too, Maggi Noodles have always been safe for consumption.” Muhammad Rahat Hussain, spokesperson for Nestle Pakistan

How did this happen? How could such a beloved brand just die? The company’s management likes to use meaningless corporate drivel to explain it, but there is no denying a simple fact: a collapse like this does not happen without a shock event. Unfortunately for the management of Nestle Pakistan, that event took place across the Wagah.

South Asia’s love affair with Maggi

he story of Maggi in our region begins in India. Maggi was originally an independent food company started in Switzerland in 1884 by Swiss entrepreneur Julius Maggi, an immigrant from Italy. Maggi started off by selling bouillon cubes – what are known in the Pakistani market as those “chicken cubes”. In 1947, Maggi GmBH was bought out by Nestle, the then-rapidly growing Swiss food company that had global ambitions and already had a sizeable footprint around the world, including in South Asia. Nestle started its presence in the region in 1912, as the Nestle Anglo-Swiss Condensed Milk Company. Nestle introduced Maggi in India in 1983, almost a full decade before it was introduced in Pakistan. Even in India, Nestle faced competition in this category from Unilever’s Knorr, but was able to build up a commanding lead in market share, typically with an 80% share, and occasionally even reaching a 90% share of the instant noodles market in India. The product came to Pakistan in 1992, and was the dominant brand of instant noodles (though less dominant in Pakistan than in India) for much of the next three decades. For most of this time, Knorr was Maggi’s only real competitor. Then, in 2012, Shaan Foods decided to enter the fray with Shoop, its own brand of instant noodles. But while the two competitors gained some market share, Maggi remained the number one instant noodles brand in both countries. Contrary to what management might say, while their competitors certainly benefited from Maggi’s mis-

fortunes, the cause of the hit to the brand – which proved fatal to its presence in Pakistan – did not originate with its competitors.

The food safety scare in India

he cause of Maggi’s demise in Pakistan starts with a man named Sanja Sindh, a food inspector with the Uttar Pradesh Food Safety and Drug Administration in India. According to reporting in Mint, a leading financial newspaper in India, it was in March 2014 that Singh decided to test the claim by Nestle that Maggi contains “no added MSG” (monosodium glutamate). Singh sent a sample to a state government laboratory in Gorakhpur, which tested positive for the presence of MSG in the noodles. He then sent additional samples to the Central Food Laboratory in Kolkata. And then waited. For one year. (This is a government bureaucracy, after all. These things take time. We are told.) In April 2015, the report came back from Kolkata: “MSG present and Lead: 17.2 ppm” (parts per million). The United States Food and Drug Administration (FDA) sets the permissible amount of lead in food products at 50 parts per billion (ppb). Nestle’s sample had just come back testing positive for 17,200 ppb, or more than 340 times the limit considered safe, and over 1,000 times the limit that Nestle India claimed it followed.

Bigger market

$488 million Estimated revenue of Nestle India from Maggi noodles and related products in 2018, based on Nestle India’s financial statements, equal to approximately PKR61 billion (based on the 2018 exchange rate)

The UP food safety commissioner asked Nestle to respond to the tests and Nestle submitted its response on May 5, 2015. Two days later, the first stories about possible safety hazards started appearing in the local press in Uttar Pradesh. Nestle, however, chose not to say anything publicly. Over the next week, national newspapers started picking up the story and writing about how Maggi might be unsafe, but Nestle still did not respond. Finally, on May 21, two weeks after the first public story about the food safety tests, Nestle responded with a statement that seemed to downplay the allegations, stating that Maggi noodles were “safe to eat”. “But recent developments and unfounded concerns about the product have led to an environment of confusion for the consumers,” the statement said. In hindsight, maybe they should have reacted more forcefully. Because what happened next would have been predictable had Nestle remembered the first rule of being a multinational corporation from a rich country operating in a poorer one: you are held to a higher standard than local competitors, both by the government and by consumers. It may not feel fair, but it is just the way it is. Deal with it and move on. But that is not what Nestle did. They felt that the tests run by the labs in Uttar Pradesh and Kolkata were flawed and that the Maggi production process was being mischaracterised. They were trying to win the argument, not solve the problem. And Nestle brought out the big guns to try to win the argument. Nestle’s global CEO Paul Bulcke flew to India to meet with regulators and address a press conference in New Delhi. “This is a matter of clarification and we need to sit down together and clear the air… We will look into the safety concerns. We do not add MSG in Maggi noodles… We apply the same quality standards everywhere. Everything we do is keeping consumers in mind. We will do everything it takes, and are fully engaged with the authorities,” he is quoted by Mint as having said during that press conference. It did not work. On June 5, 2015, the Food

“This is a matter of clarification and we need to sit down together and clear the air… We will look into the safety concerns. We do not add MSG in Maggi noodles… We apply the same quality standards everywhere. Everything we do is keeping consumers in mind. We will do everything it takes, and are fully engaged with the authorities” Paul Bulcke, chairman and former CEO of Nestle, in June 2015 Safety and Standards Authority of India (FSSAI) ordered Nestle to recall Maggi from the Indian market. Over the next three months, the company recalled over 38,000 tons of Maggi noodles and burned them. Yet despite being ordered to do so, Nestle India did not want to admit defeat. They portrayed their decision as voluntary, releasing a statement that misconceptions had developed about their product to such an extent “that we have decided to withdraw the product off the shelves, despite the product being safe,” the statement reads. They also promised Maggi consumers that the noodles would return to the market as soon as the company was able to resolve the issue.

Stubborn management

ne can almost sympathise with the Nestle management. They were right about Maggi noodles and were proven right within a few months. Nestle India exports Maggi noodles to cater to the Indian expatriate population in North America and Europe. In the United States, the FDA conducted tests in August 2015 that showed that Nestle was right: Maggi noodles did not contain unsafe levels of lead. “Following news reports about alleged lead levels in Maggi noodles made by Nestle and sold in the US, FDA tested a limited number of samples for lead contamination. FDA testing did not find any levels that present a public health concern for US consumers,” wrote an FDA

Market size

Rs6 billion Estimated size of the instant noodles market in Pakistan in the year 2016, according to officials from Nestle Pakistan

spokesperson in an e-mail to The Times of India, published on August 12, 2015. And soon, even the authorities in India recognised that there had been a mistake. The very next day, August 13, the Bombay High Court struck down the FSSAI’s nationwide ban on sales of Maggi. In its decision, the court stated that the tests conducted by the Uttar Pradesh authorities and FSSAI were in unauthorised laboratories that were not accredited by India’s National Accreditation Board for Testing and Calibration Laboratories (NABL). But Nestle management completely misread the situation. Their problem was not that their product was unsafe. It was not, and they knew it. Their problem was that the Uttar Pradesh government – and subsequently other government authorities in India – perceived their product to be unsafe and the public was increasingly concerned. The problem was not going to go away by telling everyone in India that they were wrong. It was going to go away by being seen to be taking action to address their concerns, unfounded though they were. Yet that stubborn decision to continue trying to argue with the government influenced the company’s decision not just in India, but appears to have had at least some impact in Pakistan. Following the safety concerns in India, Nestle Pakistan issued a statement on their website stating “Nestlé Pakistan does not import any Maggi product from India. Maggi products sold in Pakistan are locally manufactured in our Kabirwala factory near Multan. Maggi products produced in Pakistan are safe and Halal. Nestlé Pakistan proactively conducts tests on all their products regularly, and consumers can be assured that our products are safe to consume.” That is it. That is all the company did for nearly a full year.

