CONTENTS
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12 Why are advertisers in Pakistan experimenting with influencer marketing? 18 Is Sultana Siddiqui about to lose control over Hum TV?
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24 Cement sector had a slow FY2020, but the outlook appears positive 26 What ails agriculture: sowing nothing, harvesting nothing
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31 Cutting through red-tape with e-residency Muhammad Umar Farooq 32 Will the auto sector ever recover? Eventually
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33 Electricity generation in Pakistan rising, despite the pandemic
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35 As Eid approaches, the leather industry braces itself for the worst
WELCOME
The last refuge of the scoundrel
Perhaps we should not be surprised that it has come to this, but – even though we make it our business to approach every administration with a healthy dose of scepticism – colour us surprised as to how quickly the Pakistan Tehrik-e-Insaf (PTI) led coalition of Prime Minister Imran Khan has given up on the idea of good governance and started resorting to raw, base populism as a means of retaining their levels of political support within the voting public. How else are we supposed to interpret the recent move to ban as many as 100 books by the Punjab textbook board from the use of even private schools in the largest province in the country? Some of the books include a mathematics textbook, which made it onto the list for the grave crime of having pictures of pigs as part of a graphic meant to teach children how to count. Are the sensitivities of the Muslim population of Pakistan so slight that we cannot even bear to acknowledge the existence of pigs on one page of a perfectly serviceable mathematics textbook? Are we really that frail? More disturbing than even the book ban – and we remain deeply perturbed by it – was the move to pass a law that allows bureaucrats to raid publishers and book stories to prevent the publication or dissemination of books deemed
contrary to the ruling ideology of the party in power, all under the guise of supposedly catering to the majority religious denomination’s sensibilities. We know the government has given up on good governance when these are the kinds of bills they choose to pass in provincial assemblies that they control. The pandemic-induced economic slowdown has put the government in a bind: policies that support both good public health and the economy in the medium to long run have a negative impact on the economy in the short run, and apparently the ruling PTI has decided that in the absence of having the ability to protect the short run, they will engage in populist shenanigans instead. We are still waiting on any meaningfully substantive policy reform to actually be implemented by the Imran Khan Administration, and apparently they know that we know, and hence they have decided to try to distract us as voters instead. What a crying shame. So much potential, all gone for naught.
Farooq Tirmizi Managing Editor
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Taimoor Hassan l Abdullah Niazi l Meiryum Ali l Hassan Naqvi l Shahab Omer Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
FROM THE MANAGING EDITOR
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Readers Say You can’t differentiate with customer experience. PR plays are a risky investment with a very high fail rate. Engagement on social media isn’t necessarily meaningful engagement with your brand. Going viral doesn’t necessarily grow your brand. Interrupting people with ads may do more harm than good. The number of ad impressions is not the number of people impressed. CPG executives need to exit 2015 and create their own platform yesterday. Apropos: Survive or Thrive – how CPG companies adapted to C19 lockdown Nehal Zuberi, Website
local market, where the sky's the limit. This could result in prosperity for Pakistan. Apropos: TOMC takes the IPO route to raise cash for working capital, and for expansion Anonymous, Website
The bit abt timing is important. I work till 8 or 9 in the evening. I have been meaning for weeks to buy undergarments, a necessary item, but stores are closed when I get free, and not open in the morning when I go to the office. Loselose situation. Apropos: Malls and retailers were dying to open again. Now they’re regretting it Natasha, Website
Is it not a fantastic indictment that our mobility industry just isn’t up to the mark yet? Why should Unilever have to raise a fleet when the likes of Careem, FoodPanda, Bykea and Cheetay exist? If it is because getting the bikers of aforementioned companies to download the rider app proved challenging, then this is the stupidest excuse I have ever heard. Why do they have to be using the munchies app in the first place? Use the Bykea API and just drop the order as a delivery request. Oh wait, I forgot, they aren’t a tech company so they don’t get things like APIs. Beyond laughable. Apropos: Inside the secret $1.5 million stealth direct-to-consumer startup from Unilever Pakistan Raza Matin, Twitter
Is it possible to get an inflation adjusted chart of urban residential prices in Pak since at least the 1980s or 1990 - it would be very useful to see the growth in real terms which is usually ignored as the nominal growth is focused on? Also, the same chart in USD would be a great visual also showing the impact of devaluation of currency. Apropos: Why (and how much) Pakistanis overinvest in real estate Usman Saqib, Twitter Fantastic. A must read article on the Pakistani real estate market and its pitfalls. Also a great aid in sizing up the amount of disparity created by governments incentivising black money parking in empty plots. Apropos: Why (and how much) Pakistanis overinvest in real estate Abdul Moiz Jaferri, Twitter There is a whole other dimension to the story as you are aware. Trillions are tied up in this asset which the federal and provincial governments are managing disastrously. Multi decade qabza, legal issues, disputes, poor zoning etc. Apropos: Why (and how much) Pakistanis overinvest in real estate @bacchus9696, Twitter
facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com
HOW TO CONTACT
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TOMC and a few other companies have made a good breakthrough in the development of the so far untapped agri-oriented industrial export initiative. This could be huge, and if taken up on scientific lines, may even surpass the textile sector at the exports end. In this context, scientists and experts on the university as well as bureaucracy level need to come up to increase yield and quality in the export, as well as the
Great to see how an MNC is building a DTC from scratch in Pakistan. Interesting to see how they created their own delivery fleet as well. Apropos: Inside the secret $1.5 million stealth direct-to-consumer startup from Unilever Pakistan Adam Dawood, Twitter
I am an investor of KAPCO, and it seems to me that KAPCO has seen its worst by now. The share prices have gone down from 97 in 2016 to 15 in march 2020. The way I see it, there is only one way, and it is up. If the PPA is renewed, then we should see the prices go above Rs 50. It is currently trading around 20, which is a good price if you can hold for a year or so. Apropos: Does KAPCO have life beyond its PPA expiration? Some analysts think so Khurram, Website The sitting PTI government must take notice of the expiry period coming ahead of one of the biggest LPPs, namely Kapco. Nobody including Wapda and the power ministry is taking any action. When the company has already applied for its licence renewal for more than a year. Such a big power plant must not go to waste for the sake of political publicity or anything else. When Kapco plant has a long term useful life of more than 03-05 years, the government should renew its licence with condition of restructuring their fueling system, historically based on furnace or diesel, and convert it fully to RLNG or coal, whichever suits them best as per need of the country. Apropos: Does KAPCO have life beyond its PPA expiration? Some analysts think so Myr, Website
COMMENTS
IN BRIEF Uzma Adil, the chairwoman of the Oil and Gas Regulatory Authority retired, leaving the body in disarray. OGRA requires at least three members to run its operations; with Adil’s retirement, there are only two members left. No chairperson has been selected yet. At least 113 vehicles entered Pakistan from Afghanistan at the Torkham border without paying any leviable taxes, according to the Federal Board of Revenue chairman.
“One must admit that this practice [of declaring assets and nationality details of cabinet members] is an unprecedented one.” Foreign Minister Shah Mahmood Qureshi, defending the dual nationalities of Special Assistants to the Prime Minister.
Pakistan’s Telecommunication Authority blocked live streaming app Bigo and issued a warning to similar app TikTok, citing “immoral, obscene and vulgar content”.
TPL Trakker held an initial public offering on July 22 and 23, in what is the second IPO of 2020. The tracking service company is looking to raise Rs1.38 billion.
Pakistan’s current account deficit of the country fell by 78% to $2.96 billion during the fiscal year 2020, compared to $13.43 billion last year. Most of the fall was led by a drastic fall in imports.
The Asian Infrastructure Investment Bank approved a loan of $250 million to help Pakistan against the economic impact Covid-19 pandemic, bringing the bank’s total amount of help pledged to $750 million.
“Banning a platform like YouTube is not a solution. The 3 years when YouTube was banned in Pakistan it held back our content creator ecosystem which has just started to flourish now, creating employment opportunities for thousands.” Special Assistant to the Prime Minister, Digital Pakistan, Tania Aidrus, after the Supreme Court hinted at banning Youtube in the country.
Sports goods exports stood at $262.4 million in fiscal year 2020, falling 14.97% from the $308.5 million recorded in 2019. Gold prices in Pakistan hit Rs114,700 per tola this week. Spot gold is up by more than 20%, at levels last seen in 2011. 11
With influencer marketing, primarily through Instagram, capturing a significant portion of online advertising spending in Pakistan, Profit takes a peak behind the curtain.
By Babar Khan Javed
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e live in the age of TikTok. Generation-Z and late age millennials, who were supposed to be the internet generation, are now facing an app that is beyond even
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them in many ways. Being an influencer today can mean a full time job that rakes in the cash. And it makes sense, what follows an audience is money and advertising, and if recent reports are anything to go by, influencers could soon be making shifts in the Pakistani advertising industry. A combined forecast from the two largest advertising agencies in Pakistan has shown
that advertisers are ready to shrink advertising expenditure by nearly 10%. This cut will come mainly from digital space budgets, with priorities shifting towards using content creators and influencers on social media apps. The logic is that advertising through influencers will allow companies to offset the restrictions in creative production created by the ongoing pandemic. Advertisers are using these creators to
endorse products for them or offer them to their fan bases at a discounted rate. According to data provided by Sensor Tower, these creators are spread across the top five apps in Pakistan: YouTube, Instagram, Facebook, Snapchat, and TikTok. “Influencer marketing focuses on using social media influencers as a communication channel in the marketing mix,” said Jana Gross, chair of technology marketing at the Graduate School of Management at ETH Zurich. “Companies communicate through these influencers to a larger and targeted audience. Marketing with influencers on digital platforms has become a frequently discussed topic over the past years.” Essentially, this means that companies send products or invites to events to influencers to get them to positively review their products, or use them in their content. At other times, companies also directly pay these influencers for short promotional work. Depending on which advertising agency Profit spoke to, the scope of work of dealing with online content creators to push campaign messages was either categorised under a digital public relations (PR) practice or an influencer marketing practice. It was inferred that influencer marketing is a subset of digital PR for practitioners in both agency and marketer circles. For the purposes of this study, we will be referring to the tactic of influencer marketing,
“In Pakistan, food, cosmetics, technology, financial services, and others are all now moving towards engaging influencers” Adeeqa Nazir, head of influencer marketing at Digitz.
which primarily attracts marketers that represent beauty, fashion, apparel, luxury, lifestyle, and food products. Profit examines the origins of this advertising tactic, the advertisers and agencies that have experimented with it, the stakeholders and players on the demand and supply side, and the black market that swindles advertisers that chase vanity metrics such as reach and awareness.
