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IN BRIEF Pakistan only managed to place

79th

out of 82 countries for social mobility, according to the World Economic Forum’s recently released report ‘Global Social Mobility Index 2020 rankings’. Only three countries were below Pakistan: Cameroon, Senegal and Côte d’Ivoire.

January’s unusually high inflation rate of

14.56% crossed even analysts’ predictions (at around 1313.6%). This is the highest inflation recorded since June 2011, even when taking into account the new base year which the SBP began to use in August 2019.

In scenes recalling the 2007 operation, Maulana Abdul Aziz once again barricaded himself inside the state-owned mosque Lal Masjid in Islamabad on Saturday. Since 2007, the deposed cleric has repeatedly tried to occupy the mosque, testing subsequent administrations’ patience.

“The impression that the government is fast-tracking Karachi projects under MQM’s pressure is completely wrong... No doubt that the MQM is PTI’s ally, but we are much more concerned about the socio-economic development of the people of Karachi, where hundreds of thousands of PTI voters live.” Asad Umar, Planning, Development and Special Initiative Minister.

The Pakistani government tested

samples of patients suspected of carrying 2019 Novel Coronavirus, who had recently returned from China: all were negative. So far, there have been no confirmed cases of the virus in Pakistan. Globally, more than 31,000 people have been infected.

The Chief Minister of Sindh Murad Ali Shah has released

MCB Bank announced their yearly financial results for the period ending December 31, 2019, showing a growth in profits to Rs40.10 billion, or an improvement of 25% over the course of one year. The full year dividend is now Rs17 per share, the highest payout ratio among commercials banks.

Rs15.14 billion

from the Rs40.6 billion package for Karachi, for the total 449 schemes he claims are on-going in the city. This, according to him, is to make the city more “beautiful, impressive and livable”.

There is some confusion about what to do with the Federal Board of Revenue Chief Shabbar Zaidi, who has been on sick leave since January 31. While the FBR has maintained the office is not vacant, Finance Minister Hafeez Shaikh has hinted at a replacement if Zaidi doesn’t return soon.

Pakistani exports continued to decline, dropping 3.17% in January, and 3.8% in December 2019. The rupee’s depreciation has still not helped exports; meanwhile, Advisor to the Prime Minister on Commerce, Trade and Investment Abdul Razzak Dawood blamed a “recession at the international level” for the decline.

The ride-hailing company Careem laid off 150 people to cut losses, just weeks after its

$3.1 billion acquisition by Uber was closed. Careem’s cofounder and CEO Mudassir Sheikha said the move was necessary, and that cost-cutting will involve the loss of around 5% of existing roles.

By Meiryum Ali

t all started, innocently enough, with a beaver. In the middle of last year, British citizen Ben Goldsmith, sitting in London, was struck by a simple question: are there any beavers in Pakistan? Goldsmith is not your average gora. If his last name sounds familiar to Pakistani ears, you can thank his older sister: Jemima Goldsmith was the former wife of current Prime Minister Imran Khan. And his other older sibling, Zach Goldsmith, ran unsuccessfully as the Conservative party member for Mayor of London in 2016 (losing to British-Pakistani Sadiq Khan, member of the Labour Party). That is the Pakistan connection sorted. But what is perhaps a little less known to Pakistani audiences is that the Goldsmiths have always been a family extremely interested in the environment. The patriarch, James Goldsmith, was a critic of genetically modified foods, and nuclear power. Zach Goldsmith is the UK’s current Minister of State for Environment and International Development. Ben Goldsmith has been investing in environmental businesses pretty much since he left school – and in 2015, he started Menhaden Capital, a green investment trust (it is named after the Menhaden fish, which filters out impurities from ocean water). But back to beavers. The animal, mostly found in North America, was nearly hunted to extinction in Europe (though is slowly being reintroduced), and is extraordinarily important when it comes to water conservation. Its presence in rivers is often an indication of a healthy river ecosystem. To answer his question, Goldsmith turned to his Pakistani friend Farrukh Khan, also based in London. Khan is the founding partner and former CEO of BMA Capital Management. He is also the senior director of business development at Acumen, a non-profit impact investment fund that focuses on developing countries. Most recently, he was named the next CEO of the Pakistan Stock Exchange. Khan did not know the first thing about beavers. But the Karachi-native called up an old acquaintance, Irshad Adamjee (Khan, a Karachi

“Expats do come with a perfectionist mindset, they often have to adjust to a different reality [of working in Pakistan]” Malik Amin Aslam, federal minister and advisor to the Prime Minister on climate change Grammar School alumnus, and Adamjee, a Karachi American School alumnus, are part of the same extended social set in Karachi, and have known of each other for decades). Apart from being the managing director of Pacific Multi Products, a company within the Adamjee Group, Irshad Adamjee sits on the board of WWF-Pakistan. In an interview with Profit at his Karachi office, the genial Adamjee was frank about his initial impression of a beaver: “Yeh hota kya hai?” After a bit of googling, and research, he found out (spoiler alert), beavers do not have a natural habitat in Pakistan. This entire ridiculous chain of events is important, because it sparked another conversation about the environment and Pakistan between the three men. That one anecdote about the beaver got the ball rolling on how to enact effective action against the threat of climate change in Pakistan. The story involves not just Adamjee and Khan’s extensive Pakistani network, but also Goldsmith’s McKinsey contacts, and an enthusiastic Pakistani Ministry of Climate Change. The end result, around five months later, is the Pakistan Environment Trust (PET), a barely 8-week old company designed to help raise private investment (and potentially have access to government money) to help back green initiatives in Pakistan.

Enter McKinsey

he story takes a slight professional tilt at this point. While the three men were brainstorming potential ideas about what to do for Pakistan, in July Goldsmith reached out to Saif Hameed, Associate Partner at the consulting firm McKinsey & Company’s London office (both are members of the same high school fraternity). While Hameed had been at McKinsey since 2012, he had a much more interesting stint right before. From 2009 to 2012, he was working as a special advisor to the Government of Punjab on public policy, focusing on among other things, the environment and

waste management. Goldsmith called Hameed to say that he had been at a dinner talking to Adriana Moreira, a senior environmental specialist at the World Bank. Moreira informed him that Pakistan used only a fraction of the climate funds allocated by the Global Environment Facility, a foundation formed in 1992. Her hypothesis was that it was because Pakistan lacked a national fiduciary organization (and one not linked to the government) that could do so. Goldsmith asked Hameed if he would be interested in a project to see what a national fund could look like in Pakistan. The call could not have come at a better time for Hameed. Just a few weeks prior in June 2019, he had been promoted from Engagement Manager to Associate Partner, which gave him some free time. Plus, he was looking for slightly entrepreneurial things to do, to develop a bit of a presence at the firm. Just a few minutes after that call, Hameed called the person who leads public sector work at McKinsey, and soon after managed to secure support of McKinsey’s UK Partnership for a pro bono project on the topic. Hameed decided one analyst would be enough to help him. Muqeet Majed, a 26-year old Business Analyst, who had only worked for two years at the London office, had just booked flight tickets for a holiday in Colombia. On the very Friday he was leaving, he ran into Hameed in the corridor. Hameed told him he was thinking of working on a pro bono project on Pakistan related to climate change. Was Majed interested? Majed not only canceled his holiday, but ended up in Pakistan for July – “a bit adventurous of me”, he said. The British-Pakistani had always spent summers in Azad Kashmir, visiting family. The Cambridge grad had also always had a sense of gratitude about his life. “Seeing the kind of challenges that people in Pakistan face, left me with an underlying sense of guilt,” he said. The project was the perfect opportunity for Majed to give back.

CLIMATE CHANGE

The initial pro bono project, led by Hameed and involving Majed, with guidance from Hameed’s mentor Hauke Engel, was focussed on how developing countries like Pakistan, Bangladesh and Nigeria could develop national funds to tackle climate change. That was wrapped up in August. But because of everyone’s strong Pakistan connection, that project formed the basis of the next step. Majed prepared some slides that were a synthesis of the McKinsey project, which was used during the initial round of stakeholder consultation in Pakistan. According to the team, “the document highlights the original problem statement/facts that kickstarter our work and a vision for how we aim to drive climate action for Pakistan.” Hameed, Adamjee, Khan and Goldsmith reached out in their wider networks around late September and early October, and came up with a group of people, well known in Pakistani business circles: Asif Rangoonwala,

“It would be great if locals took responsibility, then no one from overseas would get involved” Farrukh Khan, next CEO of Pakistan Stock Exchange

of South Street Asset Management, Zia Chisti of Affiniti, Ali Raza Siddiqui of JS Bank and Masroor Siddiqui of Naya Management. They, along with others, formed the advisory board for the newly dubbed Pakistan Environment Trust. The PET raised around $250,000 to $300,000 from a pool of around 10 or so investors, to cover operating costs. The team is now led by Majed, who quit his job at McKinsey in November, and is now working as the Executive Director of the PET in Islamabad. Hameed (who is still at McKinsey) and Khan serve as Board of Directors. Adamjee, Khan, Goldsmith, Engel and Moreira all serve on the advisory board.

The PET premise

o why was the PET actually created, and why now? Pakistan is one of the top 10 countries most vulnerable to climate risk. Consider the following facts: according to a report prepared by the

Asian Development Bank in 2017, in the last 50 years, the annual mean temperature in Pakistan increased by roughly 0.5°C – but by the end of this century, the annual mean temperature in Pakistan is expected to rise by 3°C to 5°C. Also, the number of heat wave days per year has increased nearly fivefold in the last 30 years, and the sea level along the Karachi coast has risen approximately 10 centimeters in the last century. As an example, the PET cited some further alarming facts: air pollution has an estimated economic burden of $50 billion, contaminated water has led to the deaths of more than 50,000 children a year due to diarrhea, the wheat yield in Pakistan is expected to decline by 6-9% with a 1°C rise in temperature, and Pakistan has lost 33% of forest cover in just the space of two decades. On a whole, climate change is expected to cost Pakistan between $6 billion to $14 billion per year over the next 40 years. Despite these obvious risks, most experts say that Pakistan is also severely under prepared to manage this risk. While a National Climate Change Policy was established in 2012, and is Pakistan’s guiding document on climate change, only about 6.1-8.5% of Pakistan’s federal budget was spent on climate change related expenditures in 2011-2015. The total requirement should be between 8-15%. Additionally, the NCCP has been criticized for its lack of implementation, though some observers argue that is at least partly due to confusion rising over the 18th Amendment to the Constitution, which devolved many powers

“I definitely bring the kind of toolkit that I used at McKinsey. That kind of analytical mindset that can break down problems into its logical conclusion… I understand that some of it can be seen as just superficial. But look, moving from London to Islamabad is not easy,” he said. “It’s a pretty big shift and work like this is incredibly challenging. There is a risk of being perceived as an outsider, that you’re not in it for the long haul” Muqeet Majed, executive director of Pakistan Environment Trust down to the provincial governments, which in turn made it confusing as to which powers remain with the federal government, and which ones are now the responsibility of the provincial governments. In addition, there has also been criticism that the NCCP focuses on short term economic growth, as opposed to a long term framework. Some good news: some climate finance does exist for Pakistan. The Green Climate Fund (GCF), is an organization that had raised $10.3 billion in pledges from developed countries to combat climate change when it was founded by UN in 2010, and is the world’s largest multilateral climate fund. Recently, it has raised another $9.8 billion as part of its replenishment. Now, the bad news: Pakistan has only utilized $0.1 billion of available funds, mostly due to a lack of GCF accreditation, and poor monitoring of finance flows. Only two Pakistan entities are GCF-accredited, but neither has had a project approved yet. There is also a severe lack of awareness, and with that a lack of willingness to actually do anything about climate change. As Khan put it, developing countries often have so many basic needs that are unmet, such as a lack of education, or access to healthcare. “You can’t sell a solar lantern to a smallholder farmer, when he’s worried about the next meal – it doesn’t make economic sense,” he said. “But you also can’t keep firefighting, you have to invest in long term initiatives.” Similarly, Adamjee said rich people in Pakistan care more about education and feeding the poor. But ask them to invest in the environment, “and they take it as a joke.” And Majed pointed out all the difficulties associated with climate finance. “You have all these numbers being thrown around, but it’s actually very difficult for a developing country to navigate this space.” The PET is an attempt to answer all the above problems: to have a solid advisory board

and a team of seemingly competent people that will attract both local and foreign confidence, and that can act as an intermediary between international investors, organizations, and the Pakistani government. It basically aims to be the impact investment advisory organization in this space. According to PET documents: “Beneficiaries of global environment funding typically have a structured independent mechanism to distribute funding locally. Our analysis suggests that an independent National Environment Fund could help develop these factors.” The team identified that there is a need for a dedicated national entity that develops and submits projects that align with standards of large international financiers like GCF, and with the goals set out by the government of Pakistan. The PET has three main goals: Identify, develop and where necessary incubate fundable projects based on a country level blue-print of priorities. Attract, structure and deploy funding from a range of sources including equity, grants and loans. Support the scale-up of initiatives by leveraging global expertise and managing stakeholder relationships. The PET will have a blended financing model to fund projects, and overcome the climate finance gap. A potential project could be funded initially by a philanthropic grant, with subsequent funding coming from a combination of both debt and equity from development finance and the private sector.