Tremors felt in Pakistan

eanwhile, consumers in Pakistan – who received relatively little communication from the company about the safety of Maggi noo-

dles – were being influenced in their purchasing decisions by the news from across the border. Fareeha Najam, a housewife in Lahore, told Profit that although the brand has claimed that the product is completely safe and not hazardous, “I wasn’t ready to take the risk after it is about the health of my children and we moved to Knorr noodles despite the fact that my son Irtiza and daughter Kashaf were huge Maggi instant noodles fans,” she added. This is despite the fact that most consumers preferred Maggi noodles to most of its rivals. “The quality of Maggi was better than that of Knorr. Price wise both the products were the same,” said Haania Ali, a senior marketing manager at Punjab Group of Colleges. Maggi noodles, especially the ones with the small chunks of vegetables, was her personal favourite. However, she said that her daughter Insiya loves Knorr’s Chatpata flavour the most. Agreeing with her, one of her colleagues, Amina Hassan, also shared her childhood memories of how she always preferred Maggi instant noodles over Knorr noodles. “We miss Maggi noodles. It was an essential part of my life during my teens,” she said. Yet even now, the company is reluctant to admit that the crisis across the border had anything to do with the brand’s demise in Pakistan. “No, the two aren’t connected. Maggi noodles were being produced in Pakistan in our Kabirwala factory and there is no linkage between the Maggi products manufactured in India,” said Muhammad Rahat Hussain, spokesperson for Nestle Pakistan. He added that all of Nestlé Pakistan’s products, including Maggi noodles, have always been safe for consumption. “We would also like to point out that in India too, Maggi Noodles have always been safe for consumption,” Rahat said. However, one person who previously worked as part of the sales team for Maggi at

FMCG

Nestle Pakistan said that the impact of the news from India on the product’s sales in Pakistan was unmistakable. He said that, after the news started coming in from India about the alleged lead levels, he saw many consumers switching over from Maggi to Unilever’s Knorr. “The Indian debacle ruined the three decades goodwill of the Maggi brand and badly affected the brand loyalty of our product,” he said.

Attempts to save the brand

t is not as though Nestle did not try to save the brand at all. In 2016, for instance, the company launched a major advertising campaign that sought to highlight the recent changes made to the recipe to make it healthier by reducing the sodium content in the noodles. They also introduced “Maggi Chotoo”, a smaller package with a lower price point of Rs15. In hindsight, perhaps changing the recipe at a time of safety concerns was not the best strategy, at least not without making it look like a tacit admission that there was something wrong with the old recipe. Of course, Nestle was doing so in line with an unrelated global strategy to reduce the sodium content in food to make it healthier. But that was likely a point lost on most consumers. Especially when one considers that reducing sodium means, in effect, reducing salt in food. And that usually makes food taste worse. People like salt in their food, especially foods such as noodles. And in April 2018, the company engaged acclaimed singer, songwriter, and actor Asim Azhar – who is also referred to by some commentators as the “Justin Bieber of Pakistan” – and another promising singer and scriptwriter Aima Baig to promote the brand in an ad with the new and catchy tagline “Uljha Maggi Sab Suljhaye” but even that could not help the brand much. Within months of that ad campaign, the brand was discontinued in Pakistan.

An alternative explanation for the fall

ot everyone is convinced that Maggi died in Pakistan because of the scare in India, or at least that while the news from India did not help, it was not the biggest reason for the death of Maggi. According to one senior executive at a competing food company, Maggi had been losing market share to Knorr even before 2015, and the lead scare from India simply accelerated what was already an inevitable demise. “The real problem for Maggi was that Knorr does its product as well as flavour development inside Pakistan, whereas Nestle made Maggi use the same formula they use in the Indi-

an market,” he said. “These European company executives think that Indians and Pakistanis have the same taste, but we do not.” Unilever, it seems was much better at localisation than Nestle was. As a result, Unilever’s product was able to continue gaining market share from Nestle, and was therefore well-positioned to become the market leader by the time Maggi met its demise. Nonetheless, the end of Maggi still comes as a shock, even to executives who have competed against the company and developed rival products. “It was definitely a shock. Maggi is seen as a core brand for Nestle, certainly in India and we used to think in Pakistan as well. They must be making losses towards the end. A lack of localisation and also some poor communication led to this eventual demise,” said the industry source.

The fall of Maggi... and the rise of Knorr and Shoop

et even as they stopped buying Maggi, Pakistani consumers did not stop having noodles. While reliable estimates of Pakistani spending on noodles are difficult to come by, a 2016 report in The News quoted officials from Nestle Pakistan as estimating the market size at around Rs6 billion in that year. Taking up share given up by Maggi, in other words, could be lucrative business. And Unilever Pakistan Foods, the publicly listed subsidiary of the global giant, along with local food company Shan Foods appear to have stepped into the fray. According to a recent market study by Nielsen, the market research company, Unilever’s Knorr now has a 55% market share and Maggi’s share in its last year of operations had dwindled to just 35%. The remaining 10% of the market was taken up by Shan’s Shoop. “Consumers mostly buy Knorr Noodles now and they are high in demand,” said Ghulam Abbas, one of the workers at Savera departmental store in Shadman, Lahore. Agreeing with him, one of the cashiers at Jalal Sons Lahore, told Profit: “We don’t have Maggi noodles in our stock anymore. Consumers usually buy Knorr noodles and in the absence of Maggi noodles from the market they are only left with the choice of Shan’s Shoop.” And while Shoop has so far been the smallest player in the market, Shan Foods and its distributors now see an opportunity to expand their market share. Kashan Raza, one of the distributors of Shan’s Shoop, told Profit: “Shan completely understands [the opportunity]. That’s why, for market penetration, the company is concentrating on the distribution and promotion of the product to increase the market share of the

“Following news reports about alleged lead levels in Maggi noodles made by Nestle and sold in the US, FDA tested a limited number of samples for lead contamination. FDA testing did not find any levels that present a public health concern for US consumers” United States Food and Drug Administration, statement released to The Times of India in August 2015

brand,” he added. “You will find it at every big and small store.” Meanwhile, it does seem that Nestle may be out of the noodles business in Pakistan altogether. When this scribe asked the company if they might launch a different noodles brand at some future date, Rahat Hussain, spokesperson for Nestle Pakistan, said: “It’s too early to comment. We will keep you posted of any launches.”