The origin of the influencer
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etizens are all too familiar with seeing their favorite online content creators, be it on YouTube, Instagram, Facebook, TikTok, or even
LIVEE, endorse a product or service and even offer discounts or exclusive deals by using a special coupon code. These online content creators either charge advertisers a flat fee or are offered a percentage of sales generated – sometimes both. Speaking to Profit, marketers said that when content creators preemptively offer themselves a higher fee for the latter, it creates trust and is one of the indicators of an authentic fanbase. “[In Pakistan], food, cosmetics, technology, financial services, and others are all now moving towards engaging influencers,” said Adeeqa Nazir, the head of influencer marketing at Digitz. “The thing is that makeup bloggers have been there on Instagram and YouTtube way before [influencer marketing] became cooler and more widespread. They did their looks and all without specific brand endorsement and even to this day, they do brand integration instead of completely branding their looks/content with one brand.” This trend started in 2016 with YouTube, when the largest video search engine and platform began to demonetise online content creators for creating content deemed either controversial or risky to brand safety. This impacted online content creators who focused on the news if they covered sensitive topics or cited centrist opinions. In some cases, a frivolous content copyright claim led online content creators to lose out on the ad revenue generated on the work they created. These circumstances and more led online content creators to either ask viewers to support them on Patreon, a membership platform that allows online content creators to run a subscription content service and earn a monthly income, or securing deals with advertisers either through an internal sales team, an advertising agency partner, or a multimedia network such as Defy Media. These creators, to their credit, ended up being shrewd. Instead of placing all their eggs in one basket, they also diversified their
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online presence outside of YouTube, with audiences on Instagram, Facebook, Twitch, and more platforms relevant to their content. Unlike YouTube, platforms owned by Facebook do not offer revenue sharing to content creators, regardless of how many views or engagement they generate. Online content creators that start off with a presence on any Facebook platform have to rely entirely on product endorsements and affiliate deals to sustain themselves. And as the supply side has grown, with new content creators emerging on a daily basis, a new job has emerged from the chaos. If an online content creator has a genuine skill for attracting an audience, creating content against that audience, working with big brands to recommend a product and generate a return on investment against the said recommendation, they are deemed an influencer. Agency executives told Profit that brand marketers are nine times more likely to prefer a female content creator than a male creator. On that note, Profit sourced a list of the top fifty non-celebrity influencers that digital agencies work with, of which 44 are female and six are male. Aside from Altamash Javed, a Dubaibased filmmaker and cinematographer at ALJVD, all non-celebrity influencers shared with Profit peddle low involvement products, while ALJVD operates exclusively with high involvement luxury advertisers such as Audi and Apple, with whom he has been associated with for several years. From the aforementioned list, Profit sought to rank influencers by engagement instead of by followers. But first, let’s acknowledge the unintended consequences of
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“Because of the dramatic growth and diversity of influencers, one core challenge is to identify and select the right type of influencers for a given campaign” Jana Gross, chair of technology marketing at the Graduate School of Management at ETH Zurich
prioritising the one metric that can be easily faked.
Influencing and its discontents
“A
t Unilever, we believe influencers are an important way to reach consumers and grow our brands,” said Keith Weed, for chief marketing and communications officer at Unilever. “Their power comes from a deep, authentic, and direct connection with people, but certain practices like buying followers can easily undermine these relationships.” The broker between influencers and brands is usually a digital advertising or public relations agency, with influencer worth calculated by the number of followers and content engagement. The latter is important, because while some influencers may have a lot
of followers, their content may not be getting many hits. For this reason, they have to carefully craft their audience, and then companies also have to pick influencers that suit their product. Stakeholders have told Profit that brand marketers often place greater importance towards following and engagement, with only about 25% of the value of any influencer to an advertising campaign placed on the quality of content produced. This focus on vanity metrics, created by the priorities of marketers who are measured by reach, has created a black market. “Influencer marketing has led to the emergence of shady businesses called “click farms” which offer fake followers to influencers for a price, inflate the number of “likes” on their fan pages, and post spurious comments on their posts,” said authors of Influencer Marketing with Fake Followers. “A quick Google search for ‘buy Instagram followers’ yields hundreds of results, where anyone with a credit card or Paypal account can buy hundreds of thousands of fake followers instantly. The rates for follows, retweets, likes, and comments are different based on the platform in question. Paquet-Clouston et al. report that click farm clients pay an average of $49 for every 1,000 YouTube followers. The corresponding figures are $34 for Facebook, $16 for Instagram, and $15 for Twitter. Average prices for 1,000 likes on these platforms are $50, $20, $14, and $15 respectively.” Marketers that spoke to Profit shared that the most important metric for determining the worth of an online creator is the engagement on posts, calculated by taking the total engagement across the latest ten posts and taking out an average. This number is then divided by the number of followers. To do so, marketers and agency executives use tools such as Upfluence, SocialBlade, KeyHole, HypeAuditor, and Traackr to determine the worth of an influencers’ content, follow-
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ing, and possibly, their propensity to invest in brokerage services that peddle fake likes, followers, and views. Profit was unable to gain a press pass to the influencer marketing measurement tools, with which we could determine which online content creators have used black market services based on unordinary spikes in engagement. Instead, Profit has analyzed the engagement of the top 50 non-celebrity influencers in Pakistan to understand their engagement, engagement per follower slab, differences in engagement for male and female content creators, the average engagement per gender, and how content creators market or segment themselves based on branded deals and organic content creation. Analysis by Profit, independent of the aforementioned tools, found that as the follower count for an online content creator on
“At Unilever, we believe influencers are an important way to reach consumers and grow our brands. Their power comes from a deep, authentic, and direct connection with people, but certain practices like buying followers can easily undermine these relationships” Keith Weed, former chief marketing and communications officer at Unilever Instagram rose, engagement rates plummeted (see attached charts). The analysis was split between online content creators with over 600,000, over 500,000, over 400,000, over 300,000, over 200,000, and under 100,000 followers with
their average engagement rates being 0.7%, 8%, 13.9%, 6.9%, 15.4%, 12.9%, and 14.6% respectively. Male content creators outperformed female content creators, engaging an average of 19.5% of their audience while the latter engaged on average of 11.8% of audiences, despite being the segment most preferred by marketers. This may at least partially be explained by the generall larger average follower counts of female influencers. And even so, the likes, views, followers, and comments generated can and have been faked by using bots and private blogger networks (PBNs). Profit also spoke to several online content creators, public relations agencies, and technology companies with a stake in the influencer marketing space, all of whom confirmed the unregulated social media marketing tactic is rife with advertising fraud, which most brand marketers having no interest in addressing, investigating, or running any due diligence on the scope of said fraud due to incentives around reach instead of depth. Online content creators and advertising agencies told Profit that when a client-side marketer [industry lingo for the companies that actually pay for their products to be advertised, such as Unilever, Nestle, Engro, etc] has a vested interest in generating sales using influencer marketing, they are concerned about engagement fraud and try to weed out creators that have resorted to PBNs or fraud to boost their numbers. On the other hand, client-side marketers who have a vested interest in vanity metrics such as reach and awareness, Profit was told, have no interest in conducting any form of fraud assessments. With the majority of client-side marketers falling into the latter category, a black market has emerged in Pakistan consisting of brokers offering bots or ‘organic’ fake followers, with the brokers being either freelancers found on Fiverr or members of public relations agencies helping an up and coming model or celebrity be known. A simple Google search pertaining to Pakistan on the subject will lead results, some of which are using Google Adwords to peddle their services.
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The real worth of an online content creator, Profit was told, is their ability to drive the loyal fans to purchase the products which the creator has been paid to endorse or push. Advertising agency executives told Profit that if an online content creator can drive commercial results for a sponsor that represents at least 10% of their total audience, agencies begin to refer to that creator as an influencer. “Because of the dramatic growth and diversity of influencers, one core challenge is to identify and select the right type of influencers for a given campaign,” said Gross. “Influencers differ in content, social presence, actionability, and reach. Additionally, influencers within the same vertical distinguish themselves through personality, domain, or topic. Vertical refers to the broader area to which the influencer’s content can be categorised in, for example sports. The domain is a particular sub-vertical within the focal vertical, for example angling. However, at the end of the day, a clear and consistent identification of influencer types is fundamental for a successful influencer campaign.” The second challenge in this space is the lack of regulation in Pakistan that results in influencers failing to disclose the commercial nature of their product endorsement. A campaign by McDonald’s featuring Ali Gul Pir around the bun kebab burger was revealed to be sponsored only after the product had been launched nationwide. A
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similar instance occurred with Junaid Akram visiting a Haleeb Foods plant, telling his fans it was an organic invitation based on a video he did on factory hygiene standards. It was in fact a trust-building campaign initiated by and coordinated with the advertising agency Interflow Group’s digital arm DHQ. “The use of digital influencers to expand a brand and increase business is on the up,” said Christine Riefa, a reader of consumer law at the Brunel Law School. “This creates new difficulties in ensuring consumer protection. Digital influencers provide reviews and endorsements of products usually through social networks and presented as personal endorsements.” “Practices have been identified where digital influencers do not adequately disclose whether their review or endorsement has been paid for or if they have a financial relationship with an advertiser. This creates a lack of transparency and ability for the consumer to recognize content that is in fact paid for.”
Best practices in influencer marketing
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s stated above, within the scope of social media such as Instagram and video platforms such as YouTube, advertisers have the option to utilise self-service campaign rollout tools
to reach their target audience. In taking the influencer marketing route, advertisers do not have to spend money directly with platforms and instead hand over fees to either the influencer themselves or the digital agency intermediaries. “One main difference between influencers and other key players is that the border between content creation and consumption vanishes. In contrast to celebrities or opinion leaders, influencers create content for their audience and consume the traffic generated by their content,” said Gross. “They highly appreciate audience comments and take audience feedback very seriously, thereby being influenced by their audience.” She goes on to explain that based on the goals of a campaign, the exact target audience, and the message of the influencer campaign, companies should then decide whether to put a focus onto domain breadth or onto social presence. The former refers to influencers that have subject matter expertise while the latter refers to influencers who simply attract an audience based on their optics. She said that making the distinction honestly plays a big part in achieving the stated campaign goals, adding that once the focus is defined, companies should identify which of the four influencer types best matches – citing The Big Four of Influencer Marketing. A Typology of Influencers, a research paper she co-authored on the types of influencers and their best fit to brands and campaign goals. “Influencer marketing is a highly dynamic, fast-moving and growing channel,” said Gross. “When examining the trend of influencers, it becomes clear that new influencers emerge every day. It is therefore important for companies to have a guideline that can be applied when scouting influencers. In sum, it is recommended that companies should first define the target audience to be reached. Secondly, on the basis of this, they should define the goals of their influencer campaign and the message to be communicated.” Sarah Hughes, a product marketing manager at Inmar, says that selecting the right influencer is often one of the most complex pieces of campaign planning, made worse when marketers struggle with audience legitimacy and brand affinity data. She said that surface level data like followers, engagements, and content quality will no longer cut it for influencer selection. “In our research, which was conducted using AI-driven selection technology, we found that influencers selected via AI had a higher brand affinity and higher estimated impressions than influencer selected by a client,” she said. “Instead of using vanity metrics to measure the success of your campaign, use this information as a diagnostic
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tool for real-time campaign optimization to determine which channels, content, or messages resonate most with various audience segments.”
