INTRODUCTION: Launched nearly 45 years ago, Pakistan's oldest daily newspaper on business and finance, Business Recorder is today one of the leading newspapers in the country. Also widely known as BR, its news coverage in particular is known for comprehensive sweep of economic policymaking, corporate developments and market trends.
In this Industry Review 2009, we seek to provide you an in-depth analysis of various sectors/segments of business and finance in relation to their performance, challenges and prospects. Our assessment is based on our objectivity of opinion, the originality of our insight and our advocacy of economic freedom and fair market competition in the country. Enjoy! Editor
ECONOMICS
STOCK EXCHANGE
BANKING
ENERGY & ELECTRICITY
TELECOM
AGRICULTURE
TEXTILE
MEDIA & ADVERTISING
CONSTRUCTION
PHARMA & HEALTH
EDUCATION
TEA
INTERVIEW
DAIRY
An old car driven at a speed of 50-km per hour seems to function well, but if raced at 120-km/h, it starts rattling, with parts making strange and sometimes alarming noises.
The story of Pakistan's economic recovery earlier this decade is similar to that of an old car. When growing at 2-3 percent it felt too stagnant. Then the economy got a booster from external inflows and sped with a growth of 6-7 percent in the last few years. But then came the noises with external balances, inflation and in turn fiscal deficit, all of which soared to alarming levels.
This decade of economic boom was concentrated more in the service oriented sectors - telecom and financial sector, while not much was done to enhance the indigenous demand and promote exports. The brunt of global financial crises pushed Pakistan at the verge of default in 2008 with foreign exchange reserves sharply depleting by 59 percent to $6.7 billion in the span of just one year to cover mere two months of imports in October 08 from seven months of cover, a year earlier.
This forced the country's economic managers to go the doors of IMF for bailout package and enter into IMF program with a standby facility of SDR 5.17 billion ($8.07 bn) in October 08 which was later enhanced to SDR 7.24 billion ($11.30 bn) to curb the balance of payment crises.
After remaining stable at around Rs60/$ mark for number of years, the rupee fell sharply by over 25 percent to Rs84-85/$ in just a few months. The stock market, which had crossed 15,000 points in April 2008, was reduced to mere 5000 points in less than a year, despite three months price floor.
Real economic growth, as measured by the GDP, was reduced to mere average of 2 percent in FY08 and FY09, after exhibiting an average of 6.6 percent in the preceding five years. Inflation peaked to 20.8 percent in FY09 versus an average of 8.3 percent in the previous five years, as global commodity prices surged before the global financial crises shoved food and fuel prices lower.
The twin deficit problem, with external and fiscal imbalances ballooning to 8.3 and 7.6 percent respectively in FY08 leaving the economic managers helpless. There was no other way out than to entering into IMF program and follow its directives.
Ever since Pakistan got in IMF's program amid a gradual recovery in global economy, macroeconomic indicators have started showing some signs of recovery -- the current account gap and fiscal gap being reduced to 5.1 and 5.2 percent respectively.
This process continued in the first half of this fiscal year and likely to improve in near future; inflation is reduced to half, reserves are over $15 billion to cover six months of imports, twin deficits are expected to remain curtailed - especially the current account deficit is likely to be reduced to 2.5-3 percent of GDP in FY10. Even the benchmark KSE touched 10,000 points in January 2010 - its highest level in 17 months.
However, growth, especially the manufacturing sector, still remains a point of concern. Some argue that IMF led tight monetary and fiscal policies are not a right model for the economy. When the developed world and developing countries, including India and China, are doing all sorts of tricks to stimulate economy, the curbing of demand will facilitate the capital flight. And this has already started to happen with a lot of high net worth individuals taking their investment to the Middle East.
Although, there are arguments against running tight monetary policy as until of late private sector credit was on constant decline, tight fiscal policy by curtailing subsidies was a necessary evil. But more importantly institutional reforms initiation by IMF is the right step in the right direction.
The country's tax-to-GDP ratio remained stagnant at 9-10 percent of GDP in the last decade while our neighbour India enhanced it to over 15 percent. Its only time that tells the strong claim of Finance Minister Shaukat Tarin who plans to enhance the tax-to-GDP ratio to 20 percent by 2020.
As termed by the chairman of the government's Advisory Panel of Economists, Dr Hafiz Pasha, Pakistan is a 'war economy'. "The cost of terrorism comes to around Rs700 billion or roughly 5 percent of the GDP" said Pasha, adding that the costs are in excess of aid including the Kerry-Lugar Bill.
Unfortunately, this war on terror is undermining the efforts of economic reforms, at least in the short to medium term, by not only ballooning fiscal spending but more importantly hurting the investment climate for both domestic and foreign investors. Thus, slow process of economic easing with real interest rates well in green has a profoundly negative impact on both the demand of private credit and banks' reluctance to lend to the ailing industrial sector.
The State Bank of Pakistan -- which sharply increased policy rate by 450 bps in the span of nine months to 15 percent in 2008 to curb import demand and put reigns on inflation -- has not eased interest rates enough, as critics argue, to meet the needs of the industry.
Since the start of monetary easing in April, SBP has reduced it by 250 bps. Some says that SBP is functioning at the directives of IMF. However, it's the constraints on fiscal financing that is primarily limiting the money managers to cut rates further despite the fall in inflation and relatively better external account position.
The silence on FoDP pledges, delay in USA's Coalition Support Fund, inability to attract foreign private investors, and IMF's limits on high powered money creation, has shifted the onus of fiscal gap financing on the shoulders of domestic savers, which is also on decline. Thus, to attract domestic money, a lucrative rate on government bonds and securities has to be maintained that hinders SBP to aggressively cut policy rate.
Lately, mild recovery in some industrial sectors has created demand for private credit from banking channels. This coupled with the increase in lenders' confidence, has made crowding out of domestic investment a loud and clear phenomena. The fate of this recovery is now contingent upon foreign flows including FoDP, US Coalition Support Fund, the proceeds from Kerry Lugar Bill and other multilateral agencies.
Nonetheless, this recovery thesis is for the short term to run the economic machinery in coming quarters. The lack of institutional reforms and justice at the time bleak security situation has forced domestic and foreign long-term investors to shelve their business plans. Lately, there are indications that domestic businesses are moving to less developed but more secure and investment friendly neighbouring countries.
Even if these indicators suddenly turn positive by some miracle, the long-term socio-economic indicators of a healthy economy - equitable resource allocation, poverty eradication and infrastructural development - will stay depressed if the politicians of past, present and the future remain short sighted.
An engine overhaul is direly needed to ensure a smooth ride at a faster speed. The structural changes, institutional reforms and improvement in governance - economic justice must balance the bettering of macro indicators. Surely, Pakistan doesn't need another round of lost decade, as one senior economist put it, when the institutions remained stagnant despite high GDP growth.
Procter & Gamble was established in Pakistan in 1991 and since then, the Company has grown to become one of the leading consumer product companies serving the Pakistani consumers with premium quality brands and a series of community development programs. As a global company with over 170 years of history, P&G has built a rich heritage of touching consumers' lives with brands that make life a little better every day. For the past 18 years, P&G has strived to bring to Pakistanis, consumers brands that meet their everyday needs and improve the quality of life. Today, many P&G brands, including Ariel, Safeguard, Pantene, Head & Shoulders, Pampers and Always, have become famous household names.