Killed in Pakistan, alive and well in India

ere is the ultimate irony, though: while Nestle gave up on trying to rescue Maggi in Pakistan, it continues to thrive in India, and – after a few years of low market share – the company is back up to a 60% market share in India, according to reporting in The Economic Times, India’s largest business newspaper, in a news story dated August 2018. Nestle India had revenues in 2018 of ₹115 billion ($1,627 million), of which approximately 30% comes from the Maggi line of product, implying revenues of close to $488 million from Maggi noodles and related products in India. In other words, you can sit down to have a nice hot bowl of Maggi noodles in Gorakhpur, Uttar Pradesh, and Kolkata, West Bengal, just a few miles from the laboratories that conducted those faulty tests and created the panic against Maggi. Meanwhile, in Lahore or Karachi or Gujranwala, which were not even served by the same factories as the ones that had that alleged lead poisoning problem, you cannot have Maggi at all. Now, how is that fair? n

FMCG

Prime Minister Imran Khan inaugurated the Allama Iqbal Industrial City in January. But how exactly does the public-private partnership that runs the show in Faisalabad have in store next, and will Mian Kashif Ashfaq be able to bring billions of dollars to Pakistan? INDUSTRY

By Shahab Omar

ian Kashif Ashfaq kicked off the new year side by side with Prime Minister Imran Khan at the launch of the state of the art Allama Iqbal Industrial City. A charismatic young industrialist, Mian Kashif is the Chief Operating Officer (COO) of Chen One, and is currently chairman of the Faisalabad Industrial Estate Development Management Company (FIEDMC). His claim? That the industrial estate being created by the Punjab government company that he runs will bring almost 1.5 billion US dollars in investments to Pakistan. One wonders just how reliable the claim is,

would say there are chances for this being cive work environment and skill development, Mian Kashif’s plans dent a ghost town as well. Except, this zone is not to promote exports in all fields of industry, for the FIEDMC is in some far flung northern area difficult to get to promote liaison between industry and the and separated from civilization. This is in government, to have CSR - but all these claims centered around toFaisalabad, right in the spirit center of Punjab. come with the territory and could be said Despite the tall claims, the FIEDMC about any such government project. What is fostering a particular does not have the most significant profile in important is that the single true focus is bringenvironment that breeds the world, and is on the periphery of the public ing in Foreign Direct Investment to Pakistan. But with 1.5 billion USD hanging in the industry. He is putting eye. balance and significant government and CPEC factor out all the works, but investment on the other side, Profit sat down The foriegn s things stand, a total of 1100 acres Mian Kashif Ashfaq to find out what he of land have been sold to different he also wants to make it with was planning to do with the FIEDMC. industries bythe FIEDMC. The impressive so that it buyers of this sizable tract of land about? include 4 Chinese and 12 Pakistani companies, fosters a certain trust in What is ithenall asked a question, Mian which does not bode well for foreign direct this particular project. Kashif answers in typical investment. But this is only the beginning bureaucratic fashion. It is according to Mian Kashif, and this is where he It may not be the biggest, unexpected coming from him seems to get a little excited, losing some of his but he wants the considering he is neither politician or bureau- earlier, straightforward answers. but his responses are a hail of statutes “Almost 100 to 125 multi-dimensional Faisalabad crat, and years and ordinances and solid, strong, companies from China are ready to settle in industrial estates language that does not really mean anything. Faisalabad. Under CPEC Economic Zone, Once again, we find ourselves at our China wanted to relocate its industries here project to be the wits ends over this. Mian Kashif is not the sort but there was a lack in the provision of interof businessman that usually shys away from environment which they demanded” brightest under the media attention. In fact, he is quite the believer national he says, and he takes credit for the prospecCPEC umbrella in the media, regularly sending press releases tive investments.

considering the choppy waters Mian Kashif and his Chenab Group has often found itself in, from always falling prey to disastrous situations to being one of the largest defaulters of the major industries in Pakistan. But with the FIEDMC, at least, Mian Kashif seems to be claiming he is doing something different. The FIEDMC is a dream project for analysts simply because it has all of the fancy buzzwords that everybody loves. It was established in the spirit of a public-private partnership, its aim is to attract investment, build industry and support exports from Pakistan. Oh, and if all those uplifting terms were not enough, the industrial city mega project of the Special Economic Zone of FIEDMC falls under the umbrella of the China-Pakistan Economic Corridor (CPEC) The investment that Mian Kashif seemingly claims the FIEDMC will attract covers all the big words as well: textiles, engineering, electrical and electronics, chemical and paints, food processing and pharmaceuticals, automobiles, packaging and building materials. It sounds like a dream city. But industrial zones come and go. Companies build them to be big and shiny and fancy but at times they end up being ghost towns, only for industry to flourish a stone’s throw away. And if special economic zones set up under CPEC are anything to go by, prece-

and making sure to keep the readership of the english and Urdu press abreast with his whereabouts and activities. But as he explains, we glean that the FIEDMC was established by the Government of Punjab and formally registered under statute 42 of the company’s ordinance 1984, a public private partnership. The FIEDMC thus becomes a government created but privately run company responsible for the development of this area near Faisalabad into a state of the art industrial estate to house foreign and local investors, besides giving impetus to economic activities in the country. “ We are committed to achieve orderly, planned and rapid industrialization through the development of world class industrial estates to satisfy the business needs of our customers,” he says. When he is not being interviewed, he is the amicable sort, and was seen laughing and joking with the Prime Minister at the recent inauguration in January. But during the interview a switch seems to flip, and he is sober and does not make for particularly good copy. In the middle of his measured responses, a noble quality if boring, we still manage to extract certain bits of important information as to the nature of the project. The infrastructure to prospective entrepreneurs for setting up large scale industrial units, include SME’s, warehouses and related commercial concerns. There is, of course, talk of poverty alleviation through employment generation, condu-

“Now the FIEDMC has provided that international environment for them and most are now coming to Pakistan. A Chinese Company Guangzhou Rongish Trading Company will put up a unit of perfumes and cosmetics in the Allama Iqbal Industrial city and they have already purchased the land for this purpose” he explains. Mian Kashif’s plans for the FIEDMC is centered around fostering a particular environment that breeds industry. He is putting out all the works, but he also wants to make it impressive so that it fosters a certain trust in this particular project. It may not be the biggest, but he wants the Faisalabad industrial estates project to be the brightest under the CPEC umbrella. As a member of the business community himself, he feels he is in a better position to judge what businesses and investors will expect of such a venture, and it is not just shiny objects. “Our philosophy is one of honest, helpful service and unceasing improvement. Because of this, IEDMC is second to none in Pakistan as a catalyst for economic change in the country by setting up mega projects” he says. “In order to provide friendly and world class infrastructure to prospective entrepreneurs for setting of large scale industrial units we are planning to launch our commercial areas and space is already available for the warehouses.” But the shiny things are also import-

“Now the FIEDMC has provided that international environment for them and most are now coming to Pakistan. A Chinese Company Guangzhou Rongish Trading Company will put up a unit of perfumes and cosmetics in the Allama Iqbal Industrial city and they have already purchased the land for this purpose” Mian Kashif Ashfaq, Chairman FIEDMC ant, and to this end the FIEDMC has already gotten approval for an Expo Center with state of the art facilities, and will also construct a technical education university, 10,000 flats for labourers under the Naya Pakistan housing concept. They are also planting 500000 trees under a clean and green campaign and providing employment to 300000 persons. Also we will be launching a shuttle train service for the transportation of labor to urban areas. Development of dry port and airport is also being done by FIEDMC. The aim to which they are doing all this is also clear, so while trees and CSR is all well and good, the goal is clear. “Our number one priority and objective is to promote exports in all fields of industries and number two is to set up an industry for the substitutes of imports. In all these projects almost 25% of jobs will be for the local area people and we will be setting up hospitals and schools for these people. We have also planned all in the CSR initiatives by FIEDMC” says Mian Kamran.