The good, bad, and the ugly
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peaking with Profit on the condition of anonymity, an executive at Mumuso shared that a recent integrated marketing campaign employed 15 online tactics for customer acquisition. Profit was told that the worst-performing tactic was influencer marketing channels, with a $400 flat fee paid to Areeka Haq. Out of her 1.3 million followers, 36% watched the sponsored content, and only 0.41% clicked through to the site link of which a grand total of three people purchased $35 worth of products. Even with the assumption that Mumoso was mistaken in its selection of influencers, the negative return on investment is so jarring that the business will never experiment with the tactic ever again. “A successful, measurable, impactful influencer program is all about the process: research and planning, influencer selection, activation and optimization, and measurement,” said Hughes. “Use data to uncover information like shopper behavior, category trends, and audience demographics prior to selecting influencers and kicking off your campaign. Creating a campaign that is built and designed by data is the first step to a successful program.” The most prominent use case for influencer marketing in Pakistan has been to create awareness and generate trials, with limited
“Selecting the right influencer is often one of the most complex pieces of campaign planning, made worse when marketers struggle with audience legitimacy and brand affinity data.” Sara Hughes, product marketing manager at Inmar
attempts to connect the tactic with cold hard sales which cannot be doctored through bots or PBNs. Unilever Pakistan Foods Limited (UPFL), a long-time user of influencer marketing, recently rolled out a campaign utilizing micro-influencers on Instagram for Wall’s Solero, which has thus far attracted nearly 250 unique posts at an unknown average awareness rate. Across nearly 200 posts seen by Profit, there is no affiliate link, no coupon codes, and no ‘link in bio’ copy. The campaign only employs hashtags to measure awareness and audience growth. This approach of valuing awareness over commercial results corresponds to what Profit is told is the root cause behind the black market for bots and PBNs, with advertisers that are employees preferring measurement in this way.
“The final step to ensure a successful influencer campaign is to define your measurement strategy,” said Hughes. “Your post-campaign measurement strategy should correlate to your main campaign goal. For example, if your campaign goal was to increase in-store sales, you would want to use a retail sales lift analysis to measure the success of your influencer program.” In direct contrast, a sales-focused online campaign launched by Tudors Pakistan has activated nearly a dozen influencers, all of whom have been given a 10% coupon code that corresponds to their Instagram handle or name, according to documents seen by Profit. Fans and followers of the selected influencers can avail discounts as a result of the code, and the influencer will be compensated in the follow-up campaign based on the revenue generated, much like the affiliate marketing model. The decision-makers behind this campaign have a vested interest in delivering commercial interest and sales, and thus are less concerned about awareness and audience growth, pushing sales and earning reach and views as a consequence. “When large advertisers start measuring influencer marketing campaigns with sales and calculating influencer worth with their ability to drive commercial results - which no bot or PBN can fake, we will see the market shift to influencers with domain expertise instead of those that just look good for the camera and have a tharki audience,” said a prominent publicist. “Till then, advertisers will continue being defrauded and waste their money during a recession. Strange that even in times of austerity, advertisers at MNCs are wasting money on vanity metrics. When the large advertisers evolve their approach, the market follows. Till then, they are asking to be duped and the market is more than happy to profit from their ignorance.” n Additional data analysis by Taimoor Hassan.
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MEDIA
By Ariba Shahid
T
here are no two ways to say it: Hum TV is Sultana Siddiqui’s baby. Yes, she raised the financing from investors including her brother Jahangir Siddiqui – the veteran, and now retired, investment banker – and yes, her daughterin-law Momina Duraid is a key figure in the creative direction taken by the company, and her son Duraid is the CEO. But when it comes to Hum TV, everyone knows Sultana gets the last word. But, if the rumours in the market – and the astonishing movement of the company’s stock price – are any indication, that may not be true for much longer. There appears to be a concerted, well-financed effort to seize control of Hum Networks – the parent company of four major Pakistani television channels including Hum TV (local entertainment), Hum Sitaray (hybrid local and foreign entertainment), Hum Masala (food and cooking), and Hum News. How do we know this? Hum Networks’ stock price has shot through the roof, and some of its existing foreign shareholders have acquired an even larger stake in the company, implying a desire to take control over the company’s board of directors, if not the management itself. Should the changes be pushed through, it would the culmination of a saga almost as dramatic as the television shows that air on the company’s flagship entertainment channel. Unlike those shows, however, this drama has the virtue of playing out in real life.
The share sale, and the stock price run-up
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n June 5, 2020, Hum Networks sent a disclosure notice to the Pakistan Stock Exchange: Kingsway Capital – a London-based asset management firm – had bought 16.5 million shares of Hum Network at Rs8.90 per share, valuing the transaction at nearly Rs147 million (about $900,000). The shares represented about 1.7% of the total shares outstanding of the company. Kingsway already owned 16.3% of Hum Networks, so adding a little more to its holdings was not necessarily out of the ordinary, or even newsworthy. Here is what makes it significant, however: prior to this transaction, a consortium of 15 foreign investors owned about 48.6% of the company. Add in this amount and the foreign investors now own 50.3% of Hum Networks, enough to have a majority share. That this change took place against the
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“Duraid now knows he is in the minority. Duraid and JS are both consulting their advisors. The Hum [management] will want this meeting to not happen… Sultana isn’t a cheat, but of course, when you operate a company, there will be some chances of slips.” Aqeel Karim Dhedhi, Chairman of AKD Securities
backdrop of an extraordinary run-up in Hum Networks’ share price – the stock jumped from Rs1.82 per share on March 25 to Rs10.26 the day before the Kingsway announcement, an astonishing rise of 463% in just over two months – and the move starts to look like the prelude to something more serious. And then there was the massive rise in trading volumes. Prior to April 15, 2020, the average number of shares traded in Hum Networks was around 258,000 per day. Between April 15 and July 7, however, the average trading volume in the company’s shares jumped to 5,767,000 per day, an increase of 2,135%. None of this is justified by the company’s recent performance. The most recent earnings announcement came on April 30, 2020 for the nine months ending March 31, 2020. While the numbers were slightly better than the previous quarter, they were hardly anything to get this excited about. For the first quarter of 2020, revenue was up an impressive 21.8% compared to the same period last year, and the company managed to swing from a loss to a profit. However, that increase in quarterly revenue was not enough to reverse the otherwise dismal performance of
Hum Networks. Revenue for the nine months ending March 31, 2020 (the first three quarters of the company’s financial year) was still down 8.3% compared to the same period in the previous year. That result announcement justifies some of the optimism, to be sure, but hardly the kind that justifies the stock price jumping as high as it did, nor the kind of volumes that rose as high as they did. So, what exactly is happening with Hum Networks? Why are so many of its shares trading hands, and why are investors so excitedly bidding up the price of the stock? Before we explore the answer to those questions, let us add in two more ingredients to this drama: Sohail Ansar, one of the independent directors of the company sold 582,000 shares – nearly all of the shares he owned – in 18 transactions on June 9 and June 11, at an average price of Rs13.70 per share. All told, Ansar’s share transactions resulted in him receiving nearly Rs8 million. It is unclear if Ansar made a profit or loss on his investment in the company’s shares. And then came one more wrinkle: on July 6, the company once again wrote to the PSX
and informed them that the share registrar of the company – the entity that actually holds the records of who owns how many shares and when they transacted – would be changing from the Central Depository Company of Pakistan (CDC), the most widely respected registrar in the country, to FD Registrar Services, a much lesser-known provider of such services. All of this reeks of a battle for control of the company. So how did we get here?
Who wants to control Hum?
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et us first settle the mystery question: who would have an interest in wresting control of the board of directors of Hum Networks and why? Aqeel Karim Dhedhi, the highly influential investment banker and stockbroker known throughout the market by his initials AKD (also the name of his firm), thinks he knows who is behind it: “Jahangir Siddiqui just wants to bring Sultana down,” he said in an interview with Profit. He even has an elaborate theory as to how and why Jahangir Siddiqui would want his own sister ousted from the company that represents her life’s work and pinnacle of her professional accomplishments. As reported in a previous story in Profit, Sultana had started the network with the financial support of her brother, but had built it up into a successful enterprise on the strength of her own talents. In recent years, however,
there had been a falling out between the two siblings. The reason is somewhat unclear, though AKD thinks he knows why. The issue, he thinks, started in 2012, when Sultana Siddiqui and Momina Duraid – her daughter-in-law – both bought houses in the United States. “The main question [Jahangir had] was where Sultana got the money to buy the house,” said AKD. The dispute arose from the nature of the company and the complex financial arrangements that Hum Networks has with Moomal Productions (now called MD Productions), the main production company from which it buys its content. Hum Networks’ business model relies on that relationship. Here is how. Television is a difficult business because you have to keep producing shows that have audience appeal. Unlike shows in the US and UK, where good shows often run for multiple seasons, Pakistani shows are effectively all designed to be single-season shows of varying lengths, with one story arc dominating the entire season and the show concluding when that arc ends. That means there is much higher turnover in shows, and therefore much less predictability in terms of whether or not a channel will be able to produce content that people will like. It also means more financial instability for the actors, producers, directors, scriptwriters, and other staff who are involved in the production of television shows. They do not know where their next paycheck will come from once the show they are working on ends.
Sources familiar with the thinking of both Ali Jahangir and his father, however, insist that they have absolutely no intention of seeking a change in the control of the management. Even AKD admits that Jahangir Siddiqui sold his shares in Hum Networks. “Jahangir sold his shares to foreign investors at Rs17.50 [a share] a long time ago,” he said
Hum Networks succeeded by attracting the best talent, which it did by solving the financial insecurity problem for people who work in the television business. In addition to the publicly listed Hum Networks, Sultana and her family also own Moomal Productions (now renamed MD Productions), a private production house that have an exclusive contract to produce content for Hum TV, the company’s main entertainment television channel. Because they have guaranteed uptake of their shows, Moomal has a habit of granting multi-show or multi-film contracts to actors, directors, writers and other talent. Thus, even though shows last for a single season, Moomal is able to hire people for longer, giving talent more predictability and Moomal (and by extension, Hum TV), the ability to attract some of the best talent in the industry. And this strategy has largely worked. The dramas it has produced have generated an audience beyond Pakistan and the company syndicated the 2011 show Humsafar, its biggest hit drama and the biggest ever in Pakistani television history, to an Indian channel. Humsafar generated Rs200 million for the company in revenue on its first television run, the highest for any Pakistani television show until that time, and in the syndication deal, it earned even more. The downside of the strategy, however, is the potential for financial conflicts. While all the public company’s shareholders own the television channel, only Sultana and Momina own MD Productions. But Momina’s husband is the CEO of the company that decides how much MD Productions gets paid for its shows. And the minority shareholders of Hum Networks – including, back then, Jahangir Siddiqui – have no visibility into the finances of MD Productions. That means that Duraid can agree to buy a show or film for an unreasonably high price from MD Productions, knowing that the excess profits will flow to his wife and mother. That high price, however, means a lower profit margin for Hum Networks, the publicly listed
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company in which Jahangir Siddiqui then had a share. It was exactly this potential for a conflict of interest that – according to AKD – Jahangir was angry about in 2012 when he demanded to know where Sultana and Momina got the money to buy a house in the United States.