Enter the government

n the attempt to get the PET some serious recognition, the team reached out to the Ministry of Climate Change, headed by Malik Amin. Within Pakistan, Amin is most famous

for his somewhat gimmicky ‘Billion Tree Tsunami’ afforestation program. But Amin has also served as a private consultant to the World Bank and the UN on the environment, and is genuinely quite motivated. Hameed had previously called Amin to brief him on his idea while on holiday in Paris in September. Then in early November, Hameed and Majed flew to Islamabad to meet Amin. The meeting proved a fruitful one: Hameed recalls being impressed by Amin’s punctuality (“especially after having worked in the government before”), and Amin was impressed with Majed’s slides. Within a few minutes the three were talking about areas of potential interest and collaboration. Since at least October of last year, Amin has been promoting a five-point green agenda. This includes the 10 billion tree tsunami, a plastic ban, an electric vehicle policy, a clean green index and ‘Recharge Pakistan’ (which tackles floods). He reiterated these points at the UN Climate Change Conference, or COP25, held from 2 to13 December 2019 in Madrid. Almost in parallel to the formation of the PET (but not related), the government set up a fund, Ecosystem Restoration Fund (ESRF). This was launched at COP25, and is around $120 million provided by the World Bank. The ESRF is a fund that sits within the National Disaster Risk Management Fund (NDRMF), an older pre existing fund that has close to $300 million within its ambit, much of it provided by the ADB. While it is still a moving picture, and the ESRF and NDRMF relationship still has to be sorted out, the idea is that some of that public money can be used towards the PET. In addition, this year the co-chair of the GCF is a Pakistani: Nauman Bashir Bhatti, who is the deputy head of mission at the Pakistan Embassy in Belgium. The PET has positioned itself as an advisor to the co-chair for 2020,

CLIMATE CHANGE

helping guide GCF policy. According to the PET, this might help catalyze additional investment, and help establish global partnerships. As far as Amin is concerned, any Pakistani who cares about the environment is good enough for him. He also gave a little bit of a PTI spin: “I think it really speaks to the confidence expats and diaspora have in our Prime Minister – they want to be a part of the story”. PET and Amin have cultivated a strong working relationship, so much so that for now Majed’s office is on the first floor of the Ministry of Climate Change building in Islamabad. When asked whether this might seem a little too politically motivated, Majed responded that they were trying to make sure PET had a good working relationship with the government, so that their goals complement one another, and there is little overlap,clarifying that they are in the process of establishing their own office in Islamabad. Interestingly, the PET did mention they had reached out to other political stakeholders, to maintain good ties, perhaps post PTI (though they did not reveal names). One group the PET did little to foster a relationship with? Climate activists working in Pakistan. The team seemed uninterested in pressure groups like Climate Action Now, for instance (though they had heard of it), and mentioned having once spoken to people like Rafay Alam (a prominent environment lawyer based in Lahore, with an active Twitter presence), but that was the extent of it. In conversations with sources, and the people mentioned here, one element that stood out the most ‘McKinsey’. Both Amin and Adamjee, for instance, seemed impressed with the fact that Hameed and Majed were from McKinsey. Hameed and Majed, for their part, did drop consulting jargon in conversation – even the slides on the PET were designed with McKinsey principles in mind, right down to using the same arrow font and design in some sections. “I definitely bring the kind of toolkit that I used at McKinsey,” said Majed. “That kind of analytical mindset that can break down problems into its logical conclusion.” To be clear, the PET is not a McKinsey project. But Profit brings it up to emphasize that it is part of a larger trend of expats with impressive, always foreign credentials, taken at their word (consider PTI’s rollout and emphasis on the fact that Tania Aidrus, the digital spokesperson for Pakistan is an expat who used to work at Google). That often leads to accusations that Pakistani expats are out of touch. And PET is definitely led by a global and privileged bunch: many of the members live in London or Washington DC (or can travel

easily from Karachi to those places), and Majed himself was speaking from Liberia (where he was helping the GCF) during the time period for this article. In response to this concern, Khan was dismissive: “It would be great if locals took responsibility, then no one from overseas would get involved.” Amin was cautious: “Expats do come with a perfectionist mindset, they often have to adjust to a different reality [of working in Pakistan]”. But the most self-aware defense came from Majed, as the youngest member of the team, and the one actually on the ground in Islamabad: “I understand that some of it can be seen as just superficial. But look, moving from London to Islamabad is not easy,” he said. “It’s a pretty big shift and work like this is incredibly challenging. There is a risk of being perceived as an outsider, that you’re not in it for the long haul.” PET, as everyone wants to make clear, is definitely in it for the long haul.

Moving Forward

o what’s next for PET? Quite a few things, actually. The first project development: PET will finalize 1-2 high-potential, fundable project concepts from and initial shortlist. It will then create a high-level business case for a pilot project in February 2020, and raise seed funding in April.

These projects will fall under a specific point of the government’s 5-point agenda. The second is an entrepreneurship competition, that will help incubate high potential projects that focus on agriculture, waste, energy and water. This competition will be designed in February 2020, and submissions will be open in March 2020. Entries will be evaluated in September, while winners will be announced in October. The winners will receive a cash prize of $40,000 in funding to develop their idea. Third, the PET will help create a documentary series. A promotional video will be launched in March, while the series will tentatively be launched in July 2020. Each 10 minute episode will highlight a specific priority issue - agriculture, energy, forestry, waste, water - to build awareness. Finally, PET is also looking to hire folks, to help out with the GCF co-chair, and also full time hires and interns for Islamabad, to help out Majed with the growing pipeline of activities. At least one senior consultant from a top tier company is joining PET, starting in March. If the goals sound a bit hazy, that is because the trust is still in its nascent stage – a bank account was only set up in January, and some legal requirements still have to be ironed out. But if in 20 years time – or 50, or 100 – Pakistan will actually have risen to the challenge of climate change, and become a truly eco-friendly and sustainable country, we can all partly thank the PET – and the beaver. n

CLIMATE CHANGE

TEXTILES AND RETAIL

By Hassan Naqvi

n some ways, the story of Chenab Group, the textile manufacturing conglomerate that is also the parent company of the retail brand ChenOne, is not unique. Like many of Pakistan’s upper middle-market companies – the ones just on the cusp of being large but not quite – Chenab tried to grow too fast with too much debt during the easy money era of the Musharraf years, and crashed hard after the financial crisis of 2008, and has yet to recover since. Yet unlike some of the other financial carcasses of the 2008 crash, the owners of Chenab have continued to try to revive their business. And in recent weeks, some favourable rulings in the ongoing bankruptcy proceedings for the company at the Lahore High Court seem to indicate that it may be on track for a revival. The group has submitted an ambitious revival plan to its creditors and many of them, led by Habib Bank, appear to be on board with giving the group one more try at reviving its fortunes, agreeing to a restructuring of its debts on relatively favourable terms, in a bid to allow the company some financial breathing room to resuscitate and then grow its operations. Whether the plan will work, however, depends not just on whether the banks will allow the company to restructure its balance sheet, but also whether its majority owners – Mian Muhammad Latif and his family – have learned the right lessons from their mistakes. In Chenab Group’s tale is the story of how even a relatively innovative, fast-growing company can lay the seeds of its own demise if it tries to grow with too much borrowed money. And it is also the cautionary tale of how a perfectly functional export-oriented business can suddenly find itself debilitated owing to a lack of financing once the banks decide to cut it off.

The early years: innovation and growth

t is hard to think of it this way now, but Chenab was once one of Pakistan’s most innovative textile companies. When it opened its flagship store for ChenOne in Lahore in 1998, that was the first time that Pakistani consumers had the opportunity to shop for home textiles at a store that was more than just a glorified warehouse: it showcased the company’s products on actual furniture and in settings that allowed customers to visualise what they would look like in their own homes, creating the first aspirational home brand in Pakistan, similar to companies like Bed Bath & Beyond in the United States. The Chenab Group itself started off in 1975, when Mian Muhammad Latif and his three younger brothers decided to make the transition that many of Punjab’s large rural landholding families were making between the 1950s and 1980s: moving their main source of wealth away from farming the cotton – and other crops, such as sugar – and towards setting up the industrial units that would process and sell a finished good. Mian Latif’s family were large landholders in Toba Tek Singh, a district roughly halfway between Faisalabad and Multan. In 1975, they set up Chenab Textile Industries, moving the family from growing cotton and ginning it towards spinning cotton yarn and weaving it into cloth. Over the years, the group diversified its activities and in April 1985, it created its first corporate entity called the ‘Chenab Fabrics and Processing Mills Ltd’. In March 1991, it was converted into an unlisted public Ltd company. Thereafter, in 2000 the company’s name was changed to its present name Chenab Ltd. Chenab – like many of the nation’s largest textile companies – is headquartered in the Nishatabad area of Faisalabad. The cloth-processing unit and stitching units are located at Nishatabad and the weaving units are located

at Sheikhupura Road, Kharianwala, in Sheikhupura district, and in Shahkot in Nankana Sahib district. The spinning unit is located in Toba Tek Singh. “We [initially] produced textile goods for the local market. In 1985, we initiated exporting goods started from the Far East from where we moved to Europe and then USA and we exported goods to around 42 countries,” said Mian Kashif Ashfaq, CEO of ChenOne, and part of the second generation of the family to enter the business. It was the entry of that second generation into the business that catalyzed some of the most innovative changes in the way the group does business. “In 1997, I joined as a director and we established the first store of ChenOne,” Kashif said. The retail chain currently has 48 stores, including some overseas stores in the United Arab Emirates and one in Saudi Arabia. In addition to their core business, the group also owns some other smaller business, including CGI Ltd UAE, InterFab in Australia, Chenab Fibres Ltd, ChenSoft, Chenab USA, ChenOne Worldwide, House of Chenab and the ChenOne Foundation. Until it was shut down in 2017 as part of the bankruptcy proceedings, Chenab Ltd derived about 70% of its revenue from home textiles – both its export business as well as through ChenOne stores locally – and about 30% from apparel.