The shiny things

nother thing that Mian Kashif gets excited about are the parts of the project that have already been completed, and which he claims are already reaping the rewards.Among these two prized jewels are the Value Addition City, the M3 Industrial City and the earlier mentioned Allama Iqbal Industrial City. Value Addition City is the first dedicated and comprehensive industrial destination

designed as a custom-built one-stop shop for industries on a work, live and play model. “FIEDMC provides one of the region’s finest business environments as it offers world class facilities for industries and related sectors such as logistics, assembly and warehousing, vocational training and labor accommodation” Mian Kashif tells us. The M-3 industrial city is the largest industrial estate in Pakistan, and the government clams it has been Strategically located on Motorway M-4 South near Faisalabad, to provide the highest level of international infrastructure, and is slated to attract local and foreign investments that Mian Kashif describes as “massive.” The Allama Iqbal Industrial City mentioned in the beginning which Mian Kashif inaugurated next to the Prime Minister has also been created under the auspices of the FIEDMC and is part of this grand plan looking to attract “massive” investments. “Our first project of Value Addition City has been well acknowledged for its suitable land, affordable cost, state-of-art infrastructure, provision of utilities at the doorstep of each industry and a full set of dedicated business support services” he says. “The success of Value Addition City stimulated the need for our flagship project M-3 Industrial City.” The M3 Industrial City comprises an impressive 4356 acres of land having the status of SEZ accommodating Textile, Pharmaceuticals, Information Technology, Chemicals Automotive etc will also be equally successful. “In M-3 Industrial City special zones are

It was established in the spirit of a public-private partnership, its aim is to attract investment, build industry and support exports from Pakistan. Oh, and if all those uplifting terms were not enough, the industrial city mega project of the Special Economic Zone of FIEDMC falls under the umbrella of the China-Pakistan Economic Corridor (CPEC)

reserved for the foreign investors with liberal government fiscal incentives and policies.” But it is the Allama Iqbal Industrial City project that is truly the pride and joy of Mian Kashif, and one that followed from the successful launch of the M3 Industrial City. “It is a massive project comprising of more than 3300 acres of land accommodating Textile, Pharmaceuticals, Information Technology, Chemicals Automotive, service complex, etc will also be equally successful. In AIIC special zones are reserved for the foreign investors with liberal government fiscal incentives and policies.” “This land with various plot sizes would accommodate small, medium and large scale industries. 25% of the total project area has been dedicated for green area, services and facilities as per international development standards.” The saleable land in this project is 2300 acres, and of that 1100 has already been sold by the FIEDMC. To ensure that the project’s core goal of foreign direct investment and boosting of exports is ensured, the government has set up special zones that are reserved for the foreign investors with liberal government fiscal incentives and policies. In close quarters with the other two projects, it is located just opposite M-3 Industrial City SEZ and interconnected through flyover at Sahianwala Interchange, Motorway M-4, Faisalabad. “FIEDMC is surely transforming the dreams of our business community into reality. It is a unique and extraordinary endeavor based on the most modern lines of development and is dedicated towards providing excellent industrial estates to its highly valued customers.” The line Mian Kashif feeds us at the end of the interview is, once again, so much posturing. But it is something he seems excited about, and with all the tall claims, what the FIEDMC do with this opportunity is something to at least keep an eye out for. n

INDUSTRY

OPINION

Nadeemul Haque

The problem of revenue is bad tax policy, not cheating

expectation that the number of filers and people paying should be by some estimates as high as 20 million? Look at survey data, and that too confirms that the rich are not very large in number. As can be expected in a poor country like Pakistan the rich cannot be 20–25% of the population. Everyone talks of broadening the tax base as if there are millions of people who are avoiding taxes. This is not saying there is no tax avoidance. There is in all countries. And yes, we also see the avoiders since they are the most prominent, well known and the most powerful people in the country. The issue is why is the whole country being labelled as tax cheaters and that too by our own government. Yet the potential revenue may largely be missed because of the government exempts favorites from paying full taxes. The biggest exemption still remains agricultural income tax which is outside the income tax regime based on artificial Produce Index Units (PIUs). We also know of about Rs400–600 billion that are lost from exemptions to favourites given out in evenue generation is important but not top priority as in the famous statutory regulatory orders (SROs). Put the two last 3 decades. Much effort and money has been spent in together we are close to the potential tax that everyone cites. collecting taxes and spreading the story that “we are a So, let us stop the narrative of “a country of tax cheats.” nation of tax cheats!” Officials who continue to repeat this mantra should do some Such self-loathing is sad! serious research to substantiate their case or stop this self-servWhat came out of the Andrew School TARP study ing, convenient accusation. was a tax gap of roughly 30% of potential. Since then we have exaggeratRather than beat up on the whole country and continue ed this figure without ever confronting it with serious analysis or doing a to dream up draconian measures for more revenue, it would be study of our own. wiser for Federal Board of Revenue (FBR) and the finance minFor example, in a country where less than 2% of the population istry to invest in some thought and research to build a better has a bank account according to the State Bank and the number of credit policy. Sadly, both the FBR and finance ministry websites are cards are only 1.3 million (less than 1% of the population, why is there an absent ,any such work or discussion. There are those outside the government — Ikramul Haq and Huzaima Bukhari — who have done some good work. By now, they should have presented their work in talks at the FBR and finance ministry. But the arrogance of the colonial government prevents them from listening to Nadeemul Haque natives. They remain beholden to foreign consultants regardless of quality of their work. is an economist and the As Haq and Bukhari and others have noted, the problem is more that we have a mindless and grabformer Deputy Chairman of bing tax policy that does not conform to any principles of taxation. Here is how. the Planning Commission of 1. Tax policy is distortionary and has negative impact on the economy. Pakistan, and the former Vice a. S ROs are affecting industrial organization in Pakistan and preventing business entry and Chancellor of the Pakistan development of markets. Institute of Development b. W ithholding income taxes on goods and services are in reality transaction taxes which are Economics. He previously both regressive and distortionary. In most countries, withholding tax only applies to incomes. worked for decades at the Here withholding taxes are applied as income tax on many services such as utility bills, school International Monetary Fund.