Sibling rivalry
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he fight grew heated enough that outside arbitrators were involved. The initial two arbitrators were Bashir Janmohammad (one of the major shareholders of Dalda), and Arif Habib, another investment banker, and industrialist who is the controlling shareholder in the eponymous Arif Habib Group. In AKD’s telling of the story, Sultana conceded that the houses were indeed bought from the proceeds of the profits from Moomal Productions, but suggested that the profits were legitimate. Jahangir, however, found the arrangement to be untenable, and demanded that the production house be moved inside the publicly listed company so that all shareholders could share in its profits, not just Sultana and Momina. The arbitrators, however, disagreed with Jahangir’s position and insisted that Sultana had the right to continue owning the produc-
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tion house independently. Jahangir was deeply upset at this result, and then suggested what is known in market parlance as man mela: a price is set for the company and whoever has the capacity agrees to buy the other party’s shares outright. That may have resolved the problem, but – AKD says – Ali Jahangir Siddiqui, Jahangir’s son and heir stepped in and insisted that they be a forensic audit to determine how much money has been siphoned out of Hum Networks before the man mela could take place. Arif Habib suggested a compromise, suggesting a regular audit by one of the Big Five accounting firms in Pakistan. Ali disagreed that such an audit would be sufficient and insisted on a forensic audit. Since then, says AKD, Jahangir and his son have been trying to seize control over the company.
Is this JS, or just corporate governance?
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ources familiar with the thinking of both Ali Jahangir and his father, however, insist that they have absolutely no intention of seeking a change in the control of the management. Even AKD admits that Jahangir Siddiqui
sold his shares in Hum Networks. “Jahangir sold his shares to foreign investors at Rs17.50 [a share] a long time ago,” he said. However, even though JS does not appear anywhere in the shareholder list, AKD insists that he wants to take control over the company. “When Kingsway got upset at Hum, Jahangir got them to be his proxy,” he alleges. To be clear, what AKD is suggesting – while theoretically possible – does not actually make any sense. For instance, let us suppose that the foreign investors really are seeking to control the company on Jahangir’s behalf. However, even if they control more than 50% of the shares, they can still not seek an ouster of the management. Under Pakistani law, removing a CEO requires not a majority but a supermajority of 75% of the shares of a company. And the CEO has complete control over who else is in management. Duraid and his brother Shunaid control 29.4% of the company, which means that unless Shunaid decides to back Jahangir Siddiqui – a highly unlikely prospect given the recent animosity between the two families – there is no way any group of investors can remove Duraid as the CEO. This is exactly what sources familiar with the Hum Networks’ management tell Profit: that they believe there is no way to effect a
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change of management control and hence they remain unconcerned about the activity in the share price of the company or the new shares being bought by the foreign investors. Based on the data Profit has reviewed, and what we know of Pakistani securities and corporate governance laws, the case AKD is making – that Jahangir Siddiqui is out to ruin his sister and seize control over her company – does not appear to be backed by the evidence. What is clear, however, is that the objections raised by Jahangir and Ali Jahangir are shared not just by them, but by the foreign investors who bought out their shares.
Moving MD Productions in-house… maybe?
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he foreign investors to whom Jahangir Siddiqui sold his shares ended up demanding exactly what Jahangir had been demanding all along: that the production house now know as MD Productions no longer be a separate entity and instead become a wholly-owned subsidiary of the publicly listed company into which they were buying shares. In other words, what Jahangir was demanding had been in accordance with globally recognised good corporate governance practices, a demand that Sultana, Momina, and Duraid has to accede to anyway when they asked Jahangir to exit the company. However, it appears that – even though they promised the foreign investors that they would do so – Sultana and family have not actually gotten around to moving MD Productions in-house to Hum Networks, despite it having been more than four years since they first committed to having done so. The Hum Networks board first approved of the merger of MD Productions with Hum back in September 2016. In April 2019, however, the company withdrew its application for the merger from the Sindh High Court – “due to
inordinate delay in the matter proceeding with the High Court,” they said in the 2019 annual financial statements. That statement, however, sounds odd. The Sindh High Court is known as the most corporate-friendly court in the country. Halting or even delaying mergers and acquisitions transactions without cause is uncommon. Given the fact that this was a merger that the management of both companies were not particularly keen on to begin with, we suspect – though cannot confirm – that there are other reasons for why the merger was never completed. Nonetheless, it appears that the Hum Networks management have not entirely given up on the matter. On February 28, 2020, they announced that they would try once again to have the merger go through. It is unclear what stage the merger is at, and the extent to which the management has had a change of heart on the matter. One thing is clear, however: if the merger does not go through, the foreign investors are likely to have one more reason to be upset with the management.
The share registrar change
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hen we get to the shady business of changing the share registrar. Sources familiar with the management’s thinking state that Duraid and Sultana are not worried about a change in the shareholding of the company, and yet they made a move to change the share registrar from the CDC – the most widely respected registrar in Pakistan – to FD Registrar Services, a single-member private company that does not even have a website. The move is seen as highly suspect by the foreign investors, particularly Kingsway Capital, who have made the unusual move of explicitly opposing the shareholder resolution required to approve the change. The motion to change the registrar will be presented at the extraordinary general meeting of the shareholders, announced for Saturday, August 22, 2020.
Why would Hum Networks want to change their share registrar? Well, for one thing, the CDC is among the more expensive registrars, and the management have stated that they want to cut back on costs, given the declining revenues of the company. However, the costs of the registrar’s services are so immaterial that they do not even show up as a separate line item in the company’s detailed financial statements for 2019. So why change registrars? Well, if you are worried about who owns your shares, and you decide to change the entity that records who owns which shares from a well-reputed entity to a no-name company without even a website, one might forgive the foreign investors for thinking there is potential for foul play. “Duraid now knows he is in the minority,” said AKD. “Duraid and JS are both consulting their advisors. The Hum [management] will want this meeting to not happen.” Tellingly, he added the following sentence: “Sultana isn’t a cheat, but of course, when you operate a company, there will be some chances of slips.”
What comes next?
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ven though AKD remains convinced that JS is making a move to take over Hum Networks, it remains unclear as to how he might be able to do so at all. On the other hand, there do seem to be some visibly upset foreign institutional shareholders who have made their displeasure with the Hum management known in no uncertain terms. Meanwhile, one of the announcements that came through as part of the notice for the extraordinary shareholder meeting: Sultana will finally be retiring as a director of Hum Networks, perhaps choosing to relinquish control to the next generation while she can still leave on a positive note. And while the foreign investors do not have enough votes to oust the management, they do seem deeply unhappy, a situation that is unlikely to remain tenable for long. n
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Cement sector had a slow FY2020, but the outlook appears positive Analysts expect earnings for the sector to be boosted by a resumption of construction activity and a fall in interest rates
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f one looks at the sales figures for the cement industry of this quarter, one could be mistaken for thinking this is a sector that is struggling. Local cement sales during the fourth quarter of fiscal year 2020 declined by 14% year-on-year and 8% quarter-on-quarter to 9.4 million tonnes. The total local sales for fiscal year 2020 were recorded at 40 million tonnes, which is a fall of 1% year-on-year. Meanwhile, the total cement sales during the fourth quarter of fiscal year 2020 declined
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by 12% year-on-year and 12% quarter-on-quarter to 10.8 million tonnes. However, total cement sales in fiscal year 2020 increased by 2% to 47.8 million tonnes, buoyed by healthy exports. And yet despite these numbers, the cement sector is actually doing well, and will continue to do well, according to Shankar Talreja, a research analyst at Topline Securities, an investment bank, in a note issued to clients on July 20. In fact, the five companies that Talreja included in his universe managed to reduce their losses by half, from Rs1.1 billion in
the third quarter of fiscal year 2020, to Rs600 million in the fourth quarter of 2020. There are a few factors that helped these companies along. First, the cement sector is benefitting from a fall in commodity prices, like oil and coal. The companies’ earnings have improved, as they have made significant savings due to lower power, fuel and transportation costs. Fuel costs are anticipated to fall: the average coal prices were around $80 per tonne in the third quarter of fiscal year 2020, compared to the average coal price of $69 per tonne in the
fourth quarter. Many cement companies have utilized their own captive power plants, which run on furnace oil, further decreasing the cost of power. Even transportation costs will decrease due to lower diesel prices. Second, the interest rate was cut significantly by 625 basis points to 7%. According to Talreja, the benefits of the lower rate will manifest in the September 2020 quarter, as there is a lag of around three to six months on loan repricing. Third, the federal government announced a construction package in April 2020. The scheme is considered somewhat controversial, since investors no longer have to declare the source of income for their investments until the end of the year. Investors will also be granted a waiver of up to 90% on tax, if they are investing in construction projects under the Naya Pakistan Housing Scheme. The industry will also have a fixed tax regime, instead of taxes on profits. The government also followed up with more incentives for the industry in the new budget for fiscal year 2021. Around Rs69 billion was allocated for dams, and Rs30 billion was allocated for the Naya Pakistan Housing Scheme. Fourth, the central bank has asked commercial banks to allocate 5% of their total
lending to the construction sector, which will be provided at a low rate of 5% and 7% for five and 10-marla houses (one marla is around 272 square feet). This will hopefully improve lending in general: as is, banks’ current exposure to the sector is only at 1% of overall advances. The five companies that Talreja included in his universe are Lucky Cement, Kohat Cement, Fauji Cement, D.G Khan Cement, and Maple Leaf Cement. These are mostly northern players, though Lucky Cement and D.G. Khan Cement have sizable market shares in the south as well. The north comprises 75% of the country’s operational capacity, and most of their earnings come from the local market. Almost all companies will see their earnings per share drop on a yearly basis, though there is some improvement on a quarterly basis. Lucky Cement sales are expected to fall 16% on a quarterly basis, of which local sales are to fall 10% QoQ, and exports to fall 30% QoQ. Consequently, it is expected to post an earnings per share of Rs3.9 this quarter, down from Rs4.45 last quarter. Talreja expects a final dividend per share of Rs2. Kohat Cement is expected to post a loss per share of Rs1.3 this quarter, which is an improvement from last quarter’s loss per share of Rs1.9. The company saw its power costs fall by
28% on a quarterly basis, helping reduce its loss. Though local dispatches have stayed steady at 581,000 tonnes, a decline in exports means that the total sales volume will fall 5% QoQ. Fauji Cement, too, had lower power and fuel cost, and even saw its local sales increase by 2% quarter-on-quarter. Its loss per share is expected to decline from Rs0.15 in the third quarter of fiscal year 2020, to Rs0.12 in this quarter. The volumetric sales of the company are expected to decline by 10% QoQ. D.G. Khan Cement suffered some heavy exchange losses in the third quarter of fiscal year 2020, at around Rs5.5 million. This contributed to a loss per share of Rs2.3. But this quarter, the exchange losses are controlled at around Rs80 million, which means the loss per share is expected to decline to Rs1.2. The volumetric sales of the company are expected to decline by 27% QoQ to 1.45 million tonnes. Finally, Maple Leaf Cement is expected to post a loss per share of Rs0.8, a slight improvement from the loss per share of Rs0.87 in the previous quarter (this is because last quarter, the company recorded a one-off expense of around Rs200-300 million for a reversal of royalty). The sales of the company are estimated to decline by 21% QoQ to 1.02 million tonnes. n
CONSTRUCTION MATERIALS
By Hassan Naqvi
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ven as we battle in the throes of the coronavirus pandemic, something most Pakistanis will not know is that we have been fighting another virus for more than a decade now. The ‘curl leaf virus’ is a pathogenic virus that affects cotton plants, causing its leaves to curl upwards and growth to become stunted, resulting in significantly lower yields. Despite cotton and textiles being a major export for Pakistan, successive governments have been unable to combat the virus, leaving cotton farmers frustrated and complaining. This inability is testament to the neglect that the agriculture sector has seen in the country. The government often describes Pakistan as an agrarian society, a fact that is repetitively drilled into our heads by social studies textbooks. Yet, the agricultural sector remains starved of attention. Even as the government announced a multi-billion rupee rescue and relief package for textile mills, the farmers who grow the cotton for those mills were conve-
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niently ignored. And without a powerful lobby like the All Pakistan Textile Mills Association (APTMA) to back them and raise a ruckus in the media, is it any surprise that farmers do not get anywhere and remain largely ignored? The latest news, however, has been hopeful, with reports surfacing that the government has announced the Prime Ministers Agriculture Emergency Program worth a whopping Rs277 billion. After decades, there is hope that a meaningful reversal in the fortunes of the agriculture sector might be on the cards. Naturally, the relief package has drawn attention, and was a subject of discussion along with the plight of agriculture at a recent webinar attended by people in powerful corridors. But the question remains, even with the money, how deep do Pakistan’s agricultural issues go?