Growth in the Musharraf years

n 1999, when Gen Musharraf took power in a military coup, the Chenab Group was still a lower middle-market business in terms of size. And ChenOne at the time only had three stores, though its fourth store opened up in Karachi that year. During the Musharraf Administration, however, as the government privatised the banks and encouraged private sector lending, particularly for industrial growth projects, the

“If we had done offshore investments or had moved our capital to offshore locations we wouldn’t have been present in the country and negotiating with the government for restructuring of our debts. People who are involved in offshore investments, they sell the machinery, cheat banks, and save themselves. But we kept on trying for settlement because we wanted to run the Chenab Group again as 14,000 people are employed in it” Mian Kashif Ashfaq, CEO of ChenOne Chenab Group started expanding aggressively. For the financial year ending June 30, 2001, Chenab Ltd, the group’s main publicly listed company, had revenues of Rs3,406 million. Over the next six years, the company more than doubled its revenue, ending financial year 2007 with Rs8,161 million in revenue, which represents an average annual growth rate of 15.7%. That growth, however, was fueled largely by debt. In 2001, the company had just under Rs700 million in long-term debt. By 2007, that number had ballooned to Rs3,322 million, a nearly five times increase. Yet cash flows were not keeping pace: Chenab Ltd’s net income in 2007 was just Rs75 million, even less than the Rs131 million it earned in 2001. Yet the group kept expanding, particularly its retail chain, which opened up more stores throughout urban Pakistan, particularly in the smaller metropolitan areas of Punjab, where it took to developing not just its own stores, but large shopping malls and complexes under the name ChenOne Tower. The first ChenOne Tower opened in 2005 in Multan, followed by another in Sargodha, which finally opened in 2009. What is interesting is that ChenOne developed its retail chain significantly before Ideas by Gul Ahmed. ChenOne started in 1997 and Gul Ahmed did not launch Ideas until 2003. This despite the fact that even at its peak, Chenab Ltd was one third the size of Gul Ahmed in terms of revenue and thus had fewer resources to deploy in the cash-intensive project of launching a retail chain in Pakistan.

The political connection

ike many wealthy landowning families in Punjab that transitioned towards becoming industrialists, Mian Latif’s family has strong political connections.

Mian Latif has family members who have served in elected office and are currently members of political parties. Mian Latif’s younger brother is Chaudhry Muhammad Ashfaq, currently Central Vice President of the ruling Pakistan Tehreek-i-Insaf’s (PTI). Ashfaq is also a former member of the National Assembly and a former member of the Punjab Assembly. His stints in the Punjab Assembly were in the 1990s as a member of the Pakistan Peoples Party (PPP). Ashfaq was also elected as district nazim in 2001 with the backing of the then-ruling Pakistan Muslim League Quaid (PML-Q). Chaudhry Ashfaq is considered to be a close aide of Punjab Governor Chaudhry Muhammad Sarwar and Prime Minister Imran Khan. Mian Muhammad Latif’s son Mian Farhan Latif also served as an MNA from 2002 to 2008 from Toba Tek Singh, representing the PML-Q. Mian Latif was also awarded with Tamgha-e-Imtiaz on March 23, 2004 by the then President Pervez Musharraf for his services to the industry. The Latif family enjoyed strong social ties with the Chaudhrys of Gujrat, former prime minister Benazir Bhutto and former president Musharraf. Chaudhry Muhammad Ashfaq and his son Mian Kashif Ashfaq also have close ties with Prime Minister Imran Khan. Sources familiar with the matter believe that Mian Kashif Ashfaq was made the Chief Executive Officer (CEO) of Faisalabad Industrial Estate Development & Management Company (FIEDMC) due to the political connections of the family. How are all of these political connections of the family relevant? There are allegations that they were able to use their connections to help obtain loans from state-owned banks that the group then defaulted on without the stateowned banks taking significant actions to try to recover the borrowed amounts. For instance, Mian Latif served as a

director on the board of Bank of Punjab in 2007 during Pervez Elahi’s term as Chief Minister of Punjab. The Bank of Punjab is owned by the provincial government and the chief minister has the power to appoint the board. During that same time that he was a director at the bank, ChenOne and Chenab Ltd borrowed Rs600 million from the Bank of Punjab. This is despite the fact that section 19(4) of the 1989 Bank of Punjab Act explicitly bars the directors of the bank from taking any loans from the bank. Such a potential abuse of power and violation of the law would normally be something that would be prosecuted by the National Accountability Bureau (NAB), which has been hyperactive in prosecuting several prominent politicians of opposition political parties as well as many businessmen who are perceived by the ruling party as being close to opposition politicians. But NAB has so far not prosecuted what appears to be a breach of the law. On April 13, 2013, The News reported that Mian Muhammad Latif and his companies have defaulted on his loan liabilities. “In 2012, NAB as per the directive of the Supreme Court took up the issue whereby, the NAB chairman in view of the above has ordered that since it is a matter of willful loan default,” The News reported NAB spokesman as saying on April 13, 2013. “How come they managed to get their loans restructured again despite the fact that they haven’t made any repayments of loans to the banks since 2000,” one of their competitors in Nishatabad, Faisalabad said while speaking to Profit. Mian Kashif Ashfaq, CEO of ChenOne and son of Chaudhry Muhammad Ashfaq, rejected the claims of their business and political rivals. He added that Habib Bank, the country’s largest bank and the Chenab Group’s biggest creditor, made an all-out effort in convincing the other banks as well for restructuring of our

TEXTILES AND RETAIL

loan. “We cleared all the loans we have taken from different banks by 2000,” Kashif said.

The start of the troubles

t the end of the Musharraf era, which coincided with the global financial crisis, Chenab Ltd knew they were going to have trouble paying back their loans. By 2009, the year that would mark the company’s peak in revenues, the company was already talking about potential worries about them remaining a going concern, stating in the 2010 annual report to shareholders that they had created a plan to remain a going concern. The thing about remaining a going concern is this: if you have to say out loud that you have a plan for being one, you will likely not stay one for very long. So how did it all happen? What went wrong? Well, let us start with why the company became so highly leveraged in the first place. In an interview with Profit, Kashif explained the context for the company’s current financial troubles. “We invested Rs8-10 billion between 2000 and 2008, and also [invested in] establishing the brand of Chenab Group in US and we did expansion of our business here in Pakistan as well by investing heavily in processing mills, we also started a power loom setup and spinning mill as well. We had a vertical setup but the investment was quite high followed by turmoil for us.” The reason why the company decided to expand so aggressively? Kashif says that it was a good time to be in the textile business in the Musharraf era. “The export business was at its boom and the government was providing soft loans to set up industries. The majority of our customers at that time were chain stores and brands [in the United States and Europe] with which we used to work, and their compliance requirements were very tough like water treatment plant, etc. and we invested heavily [in

meeting those requirements] on debt.” It also did not help that interest rates on their variable rate loans (the most common kind in Pakistan) went up just as the global economy was slowing down. “We took the loans at the rate of 6-7% but then the rate of markups’ was increased to 12-14% due to which [we were] burdened and debt kept on piling on us,” Kashif added.

The part that does not make sense

ll of that makes sense. What they say next does not. “After Benazir Bhutto’s death we faced heavy losses and then the bank guarantee and warranties were involved.” Kashif said. It is unclear as to what exactly the company means by this. The Chenab Group’s manufacturing operations are almost entirely in Punjab and the violence following former Prime Minister Benazir Bhutto’s assassination on December 27, 2007 was almost entirely in Sindh. The company did not report to investors suffering any damage to its factories or even to its storage facilities. The one part of its business that might have suffered some damage would be if some of its export shipments in Karachi were burnt by protestors, but the company made no mention of such a thing in its 2008 financial report. In an interview with Imran Rana at The Express Tribune in 2014, Mian Latif did say they the riots in Karachi caused the company to miss an order deadline, which resulted in a €5 million fine that the company had to pay. And while that is certainly a sizable fine for a company the size of Chenab Ltd, it is also not the kind that would destroy the company either. Chenab Ltd’s revenues peaked in 2009 in rupee terms, at Rs9,091 million. They declined by 2.6% in 2010, following which there was a very sharp drop of 50.6% to just Rs4,374 million 2011. And that was not the end of the pain. Revenue dropped by 40.4% again in 2012,

to Rs2,607 million, and then again by 16.7% to Rs2,172 million in 2013. What caused that sudden decline in the company’s business? In his conversation with Profit, Kashif addressed that question only indirectly. “Our sales started decreasing and secondly, we were facing the energy crisis and processing units were not getting gas. Followed by law and order and perception issues about Pakistan in the international market due to which Chenab Group could not sustain its business,” he said. That does not address the question: why did Chenab Ltd see such a sharp decrease in revenue from 2011 onwards? Heavy borrowing alone would not explain it: higher interest costs would eat away at profits, but would not directly affect revenues, at least certainly not in that drastic and sudden a manner. And as for the problems with law and order, electricity, and the rest, those are all real challenges that would be tough to deal with, but they are also not unique to Chenab Ltd. The entire textile industry faces them. And while facing those issues, the industry as a whole had a very good year in 2011, growing revenues by 40.8% to Rs713 billion, according to a compilation of financial data of all publicly listed textile companies compiled by the State Bank of Pakistan. Hence, Chenab Ltd cannot cite that as an excuse: everyone else was also facing those exact same issues and managed to do very well nonetheless. So what else could explain that massive drop?

Whispers of impropriety

ome industry observers – especially competitors of Chenab Ltd – allege that the company has engaged in financial impropriety, moving cash overseas to buy assets and hollowing out the Pakistan-based

business in order to secure write-offs of the loans. Kashif flatly rejected the allegations. “If we had done offshore investments or had moved our capital to offshore locations we wouldn’t have been present in the country and negotiating with the government for restructuring of our debts,” he said. “People who are involved in offshore investments, they sell the machinery, cheat banks, and save themselves. But we kept on trying for settlement because we wanted to run the Chenab Group again as 14,000 people are employed in it.” Although he rejected the offshore investment allegations, he added that the US market was huge and they had a lot of business there due to which they established an office there. “[Our customers in the United States] asked us to develop warehouse and office in US to cut their costs to minimize their expenses and they shifted the burden completely on vendors,” Mian Kashif said. “They asked us to bring our products there, keep it in the warehouse and supply it locally,” he added. There were also allegations that the ChenOne stores in the UAE and Saudi Arabia continue to do brisk business, but the company does not repatriate its profits from there to repay their loans. When asked about that, Kashif said that those stores are struggling as well. “We had five stores in Dubai but we are only left with one in Saudi Arabia. We had about three stores in Saudi Arabia previously and we faced losses there as well and we are only left with one store.”

Missed orders, and the banks close in

n his interview with The Express Tribune, Mian Latif said that the company missed orders from the United States because of issues with its electricity supply, caused by the unreliability of supply from the state-owned utility companies. One other reason cited by the company

Mian Kashif Ashfaq alongwith Governor Punjab Chaudhry Sarwar and other dignitaries at the launching ceremony of Alley Group of Colleges in Lahore for their woes: banks refusing to lend to them, particularly for working capital financing. While this may certainly be true, it is also a fact that banks have a vested interest in ensuring that the company is able to continue repaying its loans and would generally seek to avoid placing the company in a situation where the only solution to repaying its loans would be to liquidate the whole company. Banks start restricting working capital financing generally when they do not have confidence in the company’s management to be able to either generate enough cash flow from that financing to repay the loan, or they do not trust the management to repay the loan even if they earn enough money to do so. Neither of those reflects well on a company’s management, and that is certainly an image that Chenab Ltd had to struggle with for several years. Indeed, matters got so bad, that by 2017, one of the company’s lenders, Saudi Pak Industrial and Agriculture Investment Company sued the company for repayment of its loans, trying to force a liquidation of its assets to be repaid, which resulted in the Lahore High Court ordering the company to shut down operations

on June 20, 2017. Chenab owes Saudi Pak Rs357 million. Chenab appealed that decision to the Supreme Court, which overturned the Lahore High Court’s decision on January 8, 2019. Now, however, it appears that the tide may finally be turning, particularly as the next generation of the family begins to take more control.