There are far fewer tax evaders than everyone assumes, and pretending otherwise helps nobody

R 30

fees, mobile telephone payments. And in most cases, this is done with no intention to refund the money. c. T he withholding regime that FBR now relies on for revenue needs serious review and thought. There are now over 60 withholding taxes and about 70% of revenue comes from withholding taxes. Banks, utilities and many other enterprises have become revenue collection agencies, increasing their costs and weakening the collection chain. So, if business establishments are collecting taxes for the FBR, what then is the FBR doing? Withholding income tax as practiced in Pakistan operates like a regressive transaction tax affecting the poor the worst. The system is set up such that this income tax is withheld from the poor with no chance of getting a refund. Withdrawal of SROs and the withholding regime in an orderly manner but relatively soon will give the economy more breathing room 2. We must develop a vision of what a good tax policy is and figure out path to go there. For me it is a few simple taxes a. I ncome taxes that are low, progressive, all-inclusive, and clear. For the middle class it must be graduated to 15%, and for very high incomes (say over Rs300 million annually), it could go from 20â€“40% i. No exceptions (for agriculture, this will require a constitutional amendment). b. Corporate tax at about 20% c. A simple capital gains on short-term speculative investments of less than one year. The rate must be set as equivalent to the ordinary income tax. The capital gains tax on long term investments should be a flat 5% d. I nheritance tax should be 40% above Rs10 billion, and nothing below that limit. e. S ales tax should be collected in value-added tax (VAT) mode, starting at 8%. (This requires a constitutional amendment). Collection must be unified. The split of revenues is a political decision and should be maintained. f. P roperty tax should be set as a local but low flat rate and the government should pay it as well to allow different jurisdictions to benefit. For example, the federal government must pay Lahore for the staff college and the Civil Service Academy or else relocate. g. S implify tariffs to 3 lines that we had developed in early 2000s i. At least 5% on all goods

ii. 10% tariffs on intermediates iii. 15% tariffs on finished goods 3. All exemptions should be removed in a three-year period and all powers to place exemptions withdrawn. All tax changes should go through the budget. 4. We need a constitution amendment quickly to make fix the revenue system to achieve the following: a. T o bring agricultural income into the income tax system. b. T o ensure that services and goods are unified for sales tax collection at the federal level. This will allow the collection system to be unified for collection. Of course, the federal government will share the revenue with provinces in accordance with the law and constitution. c. A s an aside, this constitutional amendment could also be used to introduce and strengthen much needed local governments as well as putting in place more provinces for better governance and a balanced policy. 5. L astly can the FBR and finance ministry both develop some research capacity, so they can study these issues and develop a learning attitude rather than rely on donor consultants? 6. T he proposals roaming around on wealth tax and minimum asset tax are wrong and need to be reviewed carefully in the light of the following. a. I t taxes the saver twice and rewards the profligate. It will lower the savings rate. b. I t will fall disproportionately on the old as they are mainly wealth

holders. I t will fall disproportionately on the middle class who are forced to hold wealth on their name. Business owners have a several ownership levels that will allow them to get a break. d. V aluation of some assets is very disputable and difficult to assess. e. M ost people will be holding wealth in the form of real assets or real assets, which will be full of disputes and hardship. f. M ost wealth holders will have locked wealth in real estate which has appreciated in value. Will they have the liquidity to meet the tax obligation? In that case are we going to make them vulnerable to sharks and dispossess the saving middle class g. I t will give an added impetus to capital flight. h. I t will further lower our saving rate.

This then is a minimum agenda for tax policy reform. It will have the advantage of simplification as well predictability. Alongside this we must have tax administration reform. There the solution will be to get good human capital in the FBR with appropriate technology. Let an independent serivce well-versed in technology and modern autditing techniques run the place. Letting the elite district management group (DMG) of the civil service of Pakistan (CSP) officers run the FBR has been a disaster and should be immediately discontinued. Let a responsible and accountable tech savvy group emerge to collect revenue. n

COMMENT

5G is a long way away, and an even longer way away in Pakistan. But with the eventuality already on the horizon, here is what you need to know about this explosive new technology, and just when and what it could do By Syeda Masooma

he next generation of mobile internet is almost upon us, and unlike fifth generation warfare, 5G internet actually exists. Zong and Jazz have already conducted 5G speed tests and now the Pa-

kistan Telecommunication Authority (PTA) has also allowed non-commercial trials in line with policy directives from the government. But spoiler alert, this might not be as big of a deal as when the 3G and 4G wave hit the country, or at least. Before these new bandwidths, internet usage was different in the country, and mobile data was a remote concept.

It has been the rise of 3G and 4G that has allowed the proliferation of such things as google maps and ride hailing apps. As revolutionary as 3G and 4G might have been, most people in possession of smartphones have gotten used to this new spectrum of communication. Their conception of 5G technology is that it will be faster for video streaming, with

better upload and download speeds. However, there are other implications to this new technology, including technical differences and possible requirements for usage that will have a resulting impact not only on telecommunication but also on other aspects of our society. To this end, Profit wanted to do a what’s what of 5G internet, a sort of basic crash course into the technology and all that comes with it. To debunk a few myths surrounding 5G, estimate its expected launch date, its possible health impacts, and the potentially tricky socio-political impacts of 5G technology in Pakistan, we sat down with technical experts dealing with mobile phone technology from telecom companies and government departments, took account of reports and permission announcements by PTA, and consulted technology aficionados to learn more about Fifth Generation of wireless technology. A report published by NIS Cooperation Group in the European Union, titled “EU coordinated risk assessment of the cybersecurity of 5G networks” was also consulted along with the expectations overview from general citizens.

The lay of the land

n August 22, 2019, China Mobile Pakistan (CMPak) Zong conducted Pakistan’s first 5G trials culminating on first official 5G video call testing on January 6, 2020 reaching the exhilarating speed of over 1.5 Gigabytes per second (Gbps). More on what 1.5 GB means for a video call later. Telecom operator Jazz, Pakistan Mobile Communications Limited (PMCL), followed suit on January 4, 2020 with its first 5G test attaining speed of 1.43 Gbps. Amidst the rising competitive heat between the two operators, the Ministry of Information Technology and Communication announced, on January 7, formation of a committee for the auction of 5G spectrum licenses in the country. This committee would comprise of members from all four telecom operators in Pakistan – Jazz, Zong, Telenor and Ufone – and will have members of IT ministry and an officer of the Frequency Allocation Board. Three days later, on January 10 Pakistan Telecommunication Authority (PTA) issued, “Framework for Test and Development of Future Technologies (Particularly Fifth Generation 5G) Wireless Networks in Pakistan” allowing non-commercial trials of 5G under limited environment for six months. But for people licking their lips and getting ready to take 5G out for a spin as soon as possible, we have some bad news. If you are expecting 5G technology to be up and running in Pakistan in a matter of weeks or even months, you are mistaken. Despite the grand promises from this new technology, even the

United States only has 5G coverage in 25 cities. On top of it, the kind of 5G available for now is some kind of speed boost over 4G instead of the full fledge 5G services. In China, only 50 cities have 5G coverage. There is a long way to go for the world, and an even longer way for Pakistan, and as we will see, not without reason. There is a mountain of legislation to be done before we gain access to the next generation spectrum, not to mention the immense expenditure required not only for establishing but also running the required equipment for 5G. Next comes the even worse news. If you own a smartphone that costs less than Rs 100,000, there is even lesser reason for you to be excited about 5G coming to Pakistan, since for now the only devices available in the country that can support this technology are very few and very expensive, not that they can provide any 5G service without the technology being put in place first. But here's the rub, even though it is far away and inaccessible, 5G will prove to be a lot more than just means for mobile communications and thereby has far reaching impacts on civilization as we know it. The EU and the developed countries have already started taking into account the far reaching impacts of 5G and Pakistan needs to inculcate their findings and conduct its own research applicable to our citizens if the advantages of the newest spectrum are to be obtained without risking the disruption of the socio-political dynamics of the country. But what is this 5G technology, and why is it going to cause such a massive change? What can you expect, by when should you expect it, and more importantly, what hopes can you have from this new technology?