The IPR webinar
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he woes of the agricultural community and the issues that haunt this sector prompted the recent webinar held this week by the Institute for
Policy Reforms’ (IPR), a pro-Establishment think tank run by Humayun Akhtar Khan and some other veterans of the Musharraf Administration. The webinar was supposed to get powerful movers and shakers together and ask them to be part of the conversation related to agriculture, which are usually left to farmers and the raw material users. The conclusions were stark for the sector, though judging by what the participants of the webinar thought were problems, perhaps a bigger problem for the sector is one of mental framework even for those who mean it well. For starters, the participants – who were all experts on agriculture or agricultural economics – thought that one of the biggest problems facing the agriculture sector is that it is unable to attract enough foreign aid, a reflection of the old Pakistani bureaucratic beggar mentality that nothing can be done without a handout from foreign countries. As if Pakistan does not have the resources to better its own condition. They pointed to the fact that of the grants that it does manage to get, it is rare
that they are invested in a way that increases productive capacity to produce exportable goods. Pakistan’s research capabilities have lagged so far behind that it is often impossible for the government to be able to ascertain an appropriate policy course of action. Because of its large agricultural landmass and population, Pakistan has thus far managed to skate by with its existing natural resources. However, decades of ignoring the problems have brought us here, where the country as a whole is still unable to fight the ‘curl leaf virus’ in 2020. “We have been unable to adequately deal with the virus affecting cotton, or even the harm done to all crops by insects. Is it any surprise then that many indicators reflect the sector’s grim reality,” said Pakistan Tehreek-i-Insaf (PTI) leader and IPR Chairman, Humayun Akhtar Khan on the occasion. “The area under cultivation has stayed the same as it was two decades ago. Now, this would have been okay if productivity were on the rise, but our farms have gotten no more efficient and no more larger,” he added. The production of wheat per hectare has not grown, and cotton productivity has fallen. So far, there has not been a single meaningful discussion on the effect of climate change or food security. There has not been so much as a conversation about how to manage agriculture in a fundamentally changing world. “Agriculture suffers from underinvestment, flawed policies and a lack of connection between research and policy. In times of crises, we offer Band-Aid solutions, but avoid studying the systemic issues that affect agriculture. However, it is not a lost cause yet,” said Humayun Akhtar Khan. According to Syed Fakhar Imam, the federal minister for national food security, Pakistan needs another major breakthrough in agriculture. “Until the 1990s, Pakistan’s rates of growth were close to 4%, continuously on the average for nearly two decades,” he said. “Our major breakthrough in agriculture came when we had a paradigm shift both in our wheat production with the assistance
“The area under cultivation has stayed the same as it was two decades ago. Now, this would have been okay if productivity were on the rise, but our farms have gotten no more efficient and no more larger” Humayun Akhtar Khan, Chairman of the Institute for Policy Reforms
of Dr Norman E Borlaug and with IRRI [International Rice Research Institute] in the cultivation of rice. That went up by two and half times our traditional,” he added. “After 1966 things changed because of two specific elements: the introduction of the short stature mexipak wheat breed, and the use of chemical fertiliser, and optimal use of application of water with the fertilizer. This changed the entire paradigm [and significantly increased crop yields]. And since then, there has not been a second shift in the paradigm.”
Five major crops
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ssentially, Pakistan focuses on five major crops. Of these, the most significant one is wheat, which makes up 36% of agricultural land being used. The other four are rice, sugarcane, cotton and maize. The first four of these are all very traditional crops that grow well in Pakistan’s climate. However, the big breakthrough of the past few decades has been the growing of maize. Maize only appeared on the scene somewhere in the last 12 years. About 12-14 years ago, it accounted for only 1.5 million tons. This number has now gone up to 6.7 million tons, pri-
marily because the poultry industry depends on it. It is also worth remembering that Pakistan’s overall growth has not been this significant, so there has definitely been a change in focus among growers towards maize. However, while it is a bit of a success story, maize is also a great example of everything that is wrong with the growing process in Pakistan. For starters, most of the maize or corn seeds used by farmers are imported through multi-national companies (MNCs), and not necessarily indigenous to the areas they are planted. Domestic seed production has been one major area in which Pakistan has failed to make any progress Even the curl leaf virus referred to in the beginning could have been solved using modern seed technology techniques. Many countries, including in both Africa and Asia, have managed to overcome this virus. But Pakistan’s antiquated, local seed technology and treatment has meant the disease persists and affects yields to this day. In total, Pakistan needs about 42-45 thousand tons of seeds a year. There was a time when the Punjab Seed Corporation was providing reasonably standardised seed. This met about 30-35% of Pakistan’s seed requirement. “The federal government is encouraging the provincial governments in Sindh and Punjab
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“We have to adapt to new technologies, especially In Vitro Fertilization. We must also look towards other avenues. Pakistan’s poultry sector has been a success and is globally competitive. This happened through the improvement of knowledge in nutrition and genetic selection” Syed Yawar Ali, Chairman of the Pakistan Business Council
to purchase the seed in partnership with the private sector to cover about half the requirements,” suggests Fakhar Imam. “The cost of this to governments is affordable. This way, quality seeds will be available for the next crop. The above is for several crops. We should also do the same with wheat.” Imam believes that our entire research system needs to change. He said that international specialists will soon appraise, evaluate and analyze the government’s research systems in their areas of specialisation, with a particular emphasis on the ability to generate data to analyse and solve local problems. Until Pakistan actually has cutting edge data that it can use to focus on problems and solve them, the agricultural sector will go nowhere. This is where the Catch-22 of all Pakistani problems comes in. The country needs our agricultural sector to be strong not just for food security, but because it is a significant export for us. However, to improve the sector, the country need machines, pesticides, and different kinds of fertiliser. Out of all these major inputs, very little is manufactured domestically, and all of them are imported. So to improve agriculture, until we can manufacture, we will be forced to import.
The heart of the problem
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learly there is much to be talked about in regards to how the agricultural sector has been treated in Pakistan over the decades. The
neglect and the hodge podge, half-hearted attempts at fixing it have not made things better. We also have very little accurate data to determine specific, and technical problems that the country is facing in this regard. However, experts have weighed in on what we do know. For Dr Iqrar A. Khan, former Vice Chancellor of the University of Agriculture in Faisalabad, Pakistan’s biggest challenge is small farm size and fragmentation. “The bulk of our present land holdings does not allow absorption of available technology. The research available cannot be utilized by small farm holders,” he said. “Due to large scale urbanization, parts of the country are threatened with desertification. Range lands are being overgrazed and salinity is a continuing threat to output. This is happening because of excessive groundwater mining.” Water is an endemic issue. Investment in on-farm water management and large storages have yet to show results on ground. The need of the hour is a high-efficiency irrigation system, what we have instead is the traditional gravity operated, analog irrigation system that is no longer enough, especially with smaller land holdings. Dr Khan suggested that high efficiency irrigation systems require pipelines and energy and on-farm storage. The water can be tendered and delivered on demand. “In Pakistan, we are still reliant on the ‘warabandi’ rotational water allocation system which
is not linked to high efficiency,” he said. “There is plenty of information available in the form of agro ecological zoning, and it is time that we see a policy shift. We need to move out of the traditional mindset of having a rice-wheat system or cotton-wheat system or talking about mixed cropping. We have around a hundred different agro ecological niches which are available. Therefore, crop diversification can be incentivized.” On the infrastructure side, in addition to water storage, the government should construct at least two new canals. New canals should be designed and constructed and put to use according to the needs of a high efficiency irrigation system. Currently, farmers have a difficult time in getting access to the market because of the size, efficiency, and proximity of the markets. “We need better market governance to build efficiencies. Markets are not competitive or facilitative. In the current system, they are structured to exploit the farmer and consumer instead of facilitating them. The farmer is the least served stakeholder in the market. Therefore, the market deserves attention in terms of hard and soft infrastructure development,” Dr Khan explains. “Then there is the issue of the political economy, and resource transfer and allocation. Enforcement of the Plant Breeders
“The federal government is encouraging the provincial governments in Sindh and Punjab to purchase the seed in partnership with the private sector to cover about half the requirements. The cost of this to governments is affordable. This way, quality seeds will be available for the next crop” Syed Fakhar Imam, Federal Minister for Food Security
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“There is plenty of information available in the form of agro ecological zoning, and it is time that we see a policy shift. We need to move out of the traditional mindset of having a rice-wheat system or cottonwheat system or talking about mixed cropping” Dr Iqrar A. Khan, former Vice Chancellor of the University of Agriculture in Faisalabad
Rights Act, 2016 has not begun in earnest. Mechanization is lagging. We have tractors but we don’t have any agricultural mechanization. To reduce reliance on the five major crops we need higher productivity and diversification. There is no policy or on ground support in this regard. Political economy limits the option for farmers.” There are three crops in which stagnation can be broken with the current technology, provided we achieve the optimum plant population; wheat, rice, and cotton. Dr Khan stresses that Pakistan can achieve the optimum plant population with these three crops. If done correctly, he claims it would not only manage to break the stagnation, but also add an additional 4% to our GDP. “Pakistan needs to use the latest technology to reduce the post-harvest losses. Our current post harvest losses in grains are to the tune of 12-15 pc, and in perishable goods it amounts to 20- 40 pc. If we could target the reduction of losses in three to five years, this could also add 2% to our GDP growth.