The restructuring plan

n September 28, 2019 Mian Muhammad Latif through his counsel Advocate Salman Butt filed a civil miscellaneous application in the LHC, attaching a restructuring plan of the company, along with an instant application for grant of interim relief in the form of stay of operation of the winding up order, to restrain the joint official liquidators from proceeding further in the matter, and to allow the management of Chenab Group to take steps for rehabilitation of the spinning, stitching and weaving units of the company (Production Units). Mian Muhammad Latif through his coun-

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sel submitted that he has a strong case against the liquidation order as they attached a letter from Habib Bank Ltd (HBL) – the largest bank in Pakistan and the biggest creditor to Chenab Ltd – in which they have confirmed that the restructuring of debts of the company is under process, and is being finalised, in following terms: “We Habib Bank Ltd, confirm that we are in the process of finalising a term sheet for the restructuring of Chenab Ltd’s debt and entering into a scheme of arrangement for the same. We have arranged legal and financial advisers for this purpose too. Up to now, Habib Bank Ltd, Bank of Punjab, Habib Metropolitan Bank and BankIslami have obtained internal approvals for the draft term sheet.” The HBL letter further reads that Allied Bank Ltd has also conveyed its verbal consent. However, their formal approval is in process. “We are still awaiting the approval of the banks set out in the hereto. Once these approvals are received, we will execute this term sheet and proceed to finalise a scheme of arrangement in accordance with our counsel’s advice,” the HBL letter stated. Chenab group’s short-term loans from different banks and financial houses are Rs4,344 million whereas its long-term loans are Rs5,131 million. It owes Rs1,739 million to Habib Bank, Rs1,366 million to United Bank, Rs1,227 million to Bank of Punjab, Rs844 million to Askari Bank, and Rs601 million to Allied Bank. Apart from that the group owes short and long term loans another 17 banks and financial institutions including BankIslami, National Bank of Pakistan, Albaraka Bank, Habib Metropolitan Bank, Silkbank, Standard Chartered Bank, MCB Bank, Citibank, Faysal Bank, Saudi Pak Industrial and Agriculture Investment Company, Pak Oman Investment Company, First Punjab Modaraba, Pak Libya Holding Company, Pak Kuwait Investment Company, Orix Leasing and Orix Investment Bank, First Credit and Investment Bank and First National Bank Modaraba. According to the plan of restructuring of Chenab Group’s debt, the total debt of Chenab Ltd would be divided into two equal fresh loans i.e. Tier I Loan and Tier II Loan each comprising of Rs4.738 billion. The tier I loan will be paid in 30 quarterly installments (7.5 years) commencing from the date of sanction of the proposal. The tier II loan will be paid in 26 quarterly installments (6.5 years) commencing from the date of completion of tier I loan. Kashif shared that his family jointly holds 60.1% of the company. “To raise funds for meeting the working capital requirements, we brought an investor by disinvesting one-third of our shareholding in the company (20%) to this investor at the rate of Rs15.20 per share for a

Chaudhry Muhammad Ashfaq and Mian Kashif Ashfaq with Prime Minister Imran Khan and senior PTI leadership total consideration of Rs350 million.” Mian Latif through his counsel also agreed to sell some of the non-core assets of the company including open land comprising 42 acres in Khurrianwala Faisalabad, three houses in W-Block, Madina Town Faisalabad, one house in Y-Block, Madina Town Faisalabad, Office at Park Tower Clifton Karachi, weaving unit at Khurrianwala –Sheikhupura and spinning unit at Toba Tek Singh for an approximate consideration of Rs1355 million. Mian Latif stated that 75% of sale proceeds – which are approximately Rs1,016 million – will be utilised towards the adjustment of debt while the remaining 25%, which is approximately Rs339 million, will be used to meet the working capital requirements of the company. According to the plan, the initial working capital of Rs350 million will be injected by the new investor whereupon the banks will also be requested to provide an equal amount of Rs350 million for Exports Based Limits to meet the working capital requirements. The plan stated that on account of prevailing situation, the fact that the Chenab Ltd’s operations are suspended since 2017 and in order to make the project economically and financially viable, the rate of markup on the rescheduled loan be reduced to 5% per annum. “The annual mark up on tier I loan will be started from the date of sanction of plan whereas the mark up to be charged at 3pc per annum for tier II loan for the first 7.5 years will be considered as contingencies in the future projections of the company and thereafter it will be accrued at 5pc after the payment of tier I loan,” Mian Latif stated in his submission before the LHC. Mian Latif also mentioned that the markup of tier I and tier II will be accrued at 5pc per annum and will be paid within 3 years after the payment of entire principal amount. However, markup calculated at 3pc for tier II and total

existing outstanding markup be waived off on successful completion of repayment plan of fresh loans. Following which the LHC on December 5 last year, accepted the interim relief and the company is temporarily allowed, till the disposal of the main application, to resume the commercial operation and production units of the company. “Company shall keep this court informed of the developments in operations of the company by filing monthly statements through the official liquidators and finalization of the rescheduling plan and the scheme of arrangement,” Justice Jawad Hasan announced in an open court on December 5, 2019.

Will it work?

he company appears to be clearly dedicated towards making the core business function, going so far as to sell off some real estate that – while technically owned by the company – is likely thought of by the Latif family as their family properties. That willingness to sell non-core assets to make the business work is likely what persuaded Habib Bank that Chenab’s management is serious about resuscitating their business. The issue, however, might be that the group is a little too distracted by other ventures. Kashif, for instance, spoke of the restaurants that he and the family are now invested in, including Sultan Basha, a newly constructed Lebanese restaurant in Lahore. They also acquired Urban Café, also in Lahore. But the biggest venture of the group is likely to be “Alley Group of Colleges”, which launched last week. So which is it? Is the family dedicated revitalising Chenab Ltd, or are they going into the restaurant and education business? The answer will likely determine the extent to which the restructuring plan is successful. n

TEXTILES AND RETAIL

NATIVE CONTENT

PAKISTANâ€™S CLEAR VISION AT DAVOS

The Entrepreneur turned Ambassador shares the key to a successful visit to the World Economic Forum, outcomes to look forward to and personal insights on the privilege of serving Pakistan

iddiqui is someone perfectly comfortable in working for the government. He is known for representing Pakistan as the ambassador to the United States between March and December 2018, under the Pakistan Muslim League Nawaz (PML-N) government, subsequently, he was appointed Ambassador-at-Large for Foreign Investment in June 2019 under the Pakistan Tehreek-e-Insaf government. So when it came to leading the Prime Minister’s agenda at this year’s World Economic Forum (WEF), held from January 21 to 23 in Davos, Siddiqui seems to have been a natural choice. His investing background, coupled with his ease at representing Pakistan on a global stage, made him the ideal fit for the occasion. In this interview, Siddiqui explains what happened behind the scenes at Davos this year, and how Pakistan is reshaping its narrative to global policy makers and investors. Profit: Give us a little back story on your role at the backend that led up to Pakistan’s participation at the World Economic Forum in Davos? Ali Jehangir Siddiqui: The World Economic Forum (WEF) is an excellent community of thought leaders across business, political and academic sectors that comes together annually in Davos to shape global, regional, and industry agendas. I have been associated with the Forum since 2014 when I became a part of the Forum of Young Global Leaders, a community within WEF that is made up of young people under-40 who have achieved some level of leadership in business, science, philanthropy or politics. Purposeful participation by the Government of Pakistan at what is the world’s premier business forum, is essential for Pakistan to take a targeted step towards its engagement with the decision makers of global economies and in attracting foreign investment. Both while serving as Pakistan’s Ambassador to the United States and in my current role as Ambassador-at-Large for Foreign Investment, it is my goal to have Pakistan approach the international business community in the most effective and focused manner. The WEF annual meeting in Davos is a perfect opportunity to tell the Pakistan story, meeting companies that do business in Pakistan to invest more and attracting new companies to invest in Pakistan. As Ambassador-at-Large for Foreign Investment and someone who is quite familiar with WEF, I was tasked to lead the Prime Minister’s agenda for the WEF Annual Meeting 2020. Successful participation at WEF requires a lot of planning and coordination, internally and externally. How to make the best use of the

Cenk Alper, CEO Sabanci Holding called on Prime Minister Imran Khan at WEF Annual Meeting 2020 Head of Government’s time is key in determining which events to participate in, which meetings to plan and take and which to regret. For two months, we worked in close coordination with the program staff at WEF as well as multiple organizations to iron out an impactful schedule of interactions and meetings with an audience of leaders from the global business community, multilateral organizations and global media. There was a lot of internal whiteboarding of ideas, themes, stories worth telling and achieving specific targets that was cross-referenced with research on all participating organizations to help shape the contours of our agenda. The next phase was for our team at the Prime Minister’s Office and the companies we wanted to engage to communicate, agree on areas of interest, share data and answer questions on Pakistan. Following this phase, a series of pre-engagements took place, many of which required face-to-face meetings to negotiate the objectives and outcomes of each meeting with the Prime Minister. In Davos, most meetings tend to stay under 20 minutes – therefore it is important to ensure that the outcomes of both parties are pre-discussed and planned prior to the meeting with the Prime Minister. Profit: What was the framework with which Pakistan approached Davos this year, and what would you say made it successful? AJS: We approached Davos 2020 with defined themes and a team that spoke the language

that business leaders sitting across the table understood. Our mandate was to tell the Pakistan story and be very specific about what we could do with each company we were meeting. The satellite view includes the fact that we have jumped in the Ease of Doing Business rankings and have been awarded the position of one of the top reforming countries globally. Highlighting this jump is key in building investor confidence in Pakistan. Additionally, we have some of the lowest costs of labor in the region and want to attract business across industries to come and create high value jobs in Pakistan. Investors naturally had a lot of questions about our macro data as we are in the IMF program. We answered these questions and provided necessary data in advance of the meeting with the Prime Minister so that in the meeting, investors would already be familiar with our reform program and comfortable with our performance. The themes for the visit were derived from overlapping regional, industrial, and national objectives. We led a series of engagements with some of the largest Turkish conglomerates determined through a regional theme of close economic partnership with Turkey. Japan has been a key economic partner with a large footprint in Pakistan, but we have not nurtured this relationship to its full capacity in the last few years – so we engaged with global heads of Japanese companies to identify new areas of investment. Additionally, Pakistan is a hub of low-cost high-value IT resources and in line with the vision of Digital Pakistan, we led

WORLD ECONOMIC FORUM

successful meetings with leading technology companies to attract their software development labs to Pakistan. These constituted our three key themes. We also met existing investors in Pakistan to have them make further investments both in their existing businesses and in new areas. Many of these investors need incentives and some matters that need resolution, so we have proactively engaged them to move things forward. The key to success on this global stage is to take our ‘A-Team’, which we did with all the key economic decision makers present who as expected delivered to provide great credibility and confidence to the foreign investors. Profit: Pakistan is a country that draws mixed reactions from the international community, especially business leaders. What is the biggest challenge faced while positioning Pakistan in front of international businesses? AJS: The biggest challenge is getting caught up in the narrative the world or competing countries set for you – whether it is at WEF or any other interaction. That leads to one being on the defensive. In Pakistan’s case, dated representations of insecurity and political instability have been used to undermine the many advantages of doing business in Pakistan and that the country is a very lucrative market for foreign investors. Taking control of our own narrative is important otherwise one will always be firefighting the next adjective associated with Pakistan. It is not hard but requires a decisive push to disseminate factual information through the government as well as through partners engaged in successful businesses in Pakistan. The first step is to be on the offensive. For example, as the 6th largest country in the world and a major global producer of agricultural products and technology services, it would be a missed opportunity for global investors to overlook Pakistan. This is then followed by

Fumiya Kokubu, Chairperson Marubeni Corporation met with Prime Minister Imran Khan at WEF Annual Meeting 2020 to discuss potential investment opportunities in the country asking the leaders of foreign investors currently involved in Pakistan to tell their stories both of success and of the challenges. There are no emerging markets where foreign investors don’t have challenges so it’s important to have a frank discussion on those as that adds to the credibility of the government. Then sharing future opportunities. Profit: What happened at WEF this year? AJS: This year at WEF, we had over 20 successful corporate meetings complemented with WEF’s public and private program specific to Prime Minister Imran Khan, political bilaterals and media interactions. It was a busy schedule.