The history, the present & the future of 5G

G stands for Fifth Generation of wireless technology – or more easily mobile communication technology. 5G is developed to accommodate the needs of gigantic growth in data and ever rising need of connectivity in modern societies. The Internet of Things (IoT) with billions of connected devices and many of today and tomorrow’s inventions also require faster and more reliable internet. The process to reach here, however, has been tedious. It started from Analog Cellular services in 1979 – the first generation of mobile phones featuring large and heavy handsets with extendable or fixed antennas providing merely voice calling and text messaging services. Second generation brought GSM and CDMA technology in 1991 – which in Paki-

stan you might remember from the time SIM cards became all the rage. This technology also brought us GPRS and Edge in late nineties which brought internet to our phones along with the standard waiting periods ranging from several seconds to several minutes that come with a speed maximizing on 380 kilobytes per second (Kpbs). Third Generation, 3G, came in 1998 globally, and was the ‘fastest’ internet, which at the time of its arrival jumped the mobile internet speed from few hundred kpbs to several Megabytes per second (mbps), and that most of us might remember as the true internet revolution in Pakistan. It brought mobile broadband and led for the first time to video streaming on our mobile phones and enabled a generation of online gamers to explore a whole new world of internet gaming. 4G, fourth generation or LTE, hit the world in 2008, and took almost another decade to touch Pakistan. It is still a relatively latest concept in Pakistan with one carrier in Pakistan Ufone only starting services a couple of months ago. Here we have the speed of several hundred mbps, rolling out at a time comfortably coinciding with the arrival of Netflix in the country. Now we are talking about the fifth generation, since 2019, that holds the potential of several Gigabytes per second (gbps) speed for high definition (HD) and high resolution video calling, quicker than ever uploading and downloading, and – if said in technical terms – the quickest rate of feedback from a request generated through internet. This last idea is called “latency” and lower latency means lower time needed for devices to respond to each other over a wireless network. For better understanding, a typical 3G device has a response time of 100 milliseconds or one-tenth of a second, 4G brings a latency of 30 milliseconds, while 5G is expected to reach as low as 1 millisecond. For a user this means that it will take more time to say Facebook than it will take a 5G enabled mobile to open the Facebook application on their screens. To describe it for the more tech savvy (you should skip this and the next two paras if you aren’t a techie), the move towards 5G comes through Software Defined Networks (SDN) and Network Functions Virtualisation (NFV) technologies. The European Union report highlights that this will represent a major shift from traditional network architecture as functions will no longer be built on specialised hardware and software. Instead, functionality and differentiation will take place in the software. Secondly, ‘Network slicing’ in 5G will make it possible to support to a high degree the separation of different service layers on the same physical network, thus increasing the possibilities to offer differentiated services over the

TELECOMMUNICATION

whole network. Network slicing features will require the roll-out of a new core network, i.e. replacing the 4G core network with a 5G core network, following the so called "Stand-Alone" network architecture. Thirdly, ‘Enhanced functionality’ at the edge of the network and a less centralized architecture than in previous generations of mobile network: this is reflected both in enhanced connectivity options within the radio access network, and in support for ‘Mobile Edge Computing’, which allows the network to steer traffic to computing resources and third-party services close to the end-user, thus ensuring low response times. What will you need to be able to use 5G? For starters, the government, telecom operators, and users are all in desperate need for a tech upgrade for the changing times, and one that will mean coughing up a significant amount. As technology journalist and contributing editor of ZDNet website Scott Fulton III put it, “It is a capital improvement project the size of the entire planet, replacing one wireless architecture created this century with another one that aims to lower energy consumption and maintenance costs. It’s also a huge gamble on the future of transmission technology, doubling down on consumers’ willingness to upgrade.” There are several stakeholders involved in 5G networks infrastructure, including mobile network operators (MNO), suppliers of MNOs (manufacturers of telecom equipment and third party suppliers for cloud infrastructure, security contractors, transmission equipment manufacturers and so on), content providers, and end users. We will discuss challenges from 5G later in this article, but for now it is notable that each

As revolutionary as 3G and 4G might have been, most people in possession of smartphones have gotten used to this new spectrum of communication. Their conception of 5G technology is that it will be faster for video streaming, with better upload and download speeds of these stakeholders not only present a contributing party to cybersecurity of 5G but also a potential entry point for factors of attacks. To better understand the needs of 5G network, we first have to understand that our modern telecommunication is being done on electromagnetic radiation involving radio waves and microwaves. When it comes to the internet, the frequency, wavelength, and ability to transfer data are the factors that count. With 5G we get higher frequency, shorter wavelength, and higher bandwidth meaning lots of data transfer. However, all this comes with shorter range for 5G (4G has long range) which means a lot more feeders are required for covering any particular area for 5G than they are needed for 4G or 3G. Not only this, but true application of 5G services can only happen with the perception that 5G has nearly 99.99999 percent availability, which only culminates into a very large number of required feeders. In more technical terms, 1000x bandwidth and 10-100x number of connected devices are needed. Add to this the battery life requirement of up to ten years for low power devices, and we have substantial investment requirements on our hands. Of course there is a flipside to this, where the EU report estimates worldwide 5G revenues to reach

approximately GBP 225 billion (more than PKR 45 trillion – 45 with twelve zeros), but for Pakistan we might need to look at this equation with more skepticism. The key factor here being the number of consumers willing to invest in better phones and pay higher bills to gain fractionally better video quality while watching whatever follows Game of Thrones. Then there is the point that different 5G use cases – eMBB [Enhanced Mobile Broadband], URLLC [Ultra Reliable Low Latency Communications], mMTC [massive Machine Type Communications] and FWA [Fixed Wireless Access] – have different requirements when it comes to bandwidth, latency, mobility, security, reliability and pricing. Scott writes, “Early 5G deployments are concentrating on traditional more consumer-oriented areas such as eMBB and FWA, which are based on the finalised 3GPP Rel-15 standard, and can utilise a lot of existing 4G LTE infrastructure. But phase 2 of 5G will be based on a standard which is still developing (Rel-16 standard), and will require new spectrum and infrastructure to support advanced business use cases like URLLC and mMTC.” “Enabling all this requires a cloud-native, service-oriented architecture that supports network slicing, where multiple virtual networks coexist on the same physical infrastructure, leveraging technologies like software-defined networking (SDN) and network function virtualisation (NFV)”. If this is all too technical, then perhaps it would suffice to say that you will need Samsung Galaxy S10 5G (costing approx Rs 190,000), Huawei Mate X (Rs 260,000), Oppo Reno 5G (Rs 100,0000), LG V50 ThinQ (Rs 140,000), or the cheapest one available yet Xiaomi Mi Mix3 (Rs 70,000) if you want to own a handset that can entertain 5G technology. However, since Apple is yet to launch a 5G enabled iPhone, it is alright if you haven’t gotten there yourself. Not to mention that Apple might be on its twelfth model with 5G by the time 5G comes to Pakistan for real and there might be several cheaper alternatives available at the time too. To wrap up the subject on requirements for 5G, it is pertinent to mention that even when 5G starts to roll out in Pakistan, the speeds available would be much less than those that were achieved in Zong and Jazz tests. For now PTA has allowed only limited scale testing

which is being done under strict and ideal conditions. Therefore, it is still a long way to go before we have the necessary equipment, software and hardware, and user related technical capabilities for 5G in Pakistan.