Scarce water resources for agriculture
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very year, two key inputs in the agriculture sector, water and fertilizers, end up either being scarce or subject to large fluctuations. The former is the more alarming of the two problems, since water availability is in long term decline. We have not done much to augment its supply, nor have we improved efficiency of its use. The quantity of fertilizer available to the farmlands changes from year to year. Its production depends on gas supply, while imports are contingent on the health of the external account, which is often fragile. The fertilizers are a problem, the water shortage is a crisis. Pakistan still relies on the 1873 Canal and Drainage Act to manage and govern its fresh water resources. This is a huge problem and we need to problematize the fact that the entire functional basis of our water sharing across the Indus river basin is essentially outdated.
The structure of water supply is important. Just sixty percent of the watershed of the Indus river basin lies within Pakistan, through glacial melts. That means 40% of the watershed lies outside the country’s territorial control. So what happens outside the country is massively important. Dr. Erum Khalid Sattar, Professor at Tufts University, said that Pakistan should think very carefully and seriously because we are an entirely river system dependent country. “We are 220 million people heading towards 320 to 350 million by the half century mark. We have a massive population on a landmass with a depleting resource base,” she said. “This should scare us and we should strive towards becoming a leader in global climate change initiatives.” As she explains, Pakistan’s inter-provincial water accord of 1991 was a huge step forward. But instead of creating confidence in water sharing, it has led to provincial disharmony and mistrust. We should better operate the accord with a professionally driven agenda “It is about time that our water management institutions work on actual problems that farmers face,” says Dr Sattar. “Essentially, all of these institutions work on things that have nothing to do with the actual problems or the problems we will suffer in the future due to an increasing population and depleting resources due to mismanagement.” “We must allow sufficient water flow to the sea to prevent ingress of the sea. The livelihood of one million people depends on the delta ecosystem.”
Livestock and dairy exploring other avenues
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here we often get it wrong is that being an agrarian economy means Pakistan is all about growing crops. However, under the banner of agrarian also comes farming of livestock and its by-products. To this end, livestock actually makes up a bigger portion of Pakistan’s economy, accounting
for 11.6 pc of the GDP compared to the 10.2% that the five major crops mentioned above make. These areas are ripe for government investment to accelerate further growth and productivity, since the current productivity is less than desirable. More than seventy million people depend on livestock for their livelihoods. Unlike cash crops, livestock generates income throughout the year, particularly with dairy products and egg farming. Most farmers run their households by selling animal by-products throughout the year. Syed Yawar Ali, Chairman of the Pakistan Business Council, pointed out that many modern farmers have imported breeds from Australia, the USA, and Holland. The yield of imported cows is three times more than the Pakistani breed. Productivity is based on breed improvement and genetics. Its genetics both in the seed as well in the semen. “We have to adapt to new technologies, especially In Vitro Fertilization. We must also look towards other avenues,” he explained. “Pakistan’s poultry sector has been a success and is globally competitive. This happened through the improvement of knowledge in nutrition and genetic selection.” “To increase our exports, we must first improve genetics, then rationalize feed cost, which is 70% of cost of production, and finally, build and improve the processing industry. Processing quality and volume makes a perishable commodity competitive.” Pakistan needs short- and long-term plans with enough resources and clearly defined roles for government and private sector. The government must support the private sector and not compete with it as it does now. Once again, there is also a dire need to focus on research and expansion. Without research, the basic needs of the market cannot be determined and all actions will be little more than shots in the dark. “We need to develop a new roadmap to increase productivity, reduce cost, and become globally competitive as the poultry industry in Pakistan has shown us,” said the business council chairman. n
AGRICULTURE
OPINION
Muhammad Umar Farooq
Cutting through red-tape with e-residency
exporting their goods or services there from a country that hasn’t inked a Free Trade Agreement with the EU, such as Pakistan. This legal technique has been used extensively by citizens of Estonia’s neighbor, Russia, among others, to establish businesses in Estonia despite the two countries’ strained ties, leading to a considerable revenue stream for the small Baltic country. Pakistan’s fraternal country, Azerbaijan, has also launched its version of virtual residency, known as m-residency, becoming the second country in the world to do so and given foreign Estonia is the first country in the world to establish entrepreneurs an opportunity to set up businesses on its shores as ease of business through e-residency, and it looks to diversify from its oil based economy. While Azerbaijan Pakistanis may benefit from it. lacks access to the EU common market, it offers lower taxation for m-residents - a complete three year tax exemption for companies and individuals with a start-up certificate, followed by 5% in profit e don’t have to look very hard to find the probtax, instead of its usual rate of 20%. lems faced by Pakistani businesses as they look to It needs to be clearly stated though that e-residency has compete in an increasingly interconnected world no correlations with physical residency and has no bearing on economy. applying for citizenship in any of the countries offering this. While successive governments have worked Pakistani businesses can, however, stand to gain considerably from on mitigating several issues such as the energy e-residency, as eliminating red-tape can bring down costs substancrisis, security concerns and our transport infrastructure - all of which have retially. It can be argued that this factor has played a considerable ceived a considerable boost due to the China Pakistan Economic Corridor - our role in over 1200 Pakistani individuals and businesses applying for businesses still lack easy access to foreign markets and are subject to increased Estonian e-residency over the past six years. scrutiny and tariffs. While Pakistan will have a different set of opportunities to For starters, we have an incredibly weak passport, which was ranked 104 offer from Estonia due to its access to the EU common market and by the Henley Passport Index, only above Syria, Afghanistan and Iraq- and our our experience may differ from Azerbaijan’s too despite its proxcountry’s negative perception internationally, Pakistani businesses have strugimity, we do have a lot to offer foreign entrepreneurs if our country gled to expand abroad, both due to a lack of awareness on both sides of the embarks on this journey and offers e-residency to foreigners. border and the red tape that exists which can be a hassle to maneuver around. We have a huge labor market of trained IT professionals who One of the new concepts in the modern-day business world that contincan be harnessed by global firms if they’re able to set up operations ues to gain traction increasingly is that of an E-residency. E-residency enables - physical or virtual - in our country. While our security issues non-citizens to access banking, form companies and process payments in a have driven away millions of foreign exchange over the past two host country. The first country to launch e-residency, Estonia, a former Soviet decades, those issues can be entirely mitigated with this particular republic in the Baltics and an EU member state, started providing this service endeavor. in 2014 and has reaped millions in profits from it as an increasing number of With Pakistani universities churning out graduates at an individuals have availed the facility to open businesses in Estonia. impressive rate, particularly in the fields of IT and Computer SciEssentially, individuals and businesses can form companies or subsidiarence, the issues of chronic unemployment that plagues the youth ies in Estonia remotely, which will be subject to EU regulations and taxation, in our country along with a dearth of foreign exchange can both be and bypass the higher taxes that they may incur if they were to attempt alleviated with this. Outsourcing continues to happen rapidly, especially in the tech and IT fields, and our eastern neighbour, India, has profited considerably from this with several tech and finance Muhammad Umar Farooq giants establishing headquarters in Ahmedabad and Chennai. By eliminating red-tape and initiating e-residency for foreign businesses and providing tax benis gainfully employed in the efits at a rate that is comparable to Azerbaijan’s, Pakistan can, as a country, compete to host regional Financial Services Industry in offices in our tech hubs in Karachi and Lahore. Canada. He currently holds Covid-19 has hastened the demise of brick-and-mortar businesses and the traditional workEstonian e-residenc place. Pakistan will need to act fast though if it wishes to gain a significant share in this new reality. Pakistani businesses should avail this opportunity to gain a foothold in the EU, an influential trading block that can provide us with badly needed revenue. Our government should perhaps look to compete with arch-rival India in the fields of tech by enticing foreign firms to establish on our soil. The benefits in both cases for Pakistani individuals and businesses are immense, if harnessed properly.