Susan Wojcicki, CEO YouTube in meeting with Prime Minister Imran Khan at WEF Annual Meeting 2020

WEF hosted a country strategy dialogue with 25 global Fortune 500 leaders for Prime Minister Imran Khan designed to help share Pakistan’s strategic priorities for investment. We have several follow up inquiries from these companies. After many years, the Prime Minister of Pakistan was given the opportunity to address the larger WEF community during what is known as a special address in the Congress Hall. This is a large-format, live-streamed speech with a significant audience. This was received very well by the global investment community. In two days we met companies whose total market worth surpassed many multiples

Gunn Waersted, Chairperson Telenor and Sigve Brekke, CEO Telenor called on Prime Minister Imran Khan at WEF Annual Meeting 2020

of our GDP. We met leading companies with diverse areas of business such as SAP, Siemens, YouTube, USM Holdings, Sumitomo, Marubeni, Facebook and Coca-Cola plus many conglomerates from around the world. Media interactions with BBC, CNBC and a meeting with the International Media Council which are leaders from the global media community that meet annually in Davos comprehensively propagated our communications to the worlds opinion makers. Profit: What is the plan going forward? AJS: The plan going forward is to nurture each relationship in a structured manner. Companies currently active in Pakistan have responded favorably to the consideration of creating more jobs and upskilling existing labor. SAP, YouTube, Facebook, and GSMA have agreed to offer digital upskilling opportunities in partnership with local universities and other organizations – so one of the earliest tasks will be to broker these successful partnerships. These companies are also looking to expand their business in Pakistan. SAP and Siemens want to benefit from Pakistan’s low-cost resource known for providing high value software engineering. These will create many high paying jobs in the technology sector. Engagement with Turkey is a long-term area of focus and President Erdogan’s upcoming visit will allow us to follow up with a broader engagement with Turkish companies. Profit: In your opinion, what is going right for Pakistan at this moment? AJS: In recent times, Pakistan has been building on its image as an economy that is improving on its Ease of Doing Business rankings which has led to a strong increase in foreign investment. With our currency being fairly priced, we are more competitive now in terms of labor and other domestic resources.

Prime Minister Imran Khan meets US President, Donald Trump at World Economic Forum in Davos The landmark meeting between Prime Minister Khan and President Trump was quite positive and helps boost global confidence further. This continued and frequent engagement with the US Government as it was the third such meeting between our leaders in 7 months demonstrates to the world that our relationship continues to grow, and that the US is very supportive of more economic engagement with Pakistan. Profit: What drives you to serve Pakistan and how have you felt about this journey? AJS: Public service is a duty and different people fulfill it in different ways. For me, it led me directly into government and for that I am deeply honored. My paternal and maternal grandfathers, and many of my uncles and my aunt were public servants. My mother spent her career as a public university professor. So it has been in my DNA in a manner of speaking. Not many people get this opportunity, so I

Ambassador-at-Large for Foreign Investment, Ali Jehangir Siddiqui with Magesvaran Suranjan, President Asia Pacific, India, the Middle East and Africa, Procter & Gamble Asia

treat it as a privilege. It is very rewarding when we complete something meaningful or work to avoid costly errors. Even prior to joining the government, I have considered myself an ambassador of Pakistan and that will always continue regardless of it being my official title or not. Profit: Would you like to see more businessmen from Pakistan as members of the World Economic Forum at Davos and how do you think this level of networking will impact their future projections? AJS: I would like to see Pakistan and Pakistani businesses represented at every forum that enables constructive dialogue and the shaping of the global economic and political agenda. Unfortunately, our private sector is far behind in our representation on the forums that matter, and I would encourage businesspeople who are interested to reach out to me if they need any guidance or assistance. n

Christian Klein, Co-CEO, SAP called on Prime Minister Imran Khan at WEF Annual Meeting 2020

WORLD ECONOMIC FORUM

Millions of locusts are ravaging through all four provinces in the country, leaving in their wake havoc and destruction. The government has offered a state of emergency, and three planes to fight them. Can they win? By Hassan Naqvi

n a sweltering July afternoon, Ghulam Abbas Nabi is taking a richly deserved siesta away from the attentions of the cruel sun when he is interrupted by hysterical screaming. Still groggy and more than a little annoyed, Ghulam Abbas stumbles towards the commotion only to find a disaster of biblical proportions waiting for him. A dark mass is descending from the skies.

As it buzzes and hums, nearly blocking out the sun, he has no idea what to do. The 46 year old has managed his 52 hectare farm for decades, but nothing could have prepared him for this. Perhaps the scariest thing is how suddenly it happens. Not too long ago he was going around distributing fertilizer to his workers and admiring what looked to be an abundant harvest in a few months time. By the time the screaming woman makes her way from the adjacent field, any remaining signs of sleep have disappeared. Abida Ali, a young girl working on Ghulam Nabi’s farm in

Thari Mirwah in Sindh is otherwise considered a diligent, level-headed worker. Today, she is afraid for her life. “Itnay sary Makkaroun ka hamla! Itnay sary Makkaroun ka hamla!” (Swarm of locust attack! Swarm of locust attack!) she comes in shouting. Her warning is too little too late, and all that any of them can do is take cover and watch as months of hard work is swallowed up before they can fully comprehend what has happened. “As soon as I stepped out of my room, I found myself under a sea of hovering locusts.

“Back when this happened in 1993, locusts had not been traced in KP. But this time around they have been found as far as Dera Ismail Khan. A sum of Rs7.3 billion is required to avoid further destruction by the crop-eating grasshopper and do the damage control” Khusro Bakhtiar, Federal Minister for National Food Security and Research

They were everywhere. In my backyard orchard, in the cotton fields, on date trees and on every grimery root, shrub and piece of vegetation they could find” he tells us, voice still shaky at the thought. “They spared nothing.” The next few days could have come out of Lord of the Flies. As the farmers gathered and fought for their voice to be heard, they immediately turned to fire. They tried to smoke the locusts out, but to no benefit. The invaders stayed, lounging and gorging on the hard toiled farmland. When that did not work, pesticides were suggested. But with so many, there was the fear that it would end up poisoning the land. With no solution coming to fore, tensions began to rise. And with more than vocal mutterings of this being a divine catastrophe, one wonders how far things would have gone. However, the people of Thari Mirwah were lucky, if you can call it that, because the locusts left on their own accord in a fortnight. They had devoured everything, and it was on to the next farm. “The locusts left only because there was nothing left for them to eat. We just had to wait and watch as our hard work went to waste, there was no contact from any government agency or department to offer advice let alone help” Ghulam Abbas tells us. “It has left me ruined financially.”

National emergency

n the past few months, there have been multiple reports of locusts swarming in and destroying crops before moving on to their next target. But the problem is not a new one for civilization. It is of biblical proportions precisely because farmers have been facing it since that time and before. The Hebrew bible with its trigger

happy, plague sending God is considered an important indicator of history as it is as a religious and literary text. “Stretch out your hand over Egypt so that locusts swarm over the land and devour everything growing in the fields,” God orders Moses in Exodus. “They invaded all Egypt. Never before had there been such a plague of locusts, nor will there ever be again.” There is no doubt an “invasion” of this proportion is hell to live through. It is as frightening as it is devastating. Often considered a freak occurrence, there are ways to combat it. But with an unprecedented amount of incidents being reported and studies linking climate change and rising temperatures to more frequent and more deadly attacks, Pakistan may have to brace for impact. Ghulam Abbas lost all of his crops in the face of the swarm, with no assistance. But while he may be one of the many down for the count, the government seems to finally be realising the gravity of the situation. The current Pakistan Thereek-e-Insaaf (PTI) government declared a state of national emergency on January 31st this year in the face of the attack of the locusts. But will that be enough to secure crops in Punjab, Sindh and Khyber Pakhtunkhwa (KP)? “Declaring national emergency now is too little too late” says Shams Durrani, a Queeta based journalist who witnessed the initial carnage when the swarms first made an appearance in Balochistan before spreading to the remaining three provinces. “This step should have been taken when the swarms first entered Balochistan from Iran last summer.” According to him, the swarm vandalised the already vegetation-starved Balochistan but without anyone from the federal government

The biggest losers in all of this have been the affected farmers. All of those that have had to face the plague are unhappy not just with the government’s preparations, but also their response after the fact. For the ones that are yet to face the plundering horde, there is fear

batting an eye. In fact, initial reports of the swarms in Sindh also so little to no attention. It was only when the locusts became visible in Karachi and later on more clearly in interior Sindh that the alarm bells began to ring. Late is it may have been according to Durrani, Prime Minister Imran Khan himself gave the nod to declaring national emergency, and also approved a national action plan allocating Rs7.3 billion to overcome the possibly catastrophic crisis. The decision to approve the allocation was made during a high power meeting at the PM office attended by the Food Minister Khusro Bakhtiyar, Adviser to the Prime Minister on Finance Dr. Hafeez Sheikh, Special Assistant to the Prime Minister on Information Dr. Firdous Ashiq Awan and National Disaster Management Authority (NDMA) chairman Lt General Muhammad Afzal. As a result of the meeting, the Prime Minister directed the concerned officials at the district level to deal with the threat. More importantly, the NDMA was given jurisdiction on this. “The protection of farmers and farms is the highest priority of the PTI government” Dawn reported the Prime Minister as saying. For all intents and purposes, in the middle of all the bureaucratic jargon, it was a declaration of war against grasshoppers. The challenge is a new one for everyone. Pakistan has had one previous experience with locust attack when a swarm invaded the country back in 1993 under the Premiership of Benazir Bhutto. Aircraft spraying had worked then, and the government will be hoping that it works again, except the attack in 93 was nowhere near as large as the one underway currently. Despite that, the PPP administration had been quicker to address the issue and seemed to have taken it more seriously as well. In the immediate aftermath of the meeting chaired by Imran Khan, the battle plans dictated an aerial blitzkrieg of pesticides to save crops from swarms of locusts. However, while the plans had been ambitious, the government may not have had the resources to actually pull it off. Speaking on the floor of the house, Food

FERTILIZERS

Minister Khusro Bakhtiyar told lawmakers that his ministry, which once had 20 aircrafts, now only has three operational aircrafts. The three planes are currently being run haggard trying to cover nearly 20,000 acres of farmland. Basically, the ministry cannot do it on its own, and for the next year and a half will need the support and cooperation of the federal, provincial and local government, as well as the NDMA. “A sum of Rs7.3 billion is required to avoid further destruction by the crop-eating grasshopper and for damage control,” Khusro Bakhtiar said in his address to parliament. Climate change is one of the major reasons for the delay in the exit of locusts. “Back when this happened in 1993, locusts had not been traced in KP. But this time around they have been found as far as Dera Ismail Khan” he said. “At last check, the locusts had entered Cholistan Nara from Sindh and Balochistan. Previously, locusts used to move to Iran after sometime, but this time around they extended their stay in Pakistan maybe due to the extended winter.”