Use cases for 5G

he first use case for 5G all over the world is IoT – or in layman terms ‘machine to machine communication’. This will be on a scale never experienced before and without requiring human intervention at minimum if not at all. This holds potential for revolutionizing modern industrial processes and applications in a way we have never seen before, in fields of communications, agriculture, manufacturing, and so on. Second use case comes with control of devices – also relatively more applicable for the developed world than for Pakistan – such as control of drones, industrial robotics, self-driven cars, and safety systems. With such technology accessible to masses even remote medical procedures and treatments will all become possible. Third, enhanced mobile broadband will mean significantly faster speeds and greater capacity to enable a truly connected world. This is what most Pakistanis generally understand from 5G, which in practical terms means better internet connection on the move, no need for cables and modems to be installed by your internet service provider, and in terms of media coverage better outdoor broadcast applications without the need of broadcast vans. This means that you will not see large vehicles with satellite dish antennas and brightly painted channel names outside the Supreme Court when a nationally renowned case is being heard.

Potential impacts of 5G – health, politics, censorship and all that

any people interviewed by Profit expressed apprehensions over potential health hazards brought by 5G waves saturating Pakistan’s air. These fears arise from the fact that wireless telecommunication involves radio waves and microwaves, which traditionally have a negative reputation – who hasn’t seen skull and bones and ‘danger’ labels on laboratory equipment in schools and X-ray rooms in hospitals? Some of us have grown up with instructions on not to stand directly in front of the microwave oven when it’s heating our food. The truth, however, is rather pleasant, despite the fact that the International Agency for Research on Cancer (IARC) terms radio frequency as ‘possibly carcinogenic’. For starters, IARC’s classification of pos-

However, there are other implications to this new technology, including technical differences and possible requirements for usage that will have a resulting impact not only on telecommunication but also on other aspects of our society sible carcinogens also has coffee in it along with compounds used to dye clothes, and silicon dioxide which is one of the major components of regular sand. Secondly, the World Health Organization (WHO) has said that ‘no health effects have been proven yet’ of mobile phone usage and related waves. To get into further detail, electromagnetic waves only become dangerous when they reach the frequency of 1,000,000 Gigahertz (GHz) or more. That’s when they become ionized and hazardous to human cells with potential of causing cancer or mutations – as is the case of atomic explosions. In comparison, the frequency of waves generated by a typical WiFi in a Pakistani household is from 2.4 to 5 GHz, for 4G it is less than 6GHz, and for 5G it is usually 80 GHz but can go up to 300 GHz. However, even at that point it doesn’t become ionized and therefore poses no such risk to health. The bigger dangers of 5G come from technological warfare as well as governmental regulations, or lack thereof. According to the EU report, “From a security perspective … such increased reliance on software, and the frequent updates they require, will significantly increase the exposure to the role of third-party suppliers and the importance of robust patch management procedures … it also means that the current 4G core network will need to be replaced - and that means huge replacement costs and new equipment across the whole network.” The report adds, “Some sensitive functions currently performed in the physically and logically separated core are likely to be moved closer to the edge of the network, requiring relevant security controls to be moved too, in order to encompass critical parts of the whole network, including the radio access part. If not managed properly, these new features are expected to increase the overall attack surface and the number of potential entry points for attackers, as well as increase chances of malicious impersonation of network parts and functions.” Even though there are lots of security components already included into 5G considering the experience and challenges noted from other forms of internet in the yester years, there are still newer challenges. The report notes, “These new security features will however not all be activated by default in the network equipment, and therefore their implementation will

greatly depend upon how the operators deploy and manage their networks.” There is also a strong link between the supplier and a government of a given third country especially with regards to the third country’s legislation, and especially where there are no legislative or democratic checks and balances in place, said the EU report, “…the ability for the third country to exercise any form of pressure, including in relation to the place of manufacturing of the equipment.” Coming to less technical and less financial consequences, the far greater access and connectivity brought by 5G will also come with its fair share of threats and challenges for the government as well as citizens of Pakistan. It might be difficult for this publication to define lawful and unlawful surveillance and censorship, but there will be undeniable impacts on both these fronts. 5G enabled surveillance equipment will be far more efficient which will be instrumental in fight against terrorism but at the same time, in absence of proper controls it holds the potential to become devastating through cyber attacks and data leakage. On the flipside, the same surveillance can be misused or used out rightly to censor media or social media content. Similarly, from the users’ end, unlimited reach to the world of internet has rarely brought about sharp-minded entrepreneurs from Pakistan and has more frequently resulted in disputes and online and physical threats and attacks. Cyber security bill, as it is today, remains unfinished in the halls of the parliament and we continue to debate whether to become party to international conventions of social media and information sharing, let alone draft a comprehensive bill outlining limits of operations by the users as well as authorities. In the myriad of issues related to telecommunications already prevalent in the country, the race to 5G is a lot like putting the cart before the horse than it is to prepare the infrastructure, investment environment, and user awareness about fifth generation of wireless mobile services. There is a lot to gain from 5G, but in the absence of proper legislation, economic conditions conducive to implement such technology, and clear definition of roles to be played by all relevant stakeholders, we remain farther behind in technology than we might realize. n

TELECOMMUNICATION

The government is currently receiving applications from farmers across Punjab for providing equipment and machinery at subsidized rates. But with complete disinterest from Lahore and competition from the real estate industry high, can this scheme deliver? By Hassan Naqvi

here are many images that come to mind when one thinks of Punjab. It is the country’s largest province by population, and the most influential politically. During the imperial regime, Punjab provided nearly a fourth of the British Indian Army, with many of its natives being typecast as ‘warrior castes’, a mythical ‘theory’ of Indian races perpetuated by colonial modernity. Today, the province continues to be a high yielding area for military recruitment. But despite the many faces and caricatures of Punjab, its association with the landowning, feudal classes, the political high brass and the elite military cabal, the image most entrenched with this land is that of the farmer. More specifically, it is the Punjabi farmer as seen in fertilizer advertisements. It is the happy-go-lucky, mustachioed,