Since its inception in Pakistan, P&G has made significant investments in multiple avenues including industry, community programs and human resource development. P&G's continued investments have helped improve the risk profile of Pakistan, setting a positive example for other multinationals to consider making investments in the country.
The journey of P&G investments in Pakistan began in 1994, shortly four years after its inception, with setting up of a soap manufacturing plant at Hub, Balochistan. In 2004, the P&G Pakistan Hub Plant started producing PuR, a water purifier making, this P&G Plant the first of its kind in the world. To date, P&G Pakistan Hub Plant, through the production of PuR, has provided over a billion litres of clean drinking water across the globe to communities in need.
In 2008, P&G announced an investment of approximately $100 million in Pakistan with the groundbreaking of its second manufacturing plant facility at Port Qasim Authority (PQA), Karachi. The Company has acquired 25-acres of land with a long-term vision to set up plant facilities for a range of P&G products. The facility will be set-up in two phases. The first phase - the laundry detergent manufacturing facility is expected to commence operations in 2010 followed by the diaper plant in phase two.
P&G's investment in a manufacturing plant at PQA is its largest single investment in the country, to date, and will bring FDI amounting to $100 million into the country. Through this plant P&G will bring about significant import substitution and create around 7000 direct and indirect job opportunities. In addition to bringing in the latest P&G technology, the plant will realise extensive local skill development as P&G experts from all over the world train Pakistanis to set-up and operate the plant.
P&G strives to fulfil its purpose of improving the everyday lives of Pakistani consumers not only through its brands but also its various community programs. Keeping in view the Country's needs in the area of health and education, P&G currently has several community development programs which have helped improve the lives of around 5 million Pakistanis in 2008-09 alone.
Under its global corporate program 'Live Learn and Thrive' P&G Pakistan has focused on the development of Pakistani children in need between the ages of 0 - 13. Several P&G programs are currently empowering Pakistani children with a healthy start to life, access to education and skills for life.
P&G Pakistan is setting up an orphan home in Islamabad called the "P&G Home" - in partnership with SOS Children's Villages of Pakistan, to promote the well-being, education and housing of Pakistani orphans. "Keeping the HOPE Alive" is a P&G Pakistan initiative through which 60 informal P&G-HOPE schools are operational across Karachi and Thatta. More than 2,000 children studying in P&G-HOPE schools are gaining primary education in their own neighbourhoods for free.
P&G Pakistan has also partnered with READ Foundation under the "Safe Schooling For Building Futures" initiative, immediately after the October 2005 earthquake. Through this partnership, P&G Pakistan and READ Foundation have built two purpose-built, seismic compliant schools in Azad Jammu & Kashmir, imparting quality education to more than 2,000 students. The talented children studying at P&G-READ Foundation schools have time and again delivered excellent academic results in national examinations. Encouraged with the success of this program, P&G recently established the third P&G-READ Foundation School in rural Islamabad which started operation in 2009.
P&G's corporate philosophy of touching and improving lives is inherently imbued in its brand efforts as well. Since 2004, the Safeguard "Sehat-o-Safai" initiative in partnership with Pakistan Medical Association and Infectious Diseases Society of Pakistan has empowered more than 5 million children in over 14,000 Pakistani schools with hygiene education, sharing the importance of hand washing with soap in preventing infectious diseases. Moreover, Safeguard has also embarked on a mission to build sanitation facilities in 100 primary schools in Pakistan within 100 days, in partnership with Save the Children. This project will benefit 40,000 school children in Quetta, Karachi and Lahore by providing them improved sanitation facilities and health and hygiene education.
The Pampers-UNICEF campaign has so far donated approximately 800,000 vaccines to help save the lives of new-born babies and mothers across Pakistan. Whether at their doorsteps or in hospitals, the Pampers Hospital Education Program and Babycare Mobile Clinics have to date educated 5.6 million Pakistani mothers about health baby care practices.
The P&G Always brand is also making a significant investment in the area of health and hygiene through its school education program, Aagahi. The program is conducted in partnership with the Society of Obstetricians and Gynecologist of Pakistan and World Population Foundation, educating young girls about good health and hygiene habits and coping with the pressures and demands of growing up. To date the program has reached over 4 million young girls in schools across Pakistan. The Always Mothers Education Program has educated over 600,000 mothers on how to help their daughters cope with the changes they face as they grow up and the current "Always Girls Can" mega TV show is a part of the brand's mission to encourage confidence building amongst young girls so that they realise their true potential.
Employee volunteerism is an integral part of all P&G community initiatives, bringing to life the different causes supported by the Company. P&G Pakistan employees enthusiastically participate in the numerous causes that P&G is committed to by investing personal time and energy. Over the past two years, P&G Pakistan employees have volunteered their time, effort and skills in building confidence and communication skills and simply spending time with the children benefiting from P&G community projects. Amongst their many endeavours are interactive visits to one of Pakistan's oldest school for the hearing and vision impaired - Ida Rieu, guided tours of students of P&G-HOPE schools to educational places and painting of the P&G-READ schools in the earthquake affected regions of Muzaffarabad.
P&G strongly believes in local skill development and enabling employees to realise their true potential. The talented pool of P&G employees is one of the Company's greatest assets; in Pakistan, the Company employs approximately 300 people, 99% of whom are Pakistanis and creates more than 4,000 jobs through its wide distribution networks. To date, more than 40 P&G Pakistan employees have been transferred abroad and are currently working on challenging international assignments in the Company.
P&G Pakistan's Summer Internship Program has become the key source of future talent for the company, ever since its inception. It gives young and aspiring students across Pakistan the unique opportunity to work in the Company, undertaking real-life projects. The internship program reinforces P&G's commitment to developing human resource in Pakistan as it invests in preparing future leaders by recruiting and developing Pakistani talent year in, year out.
P&G Pakistan will always have the prosperity of Pakistani people at the core of its financial, corporate and social investments because doing business is a means to achieve the P&G purpose- which truly is to improve the quality of life for Pakistanis, now and for generations to come.
At the Karachi Stock Exchange in 2009, it was the worst of times; it was the best of times. After having being haunted by echoes of silence that prevailed in the last quarter of 2008, the market dropped sharply at the start of the year.
The removal of price floor sent the market tumbling to 4815 points by January 26 -- its lowest since September 2004. Although, the KSE-100 index nearly doubled from its lowest level to 9377 points by the year's close, it is still down by 33 percent in the last two years.
Another depressing factor for the market is the continuous decline in average daily volumes that was valued just $90 million in 2009 versus $290 million in the preceding year (excluding floor period). In its heydays, KSE's cash market saw average daily turnover of $400-600 million.
Interestingly, however, April 2009 changed the foreign portfolio directions; firstly by halting the spree of outflows in first quarter following which foreign inflows remained muted for three months. Finally, after foreigners started buying in August, volumes at the bourse gradually started picking up in September. Yes, it's the foreigners who set the direction for Pakistani equity market, albeit, ironically, empirical evidence suggests that they are normally wrong in reading the market's direction.