So how bad is it?

e have been saying that the invasion is bad. But how bad is bad? To give you an idea, a swarm of locusts can consist of anywhere between 30 million to 50 million, and they reproduce rapidly. In Africa, a swarm was recorded at 800 miles long. The insects travel 150 kilometers a day and the entire swarm can devour 200 tonnes of food a day. Since June of last year, the swarms have made their way to all four of the provinces, leaving havoc in their wake. If left unattended, such an attack could possibly lead to food security issues in the months and years to come. The one trickle of good news in all of this has been that the swarms of desert locusts have

“The locusts left only because there was nothing left for them to eat. We just had to wait and watch as our hard work went to waste, there was no contact from any government agency or department to offer advice let alone help” Ghulam Abbas, Farm owner not affected the wheat crop in any significant way. University of Agriculture Faisalabad (UAF’s) Prof Dr Hassan told the media that teams of entomologists had been dispatched to different areas of Punjab for the on-field study of locust attack, which have determined that it is unlikely for the wheat crop to be affected. The agriculture expert added that the Vice Chancellor (VC) of UAF has directed the team of entomologists to study locusts life history, attacked areas, management techniques, various stages and effect of climate change. “The team of entomologists has been asked to come up with viable recommendations for addressing this serious issue and guiding farmers how to mitigate their losses,” the agriculture expert added. Dr. Waqar, an agriculture expert from Lahore, told Profit that it is a serious matter that locust is a dessert insect that is now moving on to the plain cultivated areas of Pakistan in Sindh, Punjab and KP. But to food ministry officials, it is clear that there is no time to mull over why this is happening, and even if one were to sit down and theorize, the answer is looking us straight in the face: climate change. “If lower temperatures continue and the weather remains cold and wet for a longer period of time, it will be catastrophic for the country as locusts would spread even further. In fact, a fresh swarm could very well leave its

breeding ground on the Pakistan-India border along Cholistan and create a two from battle for us” he warned. Agreeing with him, another crop assessment official says that it is the need of the hour that govt addresses the situation on war footings. Otherwise, it would be unlikely to control the outbreak until drier weather sets in. By then, it will be too late.

Crop Insurance

he biggest losers in all of this have been the affected farmers. All of those that have had to face the plague are unhappy not just with the government’s preparations, but also their response after the fact. For the ones that are yet to face the plundering horde, there is fear. Some farmers are quite literally ritually beating drums to keep the bugs away, and others are counter productive burning things so the smoke keeps them away. Farmers from the affected areas of Sindh and Punjab have strongly condemned the inaction of the federal and provincial governments in dealing with this grave situation. Following countrywide locust attacks, farmers have reached the government for an increase in the scope of crop insurance by incorporating pest attacks to the scheme. The crop insurance scheme was launched in 2018 by the Punjab government to provide cover to farmers growing cotton, rice and wheat (added in 2019) against floods, rain or any other natural calamity. But the crop insurance scheme does not provide a cushion for pest attacks, something that has, in fact, been a long standing demand of farmers, who seem to have more foresight than the government. Shahbaz Khan Sahu, a mustard farmer from Lodhran in South Punjab, whose mustard crop was badly damaged by swarms of locusts told Profit that the government must increase the scope of crop insurance scheme. “A large number of farmers who grow oilseed, especially mustard, have suffered huge losses in South Punjab this time around” he said. Until now, their demands have only be met with silence, and promises that the overworked planes will eventually get to them too. n

FERTILIZERS

OPINION

Habibullah Khan

The State Bank’s silent payments revolution

shall be exempt from this requirement. 2. The Interchange Reimbursement Fee (IRF) for debit and prepaid cards issued in Pakistan used on domestic POS terminals shall be capped at 0.5pc. 3. Card issuers shall offer SBP approved Domestic Payment Scheme (DPS) Card as the default card at the time of issuance or renewal of debit cards. Accordingly card requesting customers How the SBP’s latest circular could have far-reaching shall be offered the following options in order of priority: 1. E ither an exclusive DPS card or a DPS card co-badged consequences for the state of digital Pakistan with an International Payment Scheme (IPS) 2. A n exclusive IPS card upon written request of the n 1963, the meteorologist Edward Lorenz published an analysis of three customer equations working within a system from his study of the atmosphere. He With a single stroke, the State Bank has upended the digital found the three equations shared some surprising features. For example, payments infrastructure of the country, in its attempt to fix our all three equations are ‘sensitive to initial conditions’, meaning that tiny broken payments ecosystem. differences at the start grow exponentially with the passage of time. This To understand how far-reaching these measures are it is type of unpredictability is a defining feature of chaos. helpful to look at how payments at Point of Sales currently work No, this is not the chaos of the fantasy variety, where evil hordes overrun (The payments mentioned here are typical and indicative. The fees the land until the farm-boy-turned-master-sorcerer defeats them in an epic battle. are within a range for some heads). This is mathematical chaos, which deals with random states of disorder. Let us say you buy a glass of fresh sugarcane juice from the But Lorenz’s analysis also showed there was order within the system. mall for a hundred rupees and paid for it using your Mastercard When you visually plot his equations in three dimensions, it makes a strange yet from Faysal Bank. The cost to the merchant is 1.5pc, or 1 rupee 50 beautiful curve with two overlapping spirals. To date, this is known as the Lorenz paisa. This cost is called Merchant Discount Rate (MDR). attractor, and for nearly 60 years has symbolized deterministic order within seemThree parties split the MDR. The first party is the ‘acquirer’ ing chaos. which charged the MDR. This is the party that has the approval to On January 31, 2020, the State Bank sent a small circular to the presidents conduct this activity from the State Bank and whose Point of Sales and CEOs of all banks in Pakistan. On the surface, the memo is just laying out an (POS) machine is being used. iterative improvement in the payments ecosystem. However, just like the Lorenz The acquirer pays the ‘issuer’ a fee. An issuer is a party attractor, this tiny memo could have exponential effects on payments, banking, whose credit card you have used. In this case, it is Faysal Bank. The customer behaviour, retail, and economy. issuer makes 1 rupee 15 paisa on this transaction. This fee is also called the Interchange Reimbursement Fee (IRF) and is paid in The circular highlighted three measures taken by the State Bank: recognition of the bank having promoted its cards to be used for 1. MDR for POS acquiring in Pakistan shall be within the range of 1.5pc – payments, and owning the customer relationship. 2.5pc for both existing and new merchants. The Merchant categories mentioned… The acquirer also pays the third party, the ‘payment scheme’, 10 paisa per transaction. The payment scheme refers to the intermediary agency that facilitates interbank payments. In this case, it is Mastercard. After making payments to the issuer and the payment scheme, the acquirer is left with just 25 paisa. So what Habibullah Khan is the problem with MDR? It incentivizes issuers, whose chief interest is to offer discounts to their credit card customers. runs a digital content Typically, credit card customers have reasonable disposable incomes, and the main reason to get a credit card is for discounts. agency and also This means you have an ecosystem that is driven by high-value retailers in big cities. advises Profit on The acquirer, who has to fund the cost of the machine, related services and materials goes along with this, because these content related to merchants have a high number of daily transactions. They can theoretically pay off the cost of the POS hardware quicker. technology This system frustrated the State Bank to no end, because the regulator is tasked with increasing access to as many citizens as possible. Every year the State Bank receives a report by acquirers, noting how many POSs have been installed. The total active POS install base barely grew year-on-year, and till date only hovers around the 50,000 mark. The “Merchants using POS ” figure is even lower, as multiple POSs per merchant are common. This can only mean one

thing. Instead of the acquirers increasing the net POS install base, they were actually cannibalizing each other by replacing POSs or adding to POSs at existing high-value retailers. Essentially, there is a large gap between the current status quo, and where the state of the digital payment infrastructure needs to be. According to sources, the State Bank last year held a few consultative sessions to understand the problem in detail. The State Bank Governor Reza Baqir also launched the National Payment Systems Strategy (NPSS) in November 2019, which lays out a clear payments vision for the country. The strategy called for “a very ambitious policy… to facilitate the installation of POS terminals.” After discussions with stakeholders, the State Bank moved swiftly and issued PSD Circular No. 01 of 2020 stated above, titled “Improving Payment Card Acceptance Infrastructure in Pakistan”. The circular decisively changes the composition of the MDR. First, it sets a range of 1.5pc to 2.5pc. This means on average the fee paid per transaction will rise. The State Bank has also decreased the IFR, which was paid by the acquirer (or owner of the POS hardware) to the issuer (banks), and has capped it at .5pc. In the earlier example, the issuer took 1 rupee 15 paisa on a 100 rupee transaction. Under the new system, they will get just 50 paisa. With the intermediary fee averaging 10 paisa, the share of the acquirer, which used to be 25 paisa on a 100 rupee transaction, will suddenly go to 90 paisa at minimum, and to as high as 1 rupee 90 paisa. This is a really smart play by the State Bank on several levels. There are currently six acquirers in Pakistan. Five of them are banks who have mostly outsourced the POS hardware and maintenance to a third party. The sixth is Keenu, or a third party which has outsourced the license part to a bank and is piggybacking on an exclusive collaboration with Bank Al-Habib. Every year, almost every head of the acquisition business had to get creative trying to explain to the CEO and the board why they were heading a consistently loss-making business line. A POS machine can easily cost up to $350. But when you add the cost of the services, materials, maintenance and the opex of the merchant acquiring teams, the hardware cost can go up manifold. But under the new fee structure, you have a viable business model, so long as you get your costs under control. Meanwhile, banks, whose credit card customers drive POS usage, are in a corner they cannot get out of. There are over 50 million debit and credit cards issued, but only 11 million get used on POS machines. Most are used for ATMs only. This 11 million has been fed a discount heavy diet to drive usage. Should banks scale back on their credit card promotions, they risk losing the battle of secondary accounts to banks that do focus on smart deals and promotion. In fact, the State Bank has potentially

been even more interventionist than the circular suggests. Acquirers said that while the State Bank had dramatically increased their share of the pie, they had balanced that with quotas given to each acquirer that can only be described as hyper-ambitious. After adding all the quotas, it is clear the State Bank wants to increase the size of the install base tenfold to 500,000 POS machines within three years. According to sources, in a stakeholders’ meeting between the State Bank and Federal Board of Revenue, the State Bank requested the FBR to end duties on imported POS machines, which currently make up over 30pc of the unit cost. It is clear that State Bank’s engagement related to this circular is multi-modal and comprehensive. The last point in the circular is sure to cause some consternation with international payment scheme operators like Visa, Mastercard and their Chinese competitor UnionPay. New or renewed debit cards will be from a domestic payment scheme (DPS). Currently, there is only one such payment scheme by 1link called PayPak. It is clear what State Bank is trying to do here. The DPS has a lower transactional cost, so it is an attractive option if the aim is to increase the install base. In addition, transactional fees paid to international payment scheme operators represents money leaving the ecosystem and the country. I do not think this will have its intended effect for three reasons. Firstly, the State Bank left a loophole, where the customer can specifically request to issue an international payment scheme card issued. Also, co-branded local international cards are allowed. Secondly, Visa and Mastercard have a phenomenal hold on banking decisionmakers and give aggressive rebates, incentives and transfer of knowledge to banks, which local schemes cannot match. Lastly, customer psychology plays a large part. A Visa or Mastercard debit and credit card carry prestige and no international traveller, even if they travel infrequently, will want a domestic payment scheme. Why is the State Bank doing this? From our conversations with major ecosystem players, it is clear that the State Bank Governor Reza Baqir passionately believes that rapid digitization of payments will bring exponential benefits for Pakistan. This is why the State Bank is pushing the digital payments industry to innovate in distribution and business models, and why they are setting the groundwork for an unprecedented payments revolution in Pakistan. The Micro Payments Gateway (MPG) initiative is expected to be completed within a year, and it will allow the near-instant transfer of funds of all sizes without friction. Critically, this means that digital wallets will be able to directly pull money from a bank account, instead of needing to be topped up. This was a major user experience hindrance that significantly dampened the usage of digital wallets.