farmer walking gaily in his fields, tenderly caressing his crops wearing a dhoti with a bright kurta, inclined to break out in dance at the slightest threat of a dhol being beaten. The image is manufactured and nonreflective of the more bleak reality of farmers. But it is still the representation of the province you see at cultural festivals, in Pakistan Studies textbooks (admittedly a horrible source for literally anything), in images on the internet and yes, in advertising. Despite all of its history and symbolism, at the core, Punjab has always been an agrarian province with its talk of five rivers, fertile land and endless green fields. The image still resonates strongly, but with every passing day, it reflects reality less and less. The agricultural area in Punjab is on the shrink, and it is continuing to disappear as housing societies and other real estate projects roll all over the once lush fields at full steam. At the center of these changing times and priorities is the ancient city of Lahore, the province’s capital, and geographical and cultural heart. There was a time when the road back to Lahore

was nestled in the middle of endless green fields that stretched all the way from Kasur and Sheikhupura to the outskirts of Lahore and all the way up to Raiwind, and then some on the other end of the City. This was as recent as a decade ago, such images are now inconceivable, as Lahore has lost its agricultural land to different non-farming ventures such as housing societies, industries, marriage halls, university campuses, cold storages and all manners of ventures imaginable. So much so that even areas that still have ‘farm houses’ have been renovated by real estate developers and are being sold by these property dealers - farm houses with no ostensible farming. The few farms that do remain and have standing crops are up for sale and are being pawed at by different commercial buyers, if they have not already not been sold for the purposes, Profit has learnt. The few that are not actively up for sale continue to get unwarranted offers. Lahore is expanding too far and too fast, losing its semblance as an urban center all the while eating away at the rural and per-urban sur-

roundings that have been so central to Punjab’s agrarian economy and history. The government seems to have caught on in so much that they recognise there is a problem. The Prime Minister has launched his plan to counter the rot: ban real estate development and subsidise farming. But is it too little too late? Profit takes a look at the government’s plan for action, and just how bad things have really gotten in Lahore, and the Punjab’s, transformation from agrarian, to God knows what.

What’s the fuss?

he officials at the Agriculture Department were not particularly willing to talk, and none of them were willing to speak to Profit without the benefit of anonymity. Whether this points to complacency, fear or a the culture in the department, the officials that did speak to us anonymously are not particularly hopeful with the response that the Prime Minister’s plans have seen. On March 1, 2019, Prime Minister Imran Khan banned the development of new housing schemes on agricultural land in an effort to stop cities encroaching on agricultural land of the country. The response comes as a result of a problem that was fast becoming endemic. According to a 2016 study carried out by Pakistani academics, in Lahore, nearly 300,000 acres of agricultural land were converted to urban built-up land in the past 42 years, and a substantial part of that land was transformed to support more than 250 housing schemes. With the advent of such giants as Bahria Town, this rate of growth had seen an even sharper rise in the last few years. But as stated earlier, banning the development of new housing schemes does not seem to be working, and according to the department, it is a hopeless battle. “Agriculture is not the main occupation for those who are having agricultural land across Lahore,” said an official of the Agriculture Department. The official builds their assessment on the lackluster response of farmers to Prime Minister Imran Khan’s Agriculture Emergency, under which the agriculture department of Punjab is presently receiving applications from farmers across 36 districts of Punjab for providing equipment and machinery on subsidized rates that will be used for the production of sugarcane.

What is the government offering?

he government is offering equipment to lure these farmers. The machinery that is part of the scheme includes Chisel Plough, Imported Sugarcane Planter, Early Hilup Sugarcane Ridger and Granular Pesticide Applicator. “The farmers/applicants could

The agricultural area in the Punjab, particularly Lahore, is on the shrink, and it is continuing to disappear as housing societies and other real estate projects roll all over the once lush fields at full steam apply for one or more pieces of equipment/machinery,” said the agriculture department official. The farmers from 36 districts of Punjab including Sargodha, Bhakkar, Faisalabad, Tob Tek Singh, Jhang, Chiniot, Mandi Bahauddin, Kasur, Muzaffargarh, Layyah, Rajanpur, Bahawalpur, Rahim Yar Khan and others can submit applications to Assistant Director Agriculture in their respective districts till January 15. The applications for subsidized equipment and machinery would be scrutinized by 23rd January after which the lucky draw will be conducted on 4th February and the last date to book the equipment will be 20th February. “The selected farmers will have to book the equipment with the pre-qualified firm within 15 days of lucky draw,” an agriculture department official said. When asked which firms are pre-qualified for supplying equipment to the farmers, the official said, “The names of the firms are sent to civil secretariat for approval and he can’t disclose them at the moment.” Those farmers who have at least 12.5 acres of irrigated land (in which water is supplied to the crops by means of pipes, sprinkles, ditches or streams) or 25 acres of Barani land (rain fed agricultural land) in possession (as landlord, labour or contractor) and have at least 50 horsepower tractors are eligible to apply. As per details, if the agricultural land is jointly owned by a couple of farmers only one of the landlords could apply for this scheme.

What’s the problem with the solution?

he thing is, however, machinery is just not going to cut it anymore. And especially not in Lahore, where the ban is the only thing keeping back the remaining farmers from taking a big payday to let the land developers have at their farms. Another well placed department official, who also did not wish to be named, told Profit that Lahore is receiving the lowest number of applications as compared to other areas of Punjab as landholding is less in Lahore, “Large-area

of agricultural land in Lahore is acquired by LDA, DHA, Bahria Town and other housing societies, unfortunately,” he said, adding that there are not many farmers in Lahore with land measuring 12.5 acres or more. According to the survey figures shared with Profit, more than 85 percent of farmers in Lahore have an agricultural landholding of fewer than 5.5 acres. The few larger or middle sized farm holders are either selling or have sold large parts of their land. Bahawal Khan, a farmer from Lahore, who sold his 13 acres of agricultural land to one of the housing societies said, “I sold my agricultural land to one of the housing societies because the land became commercial and they offered me a hefty amount which I cannot earn from farming for decades.” This was corroborated by people from these housing developers. While commenting on it, one of the general managers at Bahria Town, who did not wish to be named said, “People are selling their agricultural land to us as we offer them more price than what they could not earn from doing agriculture for decades.”

Same old same old elsewhere

hile there seems to be no particular hope for Lahore’s farming future, the rest of the province, while seeing the initial signs of real estate development, is still looking forward to the boons to be received from the machinery scheme. However, as usual, it seems that the benefits will be for the large farm holders alone, with the small farm owners barely getting the crumbs Syed Aqeel Haider, a sugarcane farmer from Chiniot, told Profit that he thought it was a great initiative of the Punjab government that would add value to conventional farming. “Chisel Plough is an important tool to prepare land with limited soil disruption. The main benefit of using Chisel Plough is that it helps in loosening, and aerates the soils while leaving the crop residue at the top of the soil. This initiative would motivate and encourage farmers to use machinery for production of sugarcane which they usually do not use for production,” he added. Agreeing with him, Abbas Khan Leghari, a small farmer from Rahim Yar Khan who owns 2.7 acres of land told Profit that this initiative will only help the large farmland owners and not small farmers like us, “The govt should introduce such scheme for small farmers as well so that they could use modern equipment and technology for the production of sugarcane as well.” Mr. Leghari requested the govt to revise the eligibility criteria to apply for getting the equipment at subsidized rates. n

AGRICULTURE