‘Fintech sector needs a regulatory sandbox approach’

An interview with Shehryar Hydri, Secretary General Pakistan Software Houses Association

Shehryar Hydri has over two decades of wide-ranging experience in Technology, Media and Communication. He currently serves as the Secretary General of Pakistan Software Houses Association (P@SHA) – the key trade association that represents the IT and IT-enabled services industry of Pakistan. Prior to P@SHA, Shehryar served as the Director, Marketing & Operations and Member of the Board at Convo.com and co-founder at Trango Interactive. Below are edited excerpts from BR Research’s recent discussion with the P@SHA Secretary General on how to incentivise the local IT industry for growth.

BR Research: The budget season is coming up. What fiscal and non-fiscal measures has P@SHA proposed to the federal government for the development of IT and IT-enabled services?

Shehryar Hydri: P@SHA has proposed various fiscal and non-fiscal measures to the federal and provincial governments. They include a normalisation of GST on services to match the federal rate (5%), inclusion of e-commerce as IT/ITES, change of SBP regulations for promotion of innovation and support for the Fintech sector, ease of transactions and repatriation for investors, incentives for reporting exports to claim a 5 percent cash reward and most importantly a complete model for Special Technology Zones (STZ).

The Khyber Pakhtunkhwa province has taken the lead by announcing a 2 percent tax on services and we’re hoping that the other provinces will also incentivise the IT industry to create jobs.

BRR: How receptive have previous governments been to the IT industry’s demands? How different do you think the reception will be under this government?

SH: The previous government was very receptive as they released the National Digital Policy, extended the tax holiday on exports till 2025, brought down GST to 5 percent in the federal capital and approved a 5 percent cash reward on exports. The current government is also considering ambitious plans while keeping the budgetary constraints in mind.

We are hopeful that a few of our major proposals will be approved this year, laying the foundation for an expanded vision from next year onwards. The current government is trying to restructure a lot of things with a long-term vision and that takes time and funding.

BRR: In recent years, what has been P@SHA’s score while dealing with the government?

SH: P@SHA has been able to win substantial policy changes and incentives for the industry. In 2016, we got extension of tax exemption on exports till 2019. In 2018, we further got it extended to 2025 which was announced as part of the digital policy. We also received approval for SEZs for technology companies. Other than that, I have already mentioned the sales tax reduction in ICT and cash reward for exports.

Besides these tangible gains, the most important achievement in the past few years has been a change in the government’s mindset. We have been able to highlight the importance of the services sector as an engine of economic growth, especially for the balance of payments. We have also positioned IT as the “Great Enabler” so that the government does not confine IT in its Ministry only but uses it as a catalyst in other industries as well.

BRR: The government is desperate for exports to pick up. Your estimates put IT exports at between $2.5 to $3 billion. How can that sum be further increased, to, say, $5 billion per annum in a few years?

SH: Two of the biggest problems right now are market access and grooming the companies to enter lucrative foreign markets with their products and services. Issues range from visa restrictions to travel advisories as well as a negative country perception that will take some years to reverse. Once companies deliver on large domestic projects, they will automatically mature and move into similar projects in foreign markets.

Our sector is the only one growing in double digits and is the fastest-growing export sector compared to the traditional ones like textile, sports goods, etc. We doubled over the last four years and are expected to double again by 2022. We are already the second-largest export sector after textile and it is high time that the government supports the IT sector as an engine of export growth.

The government loves quoting the examples of the IT sector from India, Malaysia and the Philippines. But it also needs to realise that their governments supported the IT industry with exceptional fiscal and long-term policy programs that created billions of dollars in sustainable exports. So far, the IT sector has not grown due to the government but despite it.

BRR: Let’s move towards the tech and disruption. What kinds of programs does P@SHA have to support innovation in the industry?

SH: As the sole industry association that covers everything from small start-ups to large public companies, we try and support the most common requirements of these different company types. This ranges from trainings and foreign delegations to helping with business development and matchmaking, both domestically and internationally.

The P@SHA member community is very strong and helpful and smaller companies benefit from the experience of those that have been in the market since decades. We also encourage more collaboration between trusted members and that culture is also growing quickly.

BRR: What kind of fiscal and non-fiscal incentives are currently available to startups in Pakistan?

SH: Startups have exemption from all taxes for the first three years. They also have a tax holiday on exports. There is also a network of national incubation centers (NIC’s) across Pakistan set up by Ignite / Ministry of IT, which provides the first step for a lot of startups looking for guidance and subsidised space. Similar setups are run in Punjab (PITB and Plan9) and in KP (KPITB).

On top of these public sector setups, we have other platforms like P@SHA’s NEST I/O, Invest2Innovate, TIC (NUST), Innovation District 92 etc. IGNITE also acts as a fund for technology start-ups and provides an additional source of funding other than the private sector VCs and angels.

BRR: What other incentives can be offered to expand the startup scene?

SH: On the supply side, there is a desperate need to improve the quality of graduates entering the market so that companies can move up the value-chain and develop better products. There have not been many initiatives on the demand-side either, domestically or globally. This is something that needs to change as a national mindset. We are hoping that large projects like E-government and the digitization of public organisations will fuel this demand for start-ups and SME’s and help them grow.

A national VC fund is also being proposed to help startups access growth funding. A key intervention on the demand-side needs to be a framework for micro-procurement for government projects. If startups can bid for public projects under softer procurement rules, they can grow and compete with larger vendors.

BRR: That’s a valid observation. In many countries, governments are often the single-largest user of IT products and governments try to support their IT industries through local procurement. What measures can be taken to enhance government’s IT procurement in Pakistan?

SH: We believe that the public sector’s IT procurement can be the largest catalyst of growth not just for the domestic tech sector but also for our export growth engine. The experience of Silicon Valley and the examples of several countries like India, Estonia and the Nordics support shows that demand was created through public sector projects around digital transformation and citizen services. These projects added to their GDP and created a platform for those IT companies to mature their products and then sell them around the world.

Pakistan already has a success story in the form of NADRA, which is now one of the top identification solutions providers in the world. This needs to happen in the private sector, where our companies deploy local solutions around licensing, trade and customs, digital land record, etc. and then export these across the world with the help of supportive government policies.

BRR: You referred to mindset earlier. There is a perception that the banking regulator isn’t appreciating the potential of FinTech in helping improve financial inclusion and spreading digital payments. Is that so? If yes, why?

SH: That is definitely the reality on the ground as the SBP still operates in a legacy mindset. That said, there are some strong proponents of digital payments within the SBP, SECP and other key organisations and the realisation to support this change is spreading fast. We may not be dealing in crypto-currencies any time soon but the SBP is trying to expedite things with a framework for E-Money Institutions and providing a sandbox for banks to try new products.

At the end, it will have to be a partnership of aggressive banks that push to change the sector backed by forward-looking policies by the SBP and SECP.

BRR: So, what kind of a regulatory approach will you suggest for innovation to happen in the FinTech space without risking the integrity of the financial system?

SH: The approach has to be one of an open platform with relevant sandboxes that provide meaningful product testing and are not just token efforts. Just as local banks and players need a nudge by the regulator to conform to open standards and interoperability to serve customers better, foreign FIntech players and giants like Paypal and Visa need clarity on policy. They need an assurance from the SBP that they can enter a conducive arena where the laws will get more open and supportive over time and no negative surprises will be thrown at them.

The overall policies definitely matter but at the end of the day it’s as simple as someone senior at the SBP taking ownership of welcoming Fintech players and hand-holding them through the process, literally like a Priority Banking Customer Care team.