After the exclusion of Pakistan in emerging market index, thanks to floor imposition, at the end of last year, it rejoined MSCI's Frontier Market Index in May. Although, Pakistan was second best performer, after Sri Lanka, within that index of 25 markets, it couldn't match the top emerging economies including India, China, Brazil and Russia.
In terms of price multiples; KSE is at a high discount to both its own historic peak and its historic discount to regional markets despite better dividend yield in the offing during 2010. The bleak security situation, constant depreciation of Pakistani currency and economic stabilisation at the helm of foreign flows justified this anomaly.
Aside from this anomaly, there are other fundamentals factors that show trouble ahead. The old economic philosophy that supply creates its own demand is questioned in the aftermath of the global financial crises. To get out of these complicated financial instruments, the basic demand of the modern world - food and energy - is the order of time.
No wonder, hedged demand has yielded healthy returns to investors in food and energy sectors in the outgoing year. This coupled with high dividend yield amid low leverage, allowed energy exploration & production firms (151% return), fertilizer (113%) and power generation (78%) companies steal the show at KSE.
Despite favourable movement in crude prices, the circular debt curtailed the gains, especially in oil and gas marketing companies (50%) and to some extent the refineries (88%). Commercial banks which were the star of pre-crisis days managed to move in tandem with market. However, they lacked the focus in their core business and remained busy filling the fiscal appetite of the government.
But given the heavy weight of E&P and other high performers in the index, KSE-100 gained 60 percent during the year in spite of the relatively poor performance of less weighted and less important industries.
There is no doubt on the need to boost infrastructure including dams, roads and low income housing schemes. But tight liquidity amid fall in purchasing power changed the priorities, as cement (9%) and chemical (45%) significantly underperformed the market.
The change in consumption pattern and shortage of credit to consumers could not be more visible than the auto sector which underperformed the market by 38 percent last year. And, although cellular companies are not listed in telecom sector as such, saturation in the cellular market was visible through PTCL --- which also owns the cellular subsidy, Ufone - that drove the sector's underperformance.
In upcoming months, the market may continue its current rally based on foreign flows both in equity market and the overall economy. But, the absence of leverage product (i.e. Badla) will keep the volumes under pressure.
Higher fiscal deficit owing to war spending and lack of financing avenues will not allow money managers to aggressively cut discount rates, hence the valuation of scrips may not improve at the stock exchange, where as the imposition of capital gain tax may also dampen investor confidence near the budget.
The banking sector in Pakistan was sailing smoothly with quality assets generating an average return of equity of 21 percent between FY04-FY07. Bad loans were at mere 7.2 percent of total advances at the end of 2007. However, the balance of payment crises that stemmed in later part of 2007 had most profound impact on the banking sector, as ROE sharply dipped to 7.8 percent in 2008 with toxic assets ratio soaring to 10.5 percent.
The misery for banks continued in 2009; although the return for shareholders marginally improved to 9 percent, toxic assets ratio surged further to 12.4 percent by September. Despite the fall in bottom line and deterioration in assets quality, prudent regulatory checks and retention of equity for past many years, capital adequacy ratio of banks continued to improve in the last two years. The Capital Adequacy Ratio (CAR), which was standing at 11.3 percent in 2005, improved to 14.3 percent by September 09.
The key ratios may imply a mixed year for commercial lenders in 2009, but the worrisome fact is the shift in banks' assets allocation lately. Although, the shift might not impact industry numbers in the short to medium term, but it has a significant impact on real economy which is dependent upon banking borrowing.
Mind you, banks' presence in agriculture, SMEs and low to middle income households was never exciting in Pakistan. But, their bread and butter were corporate, which constitutes 60 percent of their lending portfolio.
Yet, in the last twelve months banks have not been effectively lending to industrial sector. Instead they are happy off earning from this side business called investments while the government keeps on gobbling up private sector's share in total credit.
In 2009, the deposits of banking system increased by Rs521 billion (14%), out of which only Rs121 billion on net basis were deployed in advances, as virtually all the incremental supply was used to plug the government revenue-expenditure gap.
The investments (read government borrowing) increased by Rs659 billion (68%) in 2009, while on the other hand, advances-to-deposits ratio declined by 590 basis points to stand at 69.6 percent in the first nine months of 2009.
This explains the grim position of Pakistan's economy, where commercial banks are merely routing the liquidity emanating from foreign flows, commodity operations and private domestic savings to finance the government machinery and security related expenses.
For the first nine months banks were reluctant to lend to corporate and individuals owing to skyrocketing bad loans amid lack of demand from industries who were avoiding high financial charges.
But, with some sign of economic recovery, lately, with inflation tapering off amid marginal growth in large scale manufacturing sector, the demand for corporate credit gradually rose. However, attractive rates offered by government bonds still remain lucrative enough - wooing banks to put depositors' money in low risk papers instead of meeting the demand of private sector.
Yes, it's crowding out. Mind you, one main reason for bank's persistence reluctance to lend private borrowers despite signs of demand for latter is surge in toxic assets ratio, as NPLs to total advances, surged to 12.4 percent in the third quarter, after remaining stagnate during the second quarter at 11.5 percent.
Let's revisit a basic undergrad course called 'Commercial Banking 101'. The job of bankers, primarily, is to channel money from the hands of savers to that of private investors, while earning decent spreads.
But Pakistani bankers haven't been doing that of late; they have been mostly channelling private savings to public investment i.e. the government. Here comes the role of the regulator to streamline banks' core business. But then, there is little hope of remedy when the central bank, under the influence of a government shepherded by the IMF, is running a monetary policy in support of excessive government borrowing.
To avert this behaviour and to spur demand, the central bank not only reduced its policy rate by 250 bps to 12.5 percent in a staged manner but also relaxed the forced sales value benefit for the commercial banks.
The State Bank of Pakistan allowed banks to net off its provisioning against bad loans by 40 percent of FSV on industrial land and building and enhance the benefit of 10 percent to 40 percent of FSV on pledged stocks, residential and commercial properties.
The impact on banks' profitability by the relaxation of 40 percent of Forced Sale Value on industrial land and building is just a fraction of benefit that could have been accrued in case the central bank had allowed the inclusion of other industrial property i.e. plants and machinery.
However, incorporating the additional benefit of 10 percent of FSV on pledged stocks, residential and commercial properties, the impact is meaningful for some banks. (See table for the impact of reversals in provisioning for nine top listed banks)
In addition, SBP also allowed banks to reschedule the loans classified as substandard to regular category and doubtful to substandard category. The benefit will be attained in a staged manner under certain conditions. Initially the provisioning for substandard will be reduced by 50 percent and doubtful by 25 percent. However, the benefit is allowed to be booked only in equity and not a reversal in profit and loss accounts.
The impact of these benefits has yet to be seen, as most banks would start booking its impact from the last quarter - numbers not released. The bottom line of these lenders, as a result of tough economic conditions, turned weak during the period. Net profits of top 10 commercial banks declined by 9 percent year-on-year for the Jan-Sep period, as net interest income of the banks remained sluggish -- exhibiting a growth of mere 19 percent.