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COMMENT
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Will the auto sector ever recover? Eventually
Expect low earnings for auto assemblers this quarter, though low interest rates and improving farmer economics will help in the recovery
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t seems like every month, this magazine devotes space to the ailments faced by the auto sector. And for good reason: as has been pointed out earlier, if there was any more proof that Pakistan is reliving a slump, it is that the total car sales in fiscal year 2020 are the lowest they have been since 2009. The low sales, along with the depletion of gross margins, means that earnings of auto assemblers are set to decline sharply in the fourth quarter of fiscal year 2020, according to Hammad Akram, analyst at Topline
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Securities, in a note issued to clients on July 22. Akram looked at four auto assemblers Indus Motors, Honda Atlas Cars, Pak Suzuki Motors, and Millat Tractors - as a metric to judge the auto industry by. Together, the total volumetric sales of the auto industry are down 70% year-on-year to 19,014 units in the fourth quarter of fiscal year 2020, compared to the 63,080 units recorded in the fourth quarter of 2019. This is also a 47% decline from the 36,028 units sold last quarter. According to Akram, such a sharp decline is expected to reduce the gross margins of
assemblers by between two to five percentage points. Gross margins refers to the net sales revenue minus the cost of goods. Since sales are decreasing, but the fixed costs are likely to stay the same, the fixed cost per unit is likely to substantially rise. So, what happened? Well first, the most obvious culprit: the Covid-19 pandemic. The government imposed lockdowns throughout the country in March 2020, which continued until May 2020. Car assemblers were deeply affected, as Indus Motors and Honda Car did not operate for up to 60 days, while Pak Suzuki
was only open for the last 15 days of the quarter. The pandemic itself also impacted sales in the second half of the year. Turns out, the middle of a pandemic, and the fear of job security, is when people are least likely to buy a new car. No car sales were recorded by any of these companies in April 2020, and only 4,473 units in total were sold in May 2020. Within this world, Indus Motors saw its unit sales decline the most, by 81% in this quarter, from 15,853 units in fiscal year 2019’s fourth quarter, to 3078 units in this quarter. Its gross margins declined from 7% to 9.3% in the fourth quarter as well. Consequently, Akram predicts Indus Motors to record an earnings per share of Rs7.6 this quarter, a decline of 78% from the previous quarter (Rs34.1) and a fall of 83% from 2019’s fourth quarter (Rs43.9). However, there is a bright spot. First, Indus Motors finally started delivering its new sedan, the Yaris, which was launched in March 2020. There were high hopes for the Yaris: its average price is Rs2.7 million, which is significantly cheaper than the Corolla (at Rs3.7 million). So far, the model has recorded sales of 1,327 units in the fourth quarter - impressive, considering the general Covid-19 climate. Indus Motors also maintained some short term investments of Rs31 billion in the fourth quarter, so ‘other income’ is expected to help out somewhat, accounting for Rs8.9 per share. Akram expects a cash payout of Rs2 per share this quarter, taking the total payout to Rs25 per share for fiscal year 2020. Honda Cars saw its sales fall 72%, from 8,346 units in fiscal year 2019’s fourth quarter, to 2329 units in this quarter. Akram expects Honda’s earnings to break even in the first quarter of MY21. In the previous quarter, the company had recorded a loss of Rs0.2 per share, mostly due to very high finance costs, and a turnover tax rate of 105%. “We expect sequential improvement due to normal effective tax rate and lower finance costs due to substitution of local currency loan with short term loan of USD14mn at a markup rate of 3.2% from Asian Honda Motor Co,” says Akram.
Pak Suzuki Motors sales fell 75%, from 30,433 units in the fourth quarter of fiscal year 2019, to 7512 units in the fourth quarter of fiscal year 2020. The gross margins are expected to come in at around 1% in the second quarter of calendar year 2020, and thus, the company expected to record a loss of Rs13.2 per share. Most of these losses can be attributed to the plant shutdowns, which severely impacted Pak Suzuki Motors. In addition, Akram noted that the company’s high finance costs would continue to affect profitability, as the company was highly leveraged, with a debt to assets ratio of 41%. Finally, Millat Tractors was the least affected, and saw its sales fall by only 28%, from 8,468 units in the fourth quarter of fiscal year 2019, to 6,095 units in the fourth quarter of fiscal year 2020. In fact, on a quarterly basis, it actually saw its sales rise by 13%. The gross margins of the company also stayed stable at 18%, compared to 18.4% in the last quarter. That is why the company will record an earnings per share of Rs12.4, which though is a decline of 29% compared to the earnings per share in the fourth quarter of 2019 (Rs17.3),
is still an improvement over the earnings per share of last quarter (Rs11.09). Akram expects a final cash payout of Rs20 per share, with the total payout of Rs40 per share in fiscal year 2020. Millat Tractors numbers are indicative of the tractor industry in general, and will help in the recovery of the auto sector. During the lockdown, the government allowed agriculture activities to continue. This meant tractor industries were exempt from the shut down, and Millat Tractors resumed operations in mid April 2020. The government also allowed for a Rs2.5 billion tractor subsidy, which has helped farmers buy more tractors, and keep sales alive. In addition, interest rates have been slashed from 13.25% in March to 7% in June. This will bode well for sales going forward. As noted previously, banks like Habib Bank and Bank Alfalah have started to offer discounted limited time promotions on auto loans. Granted, the loan space is still in its nascent stages: HBL’s scheme has attracted less than 1000 applicants. But the combination of low interest rates and favourable auto loans may mean that auto sales jump in the coming months. n
Electricity generation in Pakistan rising, despite the pandemic
Despite the blip of Covid-19 pandemic on power generation in the country, demand for the sector has picked up
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he year 2020 has not been kind to most sectors of the economy, what with the double whammy of a global pandemic and the ensuing global recession. Yet, all things considered, it is remarkable that
power generation in Pakistan actually fared alright, declining only marginally when comparing fiscal year 2020 to 2019. Even better, demand for power has picked up in June 2020, according to Sunny Kumar, analyst at Topline Securities, in a note sent to clients on July 23.
AUTO SECTOR
Power generation in Pakistan declined by 1% year-on-year to 121,867 gigawatt-hours (GWh), or 23,618 megawatts (MW) during fiscal year 2020. In 2019, power generation stoof at 122,708 GWh, or 23,781 MW. Most of this decline can be attributed to the overall slower economic activity during fiscal year 2020, leading to less usage of power, but also the specific time period between March and May 2020, when the Covid-19 necessitated lockdowns and restrictions. The lockdown’s effect can also be seen in the monthly data from this year. In March 2020, power generation fell 9% year-on-year to 6,911 GWh, compared to the 7,621 GWh recorded in March 2019. This was also the lowest generation recorded in 2020. Though power generation picked up in subsequent months, on a yearly basis it was still falling, such as in April 2020, where power generation fell 14% year-on-year, and in May 2020, where power generation fell by 5% year-on-year. However, starting in June 2020, power generation was recorded at 13,288 GWh, which is a 1% year-on-year increase from the 13,157 GWh recorded in June 2019. Even better, it was almost double that of the figure in March 2020 (at 92%). The sector itself is also doing better, with the installed Capacity in the country touching 34,157MW in June 2020, compared to the 30,590 MW of installed capacity in June 2019. In fact, these factors together mean that the power sector is well positioned in the future for any increase in demand. And demand will increase, as industries have opened up after the lockdowns imposed due to the Covid-19 pandemic, and there has been a pick up in economic activity in the country. The summer and monsoon seasons also typically see an uptick in demand for power, which will help the sector at least until October 2020. The fiscal year 2020 was marked by a
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move towards hydropower and coal based power generation, over gas and furnace oil. Hydel power made up 32% of total power in fiscal year 2020, compared to 26% in 2019, while coal’s share went up from 13% in 2019 to 21% in 2020. Gas generated power’s share however, fell from 18% in fiscal year 2019 to 12% in fiscal year 2020, while furnace oil’s share fell from 7% last year to 3% this year. RLNG, or regasified liquefied natural gas, contributed 20% to the overall power mix, nuclear generation took up 8%, wind-based power took up 2%, while ‘other’ (solar, bagasse) took up 2%. In terms of power generation, hydel generation went from 32,356 GWh in fiscal year 2019, to 38,000 GWh in fiscal year 2020, or a 20% year-on-year jump. According to Kumar, hydel power generation increased because there was more water available this year compared to previous years. Incidentally, this particular statistic was recently picked up by Asad Umar, the Minister for Planning, Devel-
opment and Special Initiatives, who tweeted: “Massive hydel capacity increase taking place with Dasu, Mohmand and Diamir Basha being built. We need to rely on local renewable energy instead of expensive imported thermal fuels.” Coal power generation went up from 16,312 GWh in 2019 to 25,553 GWh in 2020, a massive jump of 57% year-on-year. This section has increased because of two new projects finally commencing this fiscal year: the China Hub Power Generation, with production of around 1,220 MW, and Engro Powergen Thar, which can produce 660 MW. Meanwhile, furnace oil generation went from 9,092 GWh in fiscal 2019 to 4,178 GWh, or a fall of 54% year-on-year. Similarly, gas generated power went from 22,034 GWh last year to 15,064 GWh this year, or a decline of 15%. According to Kumar, the demand for both fell because of their higher costs of producing power demand. Despite talk of focusing on renewable energy (for example, the central bank expanded its refinance scheme for solar and wind energy plants just this week), both solar and wind generated power fell in fiscal year 2020. Wind generated power fell 11%, from 3,232 GWh in 2019 to 2,822 GWh in 2020. Solar generated power fell by 1%, from 715 GWh in 2019 to 705 GWh in 2020. One unexpected benefit of the power mix is that it is now cheaper to produce electricity this year than it was last year. The average fuel cost fell by 3% year-on-year to Rs5.97 per KWh in fiscal year 2020, compared to Rs6.13 per KWh in fiscal year 2019. This is because generation via hydropower increased by 20% yearon-year, which has no fuel cost. Also coal based generation benefited from lower coal prices in general, with the cost coming out to Rs6.1 per KWh in 2020, compared to Rs6.55 per KWh in 2019. This trend is expected to continue, considering the country’s power mix. n
POWER
LEATHER
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I
By Shahab Omar
talian leather, like Italian sports cars or suits, screams luxury. Other than the quality of the product, the idea of wearing shoes or having a belt or a wallet made of Italian leather comes with a certain oomph factor. Which is why, perhaps, every businessman involved in the leather industry in Pakistan is constantly raving about how Pakistan produces the best quality leather after Italy. The claim, which sounds like a tall one at first, is not without substance. Sporting leather apparel from Pakistan may not have the same appeal and brand equity that its Italian competitor does, but leather products from Pakistan constantly hold up their own quality wise on the global market. For starters, most of the leather produced here is vat-dyed instead of the spraydyed stuff that is more commonly available, which means it keeps its colour for longer. The frequency with which American bikers and biking enthusiasts on Harley Davidson forums extol the virtues and affordability of Pakistani leather is amusingly high. And if you egg local manufacturers on enough, they will eventually break and say their leather is the best in the world, and the Italians are simply getting by on brand value. Unsurprisingly enough, since it is a rare quality product that Pakistan is capable of producing, it is one of our top exports. The second largest export oriented industry in the country, Pakistan is not even among the top 10 leather producing countries in the world, but its product does offer high quality. One of the reasons for this has been the annual influx in hides that happens after the Eid-ul-Adha holiday. Larger animals being sacrificed instead of smaller animals that are usually slaughtered in livestock farming means larger hides, which in turn produce higher quality products. But with a less noisy
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Eid with fewer animals expected because of the coronavirus pandemic, the industry is bracing for impact. But the coronavirus, while devastating, is not solely responsible for the state of one of Pakistan’s major export products. As with most promising industries here, the main reason for the crisis in the leather industry has to do with not modernising the industry on time by shying away from adopting changing trends. While Pakistani leather is a hot product all over the world including in Germany, France, United Kingdom, Italy, Spain, the Netherlands, Hong Kong, Denmark, Canada, Belgium and Dubai, lower prices offered by India, Japan, Taiwan and South Korea are giving Pakistan stiff competition. Overhead costs, pending payments, a global pandemic, and aggressive competition and a shaky standing in the eyes of the international community are holding Pakistan’s leather industry back from achieving its full potential. Profit, takes a look at whether one of our major exports might be slipping through the cracks, right under our noses.