NPSS initiatives will also ensure another critical missing piece of the payments ecosystem is put in place. Globally, digital players are pushing for the increased adoption, usage, and financial inclusion among the most vulnerable, such as the poor and women. In Pakistan, this is not possible because the players have to onboard banks one by one, which is extremely time consuming and reduces innovation. NPSS initiatives will ensure this friction disappears, by allowing digital players to integrate with just one national layer to be connected to all banks. These innovations, combined with a much larger POS install base, form the blueprint for a digital Pakistan. Domestic spending will increase as retailers switch to omnichannel solutions. The POS install base will create a channel which will later on be used for more disruptive and cheaper technologies like Near Field Communications (NFC) and QR Codes. More digital payments will mean further documentation of the economy, which will help with Pakistan comply with FATF conditions. It will also mean valuable data for national economic policy makers. Once you have 10x the number of merchants with a digital payments infrastructure, you also have the ability to take them online in ecommerce malls and store fronts. This means an e-commerce boom that can on its own mean billions of dollars of economic activity. One cannot overstate the importance of this last point for Pakistan. The country has entered a low growth phase, and consumer spending will be one of the most important forces in getting Pakistan out of it. By no means will this be easy. Expanding a POS install base tenfold means serious upfront cash commitment by acquirers. Not only will the cost of POS machines have to be lowered, acquirers will need to innovate across hardware, processes, software and alliances to scale as cheaply as possible, and to drive usage once a POS is installed. They will also need help from State Bank, which will have to represent its stakeholders in front of FBR, collaborate on policy, and find incentives to drive card usage at POS terminals. These decisions could be controversial, such as rolling back the PKR 50,000 purchase and CNIC requirement only for digital POS transactions, or giving tax incentives to merchants who do over 80% cashless transactions. The State Bank will also have to formally push for customer journey mapping by acquirers in tier 2 cities and rural areas, to identify top customer journeys that will drive POS usage. But even with these challenges in mind, change is still possible. The Lorenz attractor was key to explaining how small changes can have large effects. Famously, Lorenz summed its core principle: “a butterfly flapping its wings in Brazil can produce a tornado in Texas.” This 353-word circular may just be that butterfly. n

COMMENT

After GIDC reduction, fertiliser companies pass on costs cuts to farmers Both Fauji and Engro have decided to decrease local prices for urea, likely to translate into lower food prices later in the year By Farooq Tirmizi

he two largest fertiliser companies in Pakistan, Fauji Fertilizer, and Engro Fertilizer, have both reduced their prices for urea fertiliser by Rs300 per bag and Rs160 per 50-kilogram bag respectively, in a move likely to result in reductions in food

prices over the coming year. This move is due in part to reductions under the Gas Infrastructure Development Cess (GIDC). Under the new GIDC amendments introduced by the government late last month, fertiliser feed and fuel gas have been reduced to Rs5 per bag, from the original Rs400 per bag. The government had imposed GIDC of Rs300 per million British thermal units (mmbtu) and Rs150 per mmbtu on feed stock and fuel

stock of fertiliser players through the GIDC Act 2015. â€œWe believe reduction in GIDC to be a positive event for FSL fertiliser players given increased pricing power due to reduction in operating cost,â€? wrote Muhammad Ashraf and Usman Arif, research analysts at Foundation Securities, a securities brokerage firm, in a note issued to clients on January 31. Analysts believe the move is likely to

have a positive impact on the profitability of the fertiliser manufacturing sector. “This is because the reduction in prices is lower than the required quantum to pass on the impact of reduction in GIDC,” according to Ashraf and Arif. The GIDC was initially imposed as a levy by the Zardari Administration PPP government in 2011 on gas consumers in the industrial sector. The money collected was to be used for the construction of infrastructure projects like the Iran-Pakistan pipeline. In December 2013, the GIDC was declared unconstitutional by the Supreme Court of Pakistan, but in 2015, the government reimposed the GIDC. The GIDC exists mainly because natural gas – like electricity – is stolen in relatively large quantities in Pakistan. The most conservative estimate of “unaccounted for gas” (UFG) is in the range of 11% for Sui Northern Gas Pipelines (SNGP) and 13% for Sui Southern Gas Company (SSGC). Until 2014, all natural gas consumed in Pakistan was domestically produced, mostly by state-owned oil and gas exploration companies and sent through state-owned gas utility companies into people’s homes as well as commercial

areas and factories. As a result, prior to 2014, the government had relatively little incentive to control UFG levels because it only represented foregone revenue. Since early 2015, however, a substantial and increasing portion of Pakistan’s natural gas supply comes from liquefied natural gas (LNG) imports from Qatar. That means that UFG can no longer be ignored. It is not just foregone revenue. It is foregone revenue for which the cost has to be paid in cash, in US dollars, and cannot be delayed indefinitely. Why is all this relevant for fertiliser manufacturers? Because fertiliser manufacturers are among the five main users of natural gas: domestic consumers, captive power plants for industrial units, power generation companies, compressed natural gas (CNG) stations for cars, and fertiliser manufacturers. The government of Pakistan does not believe in solving a problem like theft: it believes in redistributing its costs onto those who are paying their fair share already. In this case, the government will not crack down on the gas theft that is causing the high levels of UFG. It will instead increase prices for existing consumers to make them pay for the cost of the stolen gas. That is where the GIDC comes in. GIDC imposes the cost of the stolen gas onto the fertiliser manufacturing sector through the mechanism of a tax that the entire sector has to pay based on the volume of gas they use, measured in mmbtu. It is, in effect, price discrimination masquerading as a tax. The problem with GIDC, particularly in periods of high food inflation like the one Pakistan is in right now, is that it raises the cost of fertiliser which has two effects on food prices. First, it

increases input costs, which would drive prices higher through what is known as cost-push inflation. Secondly, higher fertiliser prices can result in farmers buying less, which in turn lowers the yields of their crops, and therefore creating a shortage, which would also drive prices higher. But if the government does not impose GIDC, it ends up not having the money to pay for gas imports, which in turn results in gas rationing and load shedding, the kind of which areas of Sindh are going through acutely over the last several months. In short, the government is forced to choose between cheap food, or the gas to cook it. There is, of course, the option of cracking down on gas theft and therefore avoiding the problem entirely. However, it is not realistic to assume that the government can solve a generational problem like poor law and order in time to fix the very acute shortages facing the country’s consumers. Ultimately, somebody needs to pay for the stolen gas, and it is usually the government. And if the government is paying for the stolen gas, it has to raise the money to do so from somewhere. It has chosen to do so through the GIDC. This is why the International Monetary Fund is seen as asking for price increases, even though that is not what they are asking the government to do. The IMF asks the government to stop spending money to pay for theft, and the way it does so is by having the burden of theft shifted from direct tax revenue to revenue collected by state-owned utility companies in the form of bills. Over the past two weeks, the government, led by Prime Minister Imran Khan, has decided that they will seek to lower food costs rather than ensuring adequate gas supply.

Systems Ltd’s play on Pakistan’s payments evolution gains momentum

The data entry services company gets approval from the SBP for its mobile app

ystems Ltd (SYS), a data entry services company has received in-principle approval form the State Bank of Pakistan (SBP) to grow its mobile payment application, called OneLoad. This makes the SYS the third entity to get in-principle approval under the SBP’s Electronic Money Institution (EMI) regulations, which were enacted on April 1, 2019. The other two are Nayapay, and Finja. SYS is still the only publicly listed technology company to get approval.

FERTILIZERS

OneLoad currently operates as a mobile payment aggregator or gateway, which only allows users to pool in cash, but does not allow users to cash out. Cash can only be used to clear payments against mobile loads, utility bills payments, and other transfers. The new approval means that users can now withdraw cash from retailers, and agents across the country. Additionally, the International Finance Corporation (IFC) has signed an agreement to invest in around 20% of equity of E-Processing Inc, the company which owns and operates OneLoad. SYS holds 59.13% of E-Processing. “Financial impact of said transaction is currently unclear, it will increase consumer confidence in OneLoad, in our view. OneLoad has shown impressive growth in the number of users and transactions by growing 95% and 55% respectively in the last 9 months.” wrote Mohammed Ahmed, a research analyst at Insight Securities, a securities brokerage firm, in a note issued to clients on February 3. SYS is in the business of software development, trading of software and business process outsourcing services. The Group comprises of Systems Ltd (Holding Company) and its subsidiaries – TechVista Systems and E-Processing Systems Ltd. The company’s revenue is primarily from software development and IT services work subcontracted by its subsidiary TVS operating in the Middle East region and its associated company Visionet Systems operating in the North America region. Originally started, like other fintech companies, to digitize payments and provide an e-wallet to people, OneLoad soon came to a realization that the need was not on the consumer side because many other players were there to cater to those needs like Easy Paisa, SimSim, Jazz Cash and even banks to a certain extent. Entering the market with a consumer-orienta-

tion was going to be an expensive investment because the competitors were pumping in a lot of money but OneLoad’s funds had to be used optimally. In order to get into the space without having to outspend its well-financed rivals, OneLoad decided to shift its focus to the retailer/ merchant side as the company had identified a need: keeping inventory of scratch cards was a pain for the merchants. They were unable to hold big inventories, lost count of scratch cards sold of a specific telecommunication company, coupled with a fear of theft. Moreover, getting top-ups from different companies was expensive and cumbersome as it required paying several service providers upfront and tying up money in physical cards or buying credits which were only usable for one particular service. Unused credit was also lost money for retailers. That was an opportunity there. OneLoad moved quickly and successfully digitized the retailer to make it easy for them to serve walk-in customers as retailers could now work with less upfront investment, did not have to tie up capital in multiple dedicated services and did not have to deal with numerous vendors visiting their shops demanding them to purchase more than they needed for the day. Presently, OneLoad claims that more than 25,000 retailers actively use its platform and earn commission on a transactional basis. It has served over 100 million consumers — meaning that 100 million people have bought airtime from OneLoad — since its full-service launch in late 2016, with over 20 million retailer views of the application each month. It also claims of being the largest fintech in Pakistan in terms of transactions performed and has entrenched itself for mass market, bottom of the pyramid commerce. Separately, the Pakistan Software Houses Association for IT, or P@SHA, has proposed to

the SBP to actually provide incentives to the IT industry. These could take the form of: permission to raise funds on owner’s pledged properties, 5% cash incentive on exports remittances through legal channel, and retention of 35% of foreign remittance in foreign account and its usage. According to the report, “these incentives will bode well for SYS.” Additionally, on January 28, the SBP announced it would provide an additional Rs100 billion to the Export Refinance Scheme. SYS is currently availing said scheme. The approval for OneLoad comes at a time when the government of Pakistan is actively seeking to increase the use of online transactions and boost the digital economy. Several new companies are trying to crack the code of becoming the default payment platform for Pakistan’s digital economy, but it has thus far been an uphill battle. Nonetheless, the industry has been attracting some strong global interest. Alibaba’s financial technology (fintech) subsidiary Ant Financial bought a 45% share in Telenor Microfinance Bank for $185 million in March 2018. Ant Financial’s strategy is likely to combine the offering of its product in China – Alipay – with that of Easypaisa’s mobile wallet offerings. In essence, it would replicate what Paytm built in India: a single service that combines bank accounts at formal financial institutions with the cash-vendor-dependent mobile wallet model of Easypaisa. Another startup that is looking to enter the payments space is SadaPay, a mobile wallet started by Miami-based Tech entrepreneur Brandon Timinsky, who led a successful gas delivery startup GasNinjas to a multi-million dollar exit in the United States (US). Brandon now plans to introduce Sadapay as a neobank in Pakistan. n