While this is explained by poor lending performance, a more concerning element is the increasing share of core earnings in operating revenues by 270 bps to 73.1 percent in the Jan-Sep for all banks - non-interest income fell by 6 percent, year-on-year during the period.
This either implies bankers' inability or lack of business opportunities to generate fee commission and other income. However, to the good of banks, they managed to operate more effectively, as cost-to-income ratio declined by 20 bps to 50.1 percent by September for overall sector.
This performance points to the most worrisome fundamental of banking industry that mirrors the performance of overall economy, especially the corporate sector. Wounds from non-performing loans are getting even worse in consumer sector than in corporate segment, but the formers' overall performance is still better than the latter.
Bad loans provisioned for the corporate sector mounted to 12.7 percent, up 377 bps between Jan and Sep 2009, with about 61 percent share in total advances. On the flipside, consumers who behaved much better in first quarter could not maintain it in next six months, with NPLs rising 420 bps to 11.1 percent, with 9.1 percent share in total loans.
Within the corporate sector, the toll of bad loans in textile segment (nearly 30% of total NPLs) increased by 597 basis points in nine months to stand at 20.6 percent by the end of September 09, followed by energy sector with 358 bps increase in NPLs to 7.0 percent.
This clearly mirrors the fragile picture of macroeconomic stability, as falling textile exports and acute power shortage are the biggest impediments to economic growth. Likewise, the cement sector also seems ailing, with NPLs rising 450 bps between Jan and Sep to 11.1 percent.
On the other hand, the farming sector that saw an improved growth last fiscal year on the back of higher wheat support price and bumper cash crops, has been relatively shielded from the bad loans problem. Data shows that agribusiness sector NPLs declined by 64 bps to 8.3 percent during the period.
Although, overall bad debts ratio remained stagnating in the second quarter, the infection ratio of non-performing loans jumped by 90 bps to staggering 12.4 percent in June -Sep-- leaving the proponents of recovery thesis perplexed.
Absolute growth in bad loans, including that by specialised banks, almost remained at the same level (6 percent) as in the first half; while that by commercial banks (as per raw data) reduced from an average of 9 percent growth to 4 percent in third quarter. However, decline in loans growth (1.8%) versus an increase of 5 percent in the second quarter caused the bad loans ratio to march upwards.
The worrisome fact is that a substantial part in overall NPLs occurred in the last category - payments overdue more than one year. This explains the over 5 percent increase in provisioning during quarter ending September. Although, the relaxation in FSV benefit may put brakes to the growth in provisioning for the last quarter of this calendar year, the deterioration in balance sheet quality will keep the aggressive industrial sector lending at bay.
However, with LSM index showing marginal growth in October and credit to private sector in green during the second quarter, the disbursement of multilateral and bilateral aids and soft loans and chances of monetary easing in the first half of 2101, some improvement in non-performing loans cannot be ruled out.

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Increase in EPS after FSV benefit
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EPS 1HCY09      (Rs)    (Rs)   Annualized
                                    Impat
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ABL            4.30      0.74          9%
AKBL           1.15      0.96         42%
BAFL           0.94      0.57         30%
FABL           0.35      0.66         94%
HBL            7.20      1.82         13%
MCB           11.22      1.94          9%
NBP            5.84      0.80          7%
NIB              NA      0.49          NA
UBL            5.03      1.71         17%
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Source: Latest company reports, SBP & BR Research
ASSUMPTIONS:
Relaxation of FSV by 40% on industrial land and building is on all corporate loans
he 10% additional benefit on non industrial FSV is computed as difference between the required provisioning in the absence of any FSV benefit and actual provisioning
-Only 15% of collateral is industrial land and building and the rest as residential, commercial, pledged stocks and industrial other property
Normal tax (35%) is applied on reversal of NPLs provisioning
Recently, the NBFC Sector of the country witnessed an important development. Al-Zamin Leasing Modaraba and Al-Zamin Leasing Corporation Limited merged with and into Invest Capital Investment Bank Limited (ICIBL) by completing all regulatory and legal requirements. The merged entity shall operate under the brand name of Al-Zaamin InvestBank and include the major business streams of all the merging entities.
The recent merger has resulted in building up an equity of about Rs.1,000 million and assets of Rs.8,000 million. It is in fact a carefully planned synergy of two professional groups to consolidate their operating skills, management capabilities, product range and valuable clientele in order to meet the current challenges of the marketplace. The regulators all over the world and also in Pakistan have been encouraging consolidation of financial institutions in order to increase risk management capacity of the financial sector.
In line with the commercial banking sector, non-banking financial institutions have also been trying to join hands with a view to increase their equity and income streams. Al-Zaamin InvestBank is a practical example of implementation of the aforesaid policy supported and facilitated by the regulators.
Al-Zamin Leasing Modaraba with its track record of eighteen years has been a significant member of the Islamic financial system. Building up its balance sheet on prudent and progressive pattern, the Modaraba pioneered important Islamic products. For example, it developed and floated Musharakah-based Term Finance Certificates for the first time which were widely appreciated and subscribed in the market. It also designed specific leasing products for small, medium and energy sectors. The Modaraba over the time acquired Ghandhara Leasing Corporation Limited, First Professionals Modaraba and International Multi Leasing Corporation Limited and merged their operations in order to enhance its size.
Al-Zamin Leasing Corporation Limited (formerly Crescent Leasing Corporation Limited) was incorporated in 1987 as a public limited company. The name of the company was changed to Al-Zamin Leasing Corporation Limited from Crescent Leasing Corporation Limited with effect from 6th February, 2008. The prime business of the company was leasing and investment finance services. The company had a large equity and asset base comprising of finance leases, operating lease portfolio, finance credit, investments and corporate advisory products and services. The Universal Leasing Corporation Limited was merged with and into Al-Zamin Leasing Corporation Limited during the year 2007-08. The company has eight branch offices throughout the country which are providing various services to our clients.
Invest Capital Investment Bank Limited generally known as InvestBank has also a track record of very successful operations of over thirteen years and provided multifarious services in the field of investment banking. It has a diverse client base which includes financial institution, public and private sector corporations and high-networth individuals. The bank provides a complete and comprehensive range of financial services which includes equity and debt brokering, foreign exchange trade, corporate advisory and portfolio management.
Al-Zaamin InvestBank will provide all products and services which were being operated by the merging entities. Consequently, it has become a supermarket of the NBFC operations ranging from investment banking, advisory services, brokerage business, treasury operations, portfolio management, financial leases, operating leases and corporate finance, besides offering whole range of Shariah compliant products like Ijarah, Musharakah, Murabaha and Istisna. The Board of Directors and senior management of the bank comprises of very senior bankers and professionals with proven track record and image in the domestic and international financial services. The Chairman of the Board Mr. Zafar Iqbal is a senior bureaucrat having established and managed National Development Finance Corporation with an exemplary successful record of performance. Mr. Saeed Chaudhry is a former President of Prime Commercial Bank.
Mr. Basheer A. Chowdry has more than forty five years of experience in commercial and investment banking in local and overseas assignments of very senior nature. Mr. Muhammad Zahid is a Chairman of the Zahidjee Group which is one of the major textile exporters of the country. Mr. Aamir Saeed is a professional banker with valuable experience with international banking organisations. Mr. Rehman Ghani is a very successful entrepreneur having developed and run successful businesses of various natures in Pakistan and abroad.
Mr. Najib Amanullah is Chartered Accountant from the United Kingdom with a long corporate experience of handling financial matters. Mr. Nusrat Yar Ahmad, the Chief Executive Officer, is a well-known banker who has successfully accomplished important assignments in the investment banking and advisory fields. In fact, the individual and collective caliber of the Board and management will ensure that the organisation becomes a symbol of high quality operations with multiple streams of business, well-diversified risk profile, well-integrated structure and a recognisable presence in all major towns of the country.
The brokerage arm of the bank namely Invest Capital and Securities (Pvt) Limited (InvestCap) is a leading financial management and advisory Company with very successful track record. Its research and market commentaries have continuously earned recognition and appreciation in the marketplace.
Answering a question, Mr. Basheer A. Chowdry, Managing Director of the bank said that the merger of three entities brings manifold opportunities and challenges. He said that the expertise and knowledge built by the management teams of the merging entities brings reservoirs of energy and vision which Al-Zaamin InvestBank has planned to implement. He said that the Bank wanted to establish itself as a leading provider of the services in investment banking, brokerage, corporate financing, leasing and Sharaih compliant products. Being equipped with well-developed infrastructure and experienced human capital, the Bank aims to become a truly comprehensive NBFC with a capability to meet the changing needs of the marketplace. "Our valuable assets" he said; "are our high quality and committed human resource and a large base of important clients. Our challenge is to anticipate the increasing needs of the increasing clientele and to offer the best possible standard of service, efficiency, prudence and professionalism to them. My colleagues in the Board, senior and middle management levels, and their teams, are all committed to achieve this common vision and objectives."
Pakistan's energy Exploration and Production (E&P) sector enjoys extremely favourable dynamics. Successful operational performance of this sector is the key to country's economic growth. The rising energy deficit, high vulnerability to oil prices, and expensive energy import options, all have resulted in significant government attention and incentives for the sector.
The government has been providing improving economic terms for investment in oil and gas exploration through its petroleum policies. Owing to the favorable policies, the Pakistan E&P sector enjoys high FDIs and diversity of local and foreign exploration firms. Several high potential areas in Pakistan's basin remain largely unexplored due to security concerns, whereas the offshore basin, hitherto untapped, also offers attractive exploration opportunities.
E&P sector has outpaced the growth of Pakistan's economy by growing at an average rate of 7.5 percent in the past five years, against the growth of 6.4 percent in broader economy in the same period. Owing to the massive energy deficit faced by the country, the Ministry of Petroleum and Natural Resources has been pursuing the import of gas through pipeline and LNG projects from the neighbouring region that is Iran, Turkmenistan and Qatar. The latter two projects are currently in infancy stage as no material development has taken place so far.
The Iran-Pakistan (IP) Gas Pipe-line, however, has been in the limelight of late. The project cost is estimated at $1.25bn with debt equity composition of 70:30. The target date for completion is 2013 and the pipeline is expected to deliver 750mmcfd gas. For crude price of $70/barrel, local gas fields under Petroleum Policy 2001 in Zone - 1 (Zone-1 is the most attractive zone in terms of pricing) are priced at $3/mmbtu, whereas the recently announced Petroleum Policy 2009 offers $4.62/mmbtu.
Considering the cost of imported gas could go as high 4-5 times that of local gas (and 3-4 times the cost of gas under 2009 policy), the development of unconventional hydrocarbon resources such as tight gas could offer significantly better economic terms to the country. This can come in shape of lower gas prices compared to imported gas, lower inflation, increased employment, lower pressure on balance of payments etc.
Pakistan's oil and gas reserve replacement has been impressive during the last decade. The country has managed a reserve replacement ratio of 196 percent for gas and 230 percent for oil, during 1998-2008. Oil and gas exploration firms have managed to discover 50 percent of country's total oil and gas reserves from 1980 onwards. In the last decade, 18 percent of the country's total gas reserves were discovered owing to significant increase in exploration activity, improved knowledge of the sedimentary basin, and utilisation of better exploration techniques.
The reserve life of oil and gas, however, has been on a consistent decline in Pakistan owing to significant increase in oil and gas production. The country's gas production has more than doubled since 1998, thus the gas reserve life fell from gradually from 35 years in 1998 to 23 years by 2008. The oil reserve life has remained stagnant at 12.5 years.
Of the 26 total operators in Pakistan's exploration sector, 16 are foreign players whereas 10 are local. The exploration and development expenditures carried out by foreign operators have increased by 48 percent to Rs43 billion in FY08 compared to Rs29 billion in FY02. Despite overall increase in oil production of the country, foreign operators' oil production has dropped primarily due to more than two-third decline in oil production by BP.
The story of gas production by foreign operators, however, is much more heartening as it has increased seven times from 88-bcf gas in FY98 to 618-bcf in FY08. The production share has also nearly tripled to 42 percent in FY08 from 13 percent in FY98. The overall share of foreign operators in country's hydrocarbon production has increased from 17.6 percent in FY98, to 40.8 percent in FY08, primarily due to increased gas production.
The single largest deterrent in the oil and gas exploration in Pakistan is the fast deteriorating security situation particularly in Balochistan and NWFP. The fact that out of 150 exploration wells drilled in Pakistan in the last six years, only nine have been in Balochistan and NWFP - mirrors the investors' confidence or the lack of it in these areas.
Oil and gas exploration is a high cost, high risk and technology intensive business and thus require attractive incentives and favourable working environment. Despite having a well defined petroleum policy, Pakistan has failed to attract large investors in the recent years - which would only turn into a reality if and when the security concerns are fully addressed.
Refineries by virtue of being in the business of manufacturing petroleum products play a vital role and should be considered differently from other businesses. The oil refineries, whether private or state owned, are one of the strategic assets of our country.
They form the basis of the key support structure upon which a nation is built and run. Oil refineries directly help build infrastructure, support transpiration industry, provide employment's and help build pipeline networks for continuous supply of petroleum products throughout the country. What increases their strategic importance is the fact that they ensure fuel supply for the defence needs and ensure adequate fuel reserves in case of any untoward incidents.
More importantly, refineries also help saving the ever important foreign exchange for the nation - Pakistan saves around $700 million a year on account of oil imports courtesy refineries. Refineries in Pakistan have an annual production capacity of 13 million tons per annum, but unfortunately there efficiency has remained low due to variety of reasons. Their capacity utilisation, which stood near 87-90 percent during FY03-FY08, dropped to 67 percent during FY09, causing huge losses not only to the refineries but to the national exchequer as well.
A part of the problem is that most of the refineries in the country are hydro-skimming refineries and cannot fully exploit the crude by deep conversion. Refineries, for this very purpose were provided with an incentive to upgrade their plants through deem duty which kept varying between 7.5-10 percent between FY02 till now.
It was back in 2009, when refineries' pricing formula was revised and the deemed duty was reduced back to 7.5 percent from 10 percent. This decision invited outburst on the government by the refineries. The refineries consider that the reversal of pricing policy has seriously jeopardised their viability of the existing assets and the future investments. The manufacturers have even to the extent of threatening to shut down the industry if there concerns do not get addressed.
There, however, is another school of thought which believes that refineries are the ones to blame as they failed to invest a single penny in Euro-II implementation which was the purpose of deem duty. The issue is still pending and no solution has been reached yet despite several meeting among the stakeholders.
Refineries in Pakistan generally lack secondary processing facilities and mostly produce high yield of loss making products - which is why they normally operate on lower margins. Another issue affecting the refineries is that of circular debt which restricts their ability to operate at optimal efficiency and to build reserves for future investments.
The Integrated Energy Plan 2009-2022, perhaps, has the best solution for the industry that the refineries should be supported and be given a defined timeline to upgrade their plants which is the only way they can make positive margins. Moreover, hydro-skimming refineries should be discouraged and only those who can set-up deep conversion refineries should be encouraged and allowed.
One hopes that the vital sector is handled with care by the government and that the issues are resolved as soon as possible. But at the same time, the situation also demands refineries to be more responsible in meeting the deadlines as it is eventually the consumers' money which is being used for their up-gradation.
Self sufficiency in Pakistan is a term used very rarely in Pakistan but thankfully the all important natural resource that is natural gas does not disappoint on this account as Pakistan manages to meet its gas requirement through domestically produced natural gas. The country's natural gas production has grown at a healthy pace of 8 percent in the past five years.
The valley of Sindh has the lion's share in country's natural gas production, whereas Balochistan comes a distant second, with negligible contributions from the other two provinces. But there is a worrying sign in the years to come as natural gas reserves of Pakistan are fast depleting and can only account for 17 more years to come.
Power sector is the major consumer of natural gas consuming more than one-third of total gas produced. This highlights the inefficiency of Pakistan's energy model because the scarce resource should rather be utilises for productive purposes instead of being burnt as fuel. But the inability of the energy managers deprives the ever so important industrial sector from using the gas as feedstock - which in turn is causing huge losses to the exchequer.
What is more worrying is the ever rising trend of natural gas consumption by the transportation sector in the form of CNG - the share of which has increased by six times in as many years. Back in 2002, the policy makers did not realise the growth potential of the sector as it offered cheap alternative fuel for the economy class - but this is now hurting the economy very badly. The government has failed to curtail the gas usage as CNG and has time and again succumbed to the pressure of the strong transport lobby in the country.
There has also been a lot of criticism from the industrial sector especially by the textile manufacturers on feedstock gas supplied to the fertilizer sector at heavily discounted rates. Fertilizer sector has 13 percent share in the consumption pie of gas used as feedstock, but nearly 70 percent of its gas comes from Mari gas field which produces gas of low quality. This gas can only be optimally utilised in the manufacturing of urea and therefore somewhat justifies the discounted prices.
The security situation in Balochistan is a threat in the future as many studies reveal a large potential of gas reserves is still undiscovered in that area. Moreover, the government needs to address the problems faced by the gas distribution companies and must revisit their decade old plea of revising the fixed asset based return formula. The current formula restricts the distribution companies' ability to engage in massive infrastructure development as it does not cover the cost of debt incurred in the process.
To conclude, there is a dire need for better utilisation of gas resources and government needs to incentivize E&P companies to operate in such security situation in certain areas. Moreover, the allocation of natural gas also needs to be done more effectively and alternate sources -- such as hydel, wind and solar energy -- should be worked on for the power sector to ease off the pressure on the fast depleting natural gas reserves.
Pakistan's electricity generation is heavily tilted towards thermal power generation which produces accounts for roughly two-third of the country's total power generation. Needless to say that the high dependence on thermal generation leads to the high import of furnace oil given that Pakistan does not produce sufficient crude oil to meet its requirements.
Out of the 67 percent electricity produced from thermal sources, nearly half of it comes from natural gas which is a problem in its own right. With its fast depleting gas reserves, Pakistan cannot afford to rely heavily ion gas being burnt as fuel for power as it leads to massive losses for industrial sector that has to face the music of gas shortfall in the peak season.
The never ending politicking on the issue of water storage in the form of construction of dams has also cost the country a lot in monetary terms over the years as electricity generation from hydel sources has been stagnant in the past ten years. Hydel electricity generation in Pakistan only accounts for less than one-third of the total power generated, which is only because of inefficient policy making.
With the threat of global warming and melting of glaciers fast becoming a near term reality, there exists an opportunity in the problem to build large water reservoirs to avoid catastrophic situation five years from now. This will present us with the chance of generating hydel electricity and reduce our reliance on largely imported thermal electricity generation.
Another problem is that of inefficiency - which ranges from the inefficient plants to the inefficient billing collection system - all of which adds to the worrying situation in the power sector. Firstly, a vast majority of power plants operating in the country run on less than optimal level and the average capacity utilisation according to the industry sources is a shocking 34 percent.
The reason for such inefficient plants is that not enough investment has been done in the power plants which were originally imported from Western countries and were old even at the time of installation here. Their inefficiency does not only lead to the failure in meeting the electricity requirement but also leads to heavy consumption of the imported furnace oil and the precious natural gas - hence resulting in higher tariffs.
Then there is the devil of transmission and distribution losses, which is the major cause behind the massive load shedding leading to industrial losses and social unrest. The fact that the infrastructure set-up of the power distributers is not up to the mark, hurts the IPP's as 20 percent of what they produce is lost on its way to the consumers.
Although, the official numbers show a gradual decline in transmission and distribution losses, but those close to the industry reveal that the actual picture is much worse and the losses range somewhere between 30-35 percent. Then there is a lot of electricity being stolen from the system that cannot be billed, hence, resulting in huge operating loses for the power distributors.
The dilemma is that in most cases, the thieves are known but cannot be put on trial because of the lack of political will. There is no other solution to this problem than to take strict actions against the culprits, which is only possible if the government intends to act against them.
Finally, comes the inefficient billing collection system as a large number of customers specially those having strong links in the set-up delay their payments to the distribution companies, which in turn reduces the IPPs' ability to procure furnace oil and thus a power shortfall. This is where the vicious cycle of circular debt starts and adversely affects the economy.
The government therefore, needs to be proactive in this regard and must find ways to provide continuous power supply. The hastily arranged RPPs won't serve the purpose because of the controversies surrounding the issue. There is a dire need that the government accepts its failure to fulfil the promise of a load shedding free country by the end of 2009, and instead of coming up with excuse should formulate a sound long term strategy to ensure cheap electricity to the end users.
Communication leads to community, that is, to understanding, intimacy and mutual valuing. Nokia is the bridge between your world and the world around you. Today Nokia is one of the most trusted brands in the world and Nokia has earned this status by providing the highest standards that consumers have come to expect from Nokia. Nokia envisions a world where connecting people to what matters to them empowers them to make the most of every moment. Nokia believes in providing the kind of solutions that add value to your life and the way you connect with people.