The state of the industry
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he year 2020 was supposed to be a good one for the leather industry. The past few years had been rough, with the biggest complaint being that overhead costs were too high to remain competitive. “The overhead costs of our competitors, including India, Bangladesh and Vietnam, are shockingly lower than ours,” says Sheikh Afzal Hussain, the Chairman of the Pakistan Tanners Association (PTA). “Gas, electricity bills, sales taxes on raw materials and duties on imports of chemicals are creating hitches for the industry, which makes the price of our leather more expensive in the international market and reduces demand,” he says. It was because of these reasons that the leather industry had been facing what can only be called a recession for the past few years.
However, according to the PTA, things were just beginning to improve. In 2019, the association had predicted that the first quarter of 2021 would prove to be very good for the industry, especially since the government was keen on being export oriented to bring the balance of payments in equilibrium. That is when Covid-19 struck, and like all other industries, the leather industry also took a hit. “After the pandemic, there were only more problems. The increase in freight charges from Rs100-150 to Rs1,000 per kilogram after Covid-19 is also creating extreme difficulties for us,” said Sheikh Hussain. “The government does not seem to have any policies for the betterment of the leather industry. There are many statements but no implementation.” The tanners association has demanded that the government look into their problems before their industry collapses completely. With 800 tanneries across the country and production numbers of around 13.0 million hides and 47.4 million hides per annum (2015-16), the industry employs more than 500,000 people directly and indirectly (20092010). And the demand, at this point, is no longer a subsidy or a handout, but a significant reduction in overhead costs. “If the government agrees to our demands, our exports will increase by 50% in the next few years,” said a statement from the association. The pattern of the current government is one that most people in the industry are in agreement with. That with the Pakistan Tehrik-e-Insaf (PTI) in power in the center, they had been looking forward to a good year in 2020, but that the pandemic along with government policies had made them hopeless. “We thought 2020 would be our year,” Syed Nadeem Abbas, chairman of Pakistan Leather Garments Manufacturers and Exporters Association (PLGMEA), concurs. “There was huge demand for leather products from the fashion industry, but Covid-19 has affected 60% to 70% of that demand from the international market. These sales were
TEXTILES
“Gas, electricity bills, sales taxes on raw materials and duties on imports of chemicals are creating hitches for the industry, which makes the price of our leather more expensive in the international market and reduces demand” Sheikh Afzal Hussain, Chairman of the Pakistan Tanners Association
supposed to take place in the winters, but it never happened after the lockdown. The whole process of orders and manufacturing also stopped because the time factor counts a lot in this business.” These statements are all expressions of frustration and point towards an inability to adapt to crises and a desire to continue working in the lazy stupor that Pakistani businessmen and industrialists seem to love and strive for. However, they are not wrong about one thing: the government has not been helping in all of this. “They were very active in the first year,” says Naeem Abbas. “We were also called to Islamabad many times and told our suggestions would be considered, but nothing came of it. We felt they would listen to us, but instead we ended up with things getting worse, and now 60% of the tanneries in Pakistan are now closed with more shutting their doors soon.” The biggest issue in the sector as of now that he points out is pending payments. With the pandemic, customers ended up demanding an increase in the tenure of pending payments. While this was a legitimate compulsion, it has left most leather manufacturers strapped for cash. “We have given our customers the benefit of the doubt and we stand by them in their plight. But it is still a blow, and then we have the second major issue on top of that, which is freight charges. These are hurting the industry on a large scale,” Abbas explains. “Flights were shut down after the
outbreak of coronavirus and freight charges rose from $2 to $5. Extra freight charges are unwilling to be borne by the customer, which the industry has to pay out of its own pocket.” “We will have to bear this cost until passenger flights begin. At our request, the government helped us with our liquidity and our refunds and rebates were released. We were banking on this crisis being gone by Eid, which is when we needed cash the most since we buy the hides with that cash. But now our money is stuck in foreign countries.” The government claims that it is working on resolving the issue, with Punjab Industries Minister Mian Aslam Iqbal telling Profit that the PTI government was fully aware of the importance of the leather industry. However, beyond the basic statement of reassurance, there was little that the minister had to offer. “The business community, like any other sector, has been hit hardest by the coronavirus pandemic. It is our responsibility to solve the problems of traders and industrialists and we will fulfill this responsibility. I have also directed to formulate a plan to improve the infrastructure in the area allotted for tanneries, he said. When asked what this plan was and whether or not it was too late by now, the minister insisted that the government is providing the best possible facilities to the industrialists. “Value addition moves the industry forward which needs more attention. The government is providing the best
environment for business and providing facilities to the industrialists on priority basis,” he said.
The eid equation
E
veryone has seen how big the kerfuffle over hides is after Eid-ul-Adha. Well before the Islamic festival that honours sacrifice has even begun, NGOs, government bodies, charities and political parties are all out to collect the hides of the sacrificial animals that are supposed to be given away as charity. We have all been through it, from the catchy slogans like “Sacrifice for God, hides for Shaukat Khanum” by charity organisations to the less attractive threats of certain political parties in certain cities [yes, we are talking about the MQM in Karachi], the hides business is a free for all, since the raw product is essentially being given away for free. It is all a question of who can collect them, and how cheaply leather manufacturers can buy them. And the leather industry waits with
“We have given our customers the benefit of the doubt and we stand by them in their plight. But it is still a blow, and then we have the second major issue on top of that, which is freight charges. These are hurting the industry on a large scale” Syed Nadeem Abbas, Chairman of Pakistan Leather Garments Manufacturers and Exporters Association
LEATHER
“The business community, like any other sector, has been hit hardest by the Corona pandemic. It is our responsibility to solve the problems of traders and industrialists and we will fulfill this responsibility” Mian Aslam Iqbal, Minister for Industries, Punjab
bated breath every year for Eid, because this is one of the reasons Pakistan’s leather is so good. Livestock reared for meat and hides is usually small, and thus gives smaller hides. The animals bought and sacrificed for Eid are bread for beauty and size, which ends up meaning that the hides are of a greater size and quality, both of which are desirable for leather production. “The quality of the sacrificial hides is much better than the hides purchased in routine days. For example, the size of a goat's hide purchased all year round is 4 to 4.5 square feet, while the size of a sacrificial goat's hide ranges from 8 to 12 square feet” Afzal Hussain explains. “Similarly, in the case of cow hide, the size of the hide purchased in routine days is 25 to 27 square feet, while the size of the sacrificial animal ranges from 40 to 50 square feet.” Afzal believed that goat sacrifice had declined in the last few years, due to the high cost of the animal. “In our country, the tendency of people to buy goats or sheep on the occasion of Eid-ul-Adha is decreasing due to high prices. People prefer cow sacrifice because it is collective.” He estimates that the number of goats sacrificed this year will be less than the number of cows, while the leather industry will have 25% fewer hides available this year than last year. “It is a bit difficult for us to estimate the collection of hides because we do not get exact figures from any government department, but since all the NGOs or private organizations that collect hides reach us later, we can guess whether the collection this year was less or more than the previous year.” Explaining the collection of hides and how to reach the industry, Sheikh Afzal informed that in the three days of sacrifice, large NGOs, charities or private organizations collect sacrificial hides while many such organisations also make collective sacrifices and the collected hides are delivered to leather markets across the country. “In the leather markets, these hides are first salted and then sorted by quality wise. The hides are auctioned in these markets and anyone who wants the size and quality buys it by bidding. Another way to buy sacrificial hides is for the tanneries themselves to buy
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them from NGOs or charities and they sort it by themselves in terms of quality.” The price of hides depends on the demand and supply in the market. The prices of sacrificial animal hides were high seven or eight years ago but are now very low. This situation is not only in Pakistan, but also in the international market. “Earlier, we used to buy a sacrificial goat hide for Rs800 to Rs1,000, while a cow hide cost Rs5,000. Last year, the price of cowhide was very low, while this year, cowhide will be sold in the market for Rs400 to Rs500.” Afzal believed that for the last few years, Eid has been celebrated during the summer and rainy season and the quality of the hide has not been good because of this, which was also a minor factor in the recession that the industry saw over the past few years. “It (hide) is a perishable item and the sooner it is purchased the better. In this season, if the hides are not sorted immediately, they get damaged, while if they are not salted for twelve hours, their value becomes zero.” “Another reason for falling prices is the slowdown in demand in the market. Earlier, the industry had orders all year round and used to buy and store hides on Eid days, but this year the situation has changed due to Covid-19. The market is currently in a state of uncertainty. The industry does not even have new export orders. The hide that used to sell for $30 to $35 in the international market is now worth only $10 to $12.” According to the data available with his association, for the last three years, 20% to 25% of the sacrificial hides have become unusable due to negligence. He further added that the market for sacrificial hides during Eid is worth billions of rupees. “This year the market volume of sacrificial hides will be between Rs8 to Rs10 billion.” Nadeem Abbas also agrees, saying that the purchasing power of the people will decrease significantly this year. “It is very easy to estimate how the purchasing power of the people will decrease. According to official figures, the number of cow sacrifices in the year 2018 was 3 million and in the year 2019 it decreased by only 500,000 and it was 2.5 million. In the
year 2018, the number of goats sacrificed was more than five million, which had decreased to 3.5 million last year. This means that people considered it more appropriate to contribute to the sacrifice of a cow for Rs12,000 than to buy a goat.” The PLGMEA chairman said that due to the coronavirus, there had been a clear decline in people's purchasing power this year, and this would also be reflected in animal shopping. Add to this the weather in which Eid has come, and the overall amount of hides collected will be very low this year. “The important thing is that even though the hides there may be fewer hides gathered, their price is very low. Cow hides were bought for Rs900 last year, which used to sell for Rs1,800 to Rs2,000. Similarly, goat hide was sold for Rs150 to Rs200 while sheep hide was sold for Rs25 to Rs30. One of the main reasons for the decline in the leather business is that the middlemen in the leather markets are not getting orders from big companies, so the leather is not as expensive as it used to be. If the hides are bought at the old rate, the cost will not be met. This year, the sacrifice rate will be reduced by 15% to 20%.” And as he explains, there is a lot more to the treatment of these hides than meets the eye. For example, whether it is the hide of a sacrificial animal or a routine animal, there are three steps to converting it into usable leather that determine its value. One stage is the hide itself, the other stage is the chemical used on the hide and the third is the labor cost of the process. Clumsy butchers, due to their negligence, make cuts on the hide and with one cut; the A-plus hide becomes category A. While two cuts put it in B category and three cuts put it in C category. “For the common man, these seem to be small cuts, but for us, the cut hide becomes useless. Garment patterns cannot be formed on the cut hide,” he said. n
LEATHER