FINTECH

CYBERSECURITY

By Syeda Masooma hen you buy a phone, you do not just buy a chattel for communication. Sure, it doubles as a camera, calendar, and clock (and those are just some of the Cs), but also as a handy little block in which your digital footprint is safely tucked away. Well, tucked away at least, the safe part you may want mull over. Profit is a serious magazine covering a beat so underreported in Pakistan that the responsibility on our shoulders is twofold. So it goes without saying, this publication is the last place you would expect to find senseless drivel about

constantly progressing generations of warfare, hysteria surrounding cloud computing, and advice to tape up the webcam on your laptop. Despite what all the memes have told you there is no FBI agent assigned to you peering into your life through your devices. What has happened, however, is that we all currently live in a world where data is currency, and every single person is a small, constantly buzzing mine of data. And your phone is a convenient little slip of a block that contains your digital footprint. It can tell a person what you like, where you shop, where you live, where you travel, where you work, and the deepest most embarrassing questions that you can only ask Google. Again, this is not to say someone is after you, too many people already believe this vain lie about themselves. But this is to warn you that if anyone did want to try and bug you through your phone and ruin your life, it could possibly be a cakewalk. The Economist recently advertised a digital billboard that read “Alexa’s listening. Say something intelligent”. The tongue in cheek joke warning of dystopia shows that developed and developing nations of the world are still coming to terms with laws and regulations on how to govern the unseen, unpredictable, and possibly unknown implications that Artificial Intelligence and other forms of technology might have on human lives. And as you may have guessed already, Pakistan is even farther behind. There are several facets to the technology issue and therefore several aspects of law making need to be kept in consideration. Broadly, however, the contentions may be divided into three categories: personal data protection, corporate security and risks of doing business, and government data protection and strategic frameworks for protection against cyber attacks. As of now, Pakistan has a draft bill in the shape of the “Personal Data Protection Bill 2018 (PDPB)” proposed by the Ministry of Information Technology and Telecommunication (MoITT) in July 2018. It is yet to be debated, voted on, and formulated into an enforceable law. Unfortunately, this will not be a debate about whether this crude bill even comprehensively covers all necessary areas, or is just an attempt to provide more blind power to the powers that be to aid their censorship. As far as cyber crimes against citizens is concerned, Pakistan’s elite investigation agency – FIA has no access to the data of alleged cyber criminals since Pakistan is yet to sign the Mutual Legal Assistance Treaty, more commonly known as the MLAT, with the United States, or even the cyber crime clause of the Budapest Convention for that matter. On corporate and governmental levels,

“All state of the art tech is useless without security. I have worked with several governments and spending on security has increased by many folds in the last five years. The US alone spends more than $20 billion on cyber security” Shabahat Ali Shah, CEO of NITB

we have the National Information Technology Board NITB playing its part along with a private company, Trillium Information Security Systems, to come up with appropriate technical capabilities as well as a regulatory framework necessitated by the onset of technology. However, in practical terms there is little to be seen, except token anger from the parliamentary committee directed towards the Interior Ministry for creating hurdles in signing of MLAT. The science and technology ministry, at the same time, seems to be too busy with the monumental task of building IT parks and hoping to send Pakistanis into space. What is more worrisome than all of this combined, however, is the utter indifference from the general population, and even among the computer literate diasporas. This article is written in an attempt to rectify this final problem, with hopes of this urgency reaching the authorities and leading to at least some sort of groundwork towards ensuring security and privacy of Pakistani citizens.

The state of the situation

akistan is yet to have a comprehensive cyber security law. We are not even signatories to MLAT which helps authorities to send requests about social media content blocking or removal. While the responsibility of these laws rests with Ministry of Information Technology & Telecom (MoIT), Ministry of Interior (MoI), as well as the Federal Investigation Agency (FIA), if the latest session of IT standing committee of National Assembly’s held on January 22 is considered, there is still no progress whatsoever on the cyber security, signing international covenants, or simply providing necessary security to the

denizens of Pakistan. What Pakistan does have is the Prevention of Electronic Crimes Act (2016). The act outlines cyber crimes like cyberstalking, online harassment and forms of cyberterrorism, while also giving PTA the power to block or remove access to such information. However, when it comes to implementation of the said laws, PTA and FIA both explain that their hands are tied because without MLAT and Budapest convention, they do not have the direct power to communicate or convince social media platforms to remove a post, block an account, or give any information about the ownership of such accounts. FIA representatives have said on record during parliamentary committee meetings that in the absence of social media, short of users using their real name and sharing their contact details, the authority has no capability to track them down. Meanwhile, we along with the rest of the world are inching closer and closer to the threats and inevitable dangers of technology without regulations. As a nation we are far more excited about 5G starting in Pakistan, and not nearly concerned enough about the repercussions that such technology, along with the overarching role of Artificial Intelligence is going to have on our lives in absence of proper legal and technical controls. The National Incubation Center (NIC) Islamabad hosted a conference on Cyber Security with officials from National Information technology Board, Ministry of Information Technology & Telecom, and Trillium Information Security System in attendance. This was one effort to sensitize people on the myriad number of issues that we face as a country, and as individuals. Profit decided to document the discussion in layman’s terms, and also consult some more Pakistani and foreign experts on the

newer forms of technology and do a series of stories on the invisible and mammoth hazard looming over us. “All state of the art tech is useless without security. I have worked with several governments and spending on security has increased by many folds in the last five years. The US alone spends more than $20 billion on cyber security” said Shabahat Ali Shah, the CEO of NITB. Cyber security is not limited to technology. It also involved the mechanisms of how access is granted to different stakeholders for usage of any particular technology. He said that it is a misconception even with some governments that installing an antivirus does the entire job of securing sensitive data. “Pakistan’s cyber security ranking on GCI is 84 and I would not be surprised if we deteriorate to 100. We need laws and regulations” he said. “The hackers are smart people. They don’t have an epiphany to intrude. They do as much research [to hack you] as you do [to protect yourself].” Trillium CEO Mahir Mohsin Sheikh took the stage next to say that advanced targeted attacks are inevitable and they are always successful. 100 percent security is impossible. These attacks are not only effective but also cost-effective. According to the chief executive of Pakistan’s oldest information security company no amount can be said to be enough for cyber security. Of course, he would want things to sound this bleak, but for once it may even be the truth. The only thing for sure, is that fighting back in some way or the other is necessary. The problem is that cyber warfare changes the dynamics of international hostilities. More importantly, you do not have to be the state to wage this kind of war - cyber terrorism exists. No two countries need to be at war to conduct cyber attacks, yet they remain one of the key security risks. According to the latest annual report of the World Economic Forum, 36 countries mentioned cyber attacks among

There are several facets to the technology issue and therefore several aspects of law making need to be kept in consideration. Broadly, however, the contentions may be divided into three categories: personal data protection, corporate security and risks of doing business, and government data protection and strategic frameworks for protection against cyber attacks the top 3 risks of doing business. 18 of them mentioned it as the top risk factor. Cyber security experts explain the cycle through 4 stages: Threats leading to Attacks which lead to Breaches which in turn lead to catastrophic Incidents. This also means that a defensive strategy is required at each of these steps. That translates into Prediction of threats, Prevention of attacks, Responding to breaches, and finally Detecting the eventual fallout. Legislation formed for cyber security, therefore, needs to include methods and ability to analyze threats and mitigate risks, analyze incidents and mitigate consequences, and finally discover the incidents, track its immediate source and understand its nature for future.

Why should you be concerned?

n October 27, 2018, Bank Islami reported an online breach of their system in which the bank lost Rs 2.6 million. In November of the same year, the stolen data went on sale on the black market. On February 22, 2019 Moscow-based threat intelligence firm Group-IB reported spotting the sale of nearly 70,000 Pakistani identity cards on the cybercrime marketplace called Joker’s Stash, worth approximately $3.5 million at the time. In June 2019, PTA reported the identity theft of nearly 45,000 Pakistani international

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travelers for the purpose of registering imported mobile phones on DRIBS to avoid payment of customs duty. In December 2019, it was reported that biometric machines available with the myriad of retailers for SIM card registrations were faulty and were potentially leaking data. You ID card floating around somewhere not concerning enough? How about the things in your phone you would not want anyone to see. Consider the leaked videos of celebrities and politicians over social media, hacking of social media accounts of public officials, and blackmailing through such videos. If this is still not enough to worry, then perhaps a look at international scenarios might clear the picture. In January 2014, in South Korea data from 100 million credit cards was stolen along with 20 million bank accounts. In 2017, a marketing analytics firm, Alteryx, left an unsecured database online that publicly exposed sensitive information for about 123 million U.S. households. In 2015, a dating site was attacked where pseudonyms, birth dates, postal codes, and IP addresses of 4 million accounts were made public. In early 2018, Facebook-Cambridge Analytica data scandal revealed that the said company had harvested the personal data of millions of people’s Facebook profiles without their consent and used it for political advertising purposes. More recently, the Mueller Report outlined investigations into allegations of Russian interference into the US elections, through social media campaigns and hacking into email accounts owned by volunteers and employees of the losing candidate of 2016 US Presidential elections. The fact of the matter remains that our lives are changing and becoming increasingly dependent on technology. If you have an air conditioner in your bedroom that you can control through your mobile phone, chances are that anyone with the required skill set will be able to control your AC with your mobile phone as well.

What do the experts say?

he technological world is being run by two countries: a hardware producer – United States of America and a software producer – China. The rest of the globe is just consumers. Put in a crude way, the globe is undergoing a technological colonization of sorts. Information security is now an inevitable part of national security. From atomic codes to national databases, and from the switch of a television to the adjustment of a thermostat, everything around a modern human is engulfed

“These attacks are not only effective but also cost-effective. No amount can be said to be enough for cyber security” Mahir Mohsin Sheikh, CEO Trillium

in technology, and therefore is under a very real threat of being hacked and overpowered. Pakistan is building IT parks, while the rest of the world has already moved on to “Smart cities”. From water supply to banks, and from the stock market to self-driving cars, the world is increasingly moving towards artificial intelligence. There will be no need for bombs anymore. A simple code, overtaking a GPS controlled car can crash it into a crowd of people, stock markets can be hacked, water supply can be stopped, and internet services can be disrupted. The possibilities of chaos and therefore international technological warfare are endless. An entire regulatory infrastructure is the need of the hour, including a written and enforceable law, bodies and regulators to oversee the implementation of the said law, and governing and judicial bodies to carry out punishments for the violations of the same law. In the absence of a single tier, this chain will render everything useless and the sense of security deficient. Last decade and a half has completely altered life as we know it, so who is to say what will happen in the next decade? On an individual level, how many of us feel proud when we find an android cable of an off market brand at one-fifth of the price of a branded cable? A quick conversation with a technical expert sitting in MoIT will tell you how these off-brand cables now come with a potential tracker secretly saving a copy of all data you transfer through it. Similarly, how many of us have turned auto updates off on our mobile phones because it consumes too much of our data packages? That is playing right into the hands of those wishing to steal photos, videos, audio messages, and even finger prints of our mobile phones in the absence of the updated protective cover on our smartphones. While there is only so much an ordinary citizen can do to protect their privacy and digital security in the absence of governmental steps, they are not absolved of the responsibility to keep an eye out for all these dangers hiding in plain sight. On the government side, for starters we can implement the “General Data Protection Regulation (GDPR),” which has been passed and enacted by the European Union and its member states. It lays down what are believed

to be the strongest data protection rules yet. According to a document of recommendations submitted to the parliament by a not-for-profit organization, Media Matters for Democracy, following their set of rules may also be of help until we come around to building a complete infrastructure and working mechanism of controlling and defending against this new and unknown technological takeover. The Personal Data Protection Bill 2018 should ensure that all its provisions are interpreted in line with the General Data Protection Regulation (GDPR). In addition to this, a specific requirement should be present for the corporations through which they must be obliged to draw up their privacy policy according to the rules laid down in GDPR. The data collected by government entities i.e such as the data collected by NADRA, is most at risk of being misused as this data falls within the purview of ‘sensitive personal data’. The scope of the bill should be extended to government-controlled, collected and processed data, ensuring protection and legal liabilities for data held by the government entities as much as for commercial entities. There should be a time limit on the retention of data collected on the subjects. The addition of a provision that puts a time-frame of data retention would restrict data controllers from retaining data for indefinite periods. It is our belief that the time frame of data retention should vary for data controllers according to the nature of their activities and the purpose for which the data is being retained in the first place. All sections of the Personal Data Protection Bill 2018 should have civil liabilities instead of criminal liabilities in order to (a) avoid overlaps with other laws such as the Prevention of Electronic Crimes Act (PECA) 2016, and (b) ensure implementation of the law is warranted on the basis of executable fines as criminal liability would create loopholes in applicability of identified fines. There are many laws and regulations to mull. But when our entire lives are at stake, all we really can do is try.

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