Nokia is the world leader in mobility. It has been a pioneer since the industry's infancy in the 1980s and is now at the forefront of transformation. Nokia's first priority has always been a consumer-centric approach. That's why Nokia makes products that perfectly compliment the consumers' lifestyle. Nokia is not only the world leader in mobile phones, it is also the world's largest camera manufacturer, a leader in digital music, world's largest manufacturer of converged devices and the first mobile phone company to introduce torch and radio in a mobile phone.
Headquartered in Finland, Nokia wants to connect people around the world who want to benefit from communications technology. With strong R&D presence in 16 countries, device manufacturing in 9 countries, infrastructure equipment manufacturing in 4 countries and Sales in more than 150 countries; Nokia is a truly global company.
To cater to changing consumer needs more elaborately, Nokia brand has transformed into a solutions business. The solutions approach is a winning combination of devices, services and gear. Nokia will now offer its solutions based on each of its five themes:
-- Play - This solution will offer Nokia's Music & Touch portfolio along with Nokia headsets and services like Nokia Music Store and Ovi Store. To maximise the exclusive music experience, Nokia is also entering into partnerships with leading artists and record labels.
-- Work & Life - Nokia Email Solutions offer growing portfolio of email-enabled devices which is inclusive of affordable phones and high-end Eseries phones which are further complimented by services like Instant Messaging, 90% of world's email accounts, Corporate Messaging as well as Bluetooth gear range.
-- Mobile Computing - This solutions category includes internet tablets and Nseries mobile computers available with support for all Nokia services such as Ovi Services, Nokia Maps and Music Store.
-- Community - Community solutions are targeted towards social butterflies who always want to stay connected with friends and family one way or the other. The mobilephones in this category are fresh and vibrant with social networking and media sharing features that support instant communication with friends and family. Available with Nokia Maps, this solution helps you connect in more meaningful ways.
-- Entry - My First Nokia (MFN) is highly relevant to Pakistani market due to our large rural population. This solutions category reflects the most affordable Nokia devices with basic features. Supported by Ovi Mail, Nokia Life Tools and Nokia Money, the entry solutions help minimize the digital divide and create more opportunities for first-time mobilephone users.
Part of the Nokia Middle East & Africa (MEA) region, Pakistan is a high growth potential market for Nokia. With cellular teledensity of 58.2% and growing, Nokia Pakistan is growing fast and strong with a large untapped market at its disposal. Pakistan is a lucrative market for manufacturers of mobile handsets and other telecom equipment as 20 percent of mobile users in Pakistan change their handset thrice a year. A similar percentage of mobile users change the mobile handset once a year and this could be a successful business model, according to a regulator Pakistan Telecommunication Authority (PTA).
Being the market leader since inception in the country Nokia stands out as the clear market leader in Pakistan and independent sources claim that all other players share combined is one fourth of Nokia market share.
Nokia's main focus in Pakistan is to reduce the total cost of ownership for consumers and bring more affordable yet feature-rich mobile phones in the market. Nokia continues to enhance its solutions targeted towards professionals and business users. This includes a growing portfolio of email-enabled devices, softwares, services and accessories.
Nokia Messaging:
Around 300 million people world-wide* have experimented with mobile email but only 10% of accounts, or 30 million accounts, have actually been activated on the mobile phone. ** With over 100 million email-enabled devices from Nokia in people's hands - the biggest choice available in the market today - mobile email is now more accessible than ever. Nokia's messaging solutions are simple to set up, easy to use and offer people the freedom to communicate whenever and wherever they are. People don't necessarily have to buy an Eseries phone to enjoy mobile email. Nokia devices with email support are available starting from PKR 4,200 and upwards with a choice of both QWERTY and touch screen keypad. Nokia email-enabled devices are now more affordable than before.
NOKIA E72 NOKIA E63 NOKIA E52
Nokia email is push messaging service so that email is received in your inbox as soon as it is delivered. UI interface is similar to what you experience on PC/laptop to streamline the user email experience on mobile phone. Nokia mobile phones allow users to access up to 10 different email accounts on the same device which is 3 times more accounts compared to competitors' offerings.
Nokia Messaging gives you quick and easy access to the world's most popular email accounts - thousands, in fact - and chances are that you have an account with one or more of them. One device is all you need to manage multiple accounts. With fixed data plans making costs more predictable and affordable. Nokia Messaging is quick and easy to install, all you need is your email address and password and you'll be reading emails and replying to them - on your mobile device - within a couple of clicks. Nokia has worked with all the major ISPs (Yahoo! Mail, Windows Live Hotmail, Gmail, AOL Mail). Nokia mobile phones support both global and local ISPs. For example, To a Pakistani user, both Google mail and Cyber mail accounts will be accessible. More information about Nokia Messaging can be found at http://email.nokia.com.
Many people in emerging markets like Pakistan have Nokia devices, which unknown to them, are email-optimised. Now - to help them along the path of digital connectivity - Nokia has developed Ovi Mail, an email service that gives them a personal digital identity, and which could probably be their first step in discovering the mobile internet. Ovi Mail gives first-time email users the opportunity to set up and start using an email account (username@ovi.com) right on their mobile phone.
According to research, 25% of the world's mobile phone users are connected, but for the remaining 75%, there's Ovi Mail, which completely eliminates the need for a PC to create and use an email account.
Ovi Mail is a secure and spam-free personal email service designed especially for Nokia Series 40 devices. Mobile phone users who have any of the more than 40 Ovi Mail-optimized devices* can set up their email account for free within a few minutes, and start using the account right away. They can choose to create a new Ovi Mail account or activate email for an existing Ovi sign-on profile. Ovi Mail is also available on the web at https://mail.ovi.com.
Nokia for Business:
Today, work or corporate email on the mobile device is not only the privilege, but also the right, of many. Nearly half of corporate email accounts depend on the Microsoft Exchange server. Nokia's Mail for Exchange lets you wirelessly synchronise your Microsoft Exchange email, calendar and contact data, as well as providing easy and instant access to your global company. In newer devices like the Nokia E72, Nokia E75 and Nokia E63, Mail for Exchange is pre-loaded in devices, so setting up the account on the mobile device is only a few steps away. In other devices, such as the Nokia E71 or Nokia N96, Mail for Exchange can be accessed from the Download! folder. Mail for Exchange is enabled on more than 50 Nokia devices, including the Nokia E75, Nokia E71, Nokia E63, Nokia N96, Nokia N95, Nokia N79, Nokia N97 and Nokia N86 8MP
IBM Lotus Notes Traveler synchronises the Nokia device to the Lotus Domino server, bringing real-time IBM Lotus Notes push email and PIM (Personal Information Management) synchronisation, with no additional server or middleware required. Email (with attachments), calendar, address book, journal and to-do lists, are available to the Nokia device that the customer loves to use, including all Nokia Eseries and Nokia Nseries phones. The email service is available at no extra cost with new Lotus Domino servers and is delivered securely by IBM and IBM Channel partners.
To configure Mail for Exchange and Lotus Notes on Eseries mobile phone, slightly more information is required compared to consumer messaging for security purposes which can be easily obtained from your organisation's IT manager.
Nokia E72 - Boost your work
Nokia E72 is the latest arrival in Nokia's Eseries family that maintains essential elements of its predecessor, whilst still improving its capabilities in a number of areas. Nokia E72 offers a desktop like email experience and has new optical navigation key for more intuitive scrolling through menus, emails and fast panning of images. It comes with 5 megapixel camera and a standard 3.5 mm audio jack.
On top of these developments, for the first time, Eseries owners will be able to set up instant messaging (IM) accounts provided by Nokia Messaging direct from the homescreen. In just a few steps, device owners will be able to connect to their favourite IM accounts such as Yahoo! Messenger, Google Talk and Ovi, amongst many others.
-- Strategy Analytics, MyMetrix ComScore 2008, Canalys 2008
-- According to industry analysts Gartner, June 2008
One of most resounding words in Pakistan's telecom industry last year was mobile banking. Experimenting with the concept of "branchless banking", telecom operators in the country have been quite successful.
After the successful launch of "Mobile Money Order" and "Mobilink Genie" by Mobilink, the launch of Telenor's "Easy Paisa" - a product that allows the payment of utility bills through its retail outlets in addition to facilitating domestic remittances - was the second major breakthrough in sowing the seeds of m-banking industry in Pakistan.
Both telecom firms look set to gain popularity, as branchless banking through agents and mobile phones is far more efficient and convenient than going to a branch. M-banking services can fulfil the needs of both urban and rural community; on one hand, it can save time of the urban community and on the other, it can provide banking services to rural community.
This concept is truer for a developing country like Pakistan, which is marked by limited access to banks mainly because lenders haven't penetrated in rural and sub-urban areas where the majority of country's population lives.
Low penetration of branches can be gauged from the fact that there are just seven branches per hundred thousand people and 0.22 braches per thousand kilometers. Similarly, there is a lack of availability of ATM facility; on an average there are only 0.10 ATMs per thousand kilometers.
Such dearth in banking when seen in the backdrop of significantly high penetration of cellular technology shows that growth opportunities in the m-banking sector are fairly lucrative. According to a UN report, mobile subscription in Pakistan expanded at a cumulative growth rate of 102 percent in past four years, while on the contrary, bank account holding stood as low as 226 bank accounts per thousand adults.
Increasing the scope of m-banking is also good for the broader economy. According to a recent study, mobile service facility reduces poverty using microfinance and cash management facilities. Another report points out that adding ten extra cell phones per 100 people in a typical developing economy, GDP growth per person boosts by 0.8 percentage points.
Quite naturally the industry is gathering pace, as revealed by the State Bank of Pakistan's annual report on retail payment.
Although, payments through mobile haven't penetrated the market as yet and have extremely low share in the overall pie, SBP data show that m-banking saw significant growth both in terms of volume and value of transactions in the first quarter of current year.
The number of transactions made through cell phones more than doubled to 54,009 in the first quarter from 21,733 in the last quarter of FY09. Total worth of m-banking transactions in value terms also jumped manifolds over the period, from just Rs4.9 million in the fourth quarter of fiscal year 2009 to Rs152 million in the first quarter of fiscal year 2010.
GROWTH
The success story, of course, comes on account of back to back launches of cellular banking facilities by bankers and telecom operators alike. And with the advent of these services and products, it seems that it will surpass all other banking channels in rural and far-flung areas, as it provides an effective way of doing banking business to the large un-banked region in Pakistan.
Given high mobile density in Pakistan, 54,000 per hundred thousand people, m-banking has been gaining quick market acceptance, since penetration of other banking channels such as bank branch, ATM, Point-of-Sale Terminals and internet is still quite low at 7.50, 3.39, 47.06 and 11,380 per hundred thousand people respectively, according to CGAP - a Washington based consultative group on global micro finance environment.
Besides, m-banking can target those un-banked areas much easily in areas where it is not feasible to expand services through ATM, POS due to high cost of infrastructure. Moreover, the speed and ease of access to banking facility through mobile is also high, in contrast to all other banking channels.
On top of it, the cost per transaction through mobile is also very cheap -- just $0.08 per transaction, which is nearly 10 and 50 times lower than that incurred for ATM and bank branch respectively, according to CGAP.
This cost effectiveness can help banks to gradually shift towards m-banking for retail banking service offerings. But while m-banking can be a big threat to ATM and POS, as all they facilitate small transactions, due to restriction on both volume and value of transaction, it can not entirely replace internet banking and the IVR - avenues that can also handle bigger transactions.
As for bank branches, it might reduce the frequency of visiting customers, especially those small account holders, which in fact is in great interest of the banks, as services to small account holders through bank branch is quite expensive.
But although m-banking has great potential in Pakistan - being at a nascent stage -- there is a huge gap for technological development and improvement in this regard. And one way to do so is to adapt the model applied by their peers elsewhere.
For instance, the model successfully launched by Globe Telecom in Philippine can offer an interesting insight. Globe's model provides facility through which cellular users can deposit cash into an e-virtual account, tied to their mobile connection through retail outlets. In addition, they can send funds from one personal account to that of another person, pay bills, make loan repayments and also shop by using the money deposited in their e-virtual accounts.
And it seems the industry is moving in the right direction. Reportedly, Telenor also plans to launch a mobile-account service that features savings and withdrawals. Anyone in Pakistan with a Telenor connection - more than 22 million people as of last update -- will be able to open a bank account at an EasyPaisa merchant. They'll be able to cash in and cash out at such merchants, too -- no bank branches required.
But unlike Telenor, not every operator has the same ease, chiefly because it can offer savings accounts because their management actually went ahead and bought a bank, Tameer Microfinance, which has a full banking license.
And that's why, in the wake of technological advancement and the growing need to expand microfinance facilities to un-banked areas, bankers, regulators and mobile operators are in a hot discussion these days to craft a workable model for mobile banking, or m-banking, in Pakistan.
REGULATIONS
The industry is currently studying the different types of m-banking models tried and tested elsewhere in the region and around the world. But the process of selection and the decision of whether to adopt or adapt is somehow complicated, as the choices offer different set of pros and cons -- requiring different regulations and policies.
Crucially, the major issue is whether the regulators should allow mobile users to open a 'virtual bank account' (via any retail agent) tied to mobile SIMs or whether they should make it compulsory for a user to open an actual bank account first before he/she can be offered mobile banking services.
For instance, in India, the guidelines put the onus of providing mobile banking services on conventional banks and that mobile-payment service providers - i.e. cellular firms -- can only serve as intermediaries in providing the technology framework for such services.
A similar hybrid model - one where bank co-operate with cellular firms -- is being offered in South Africa by the name of Wizzit, where the bank and the mobile operator jointly offer m-banking services.
Indeed the direct involvement of banks makes sense, given their expertise to handle money and monitoring to check money laundering, e-money risks and the protection of consumer rights. But in case of m-banking, these benefits would come at a cost of relatively lesser penetration in the unbanked areas, as most of the rural population in Pakistan lacks access to bank branches.
On the contrary, true motivation to target the un-banked market can be achieved if regulators permit the opening of a virtual bank account tied to mobile SIMs, as telecom operators can potentially have greater knowledge of actual target market owing to their vast network existing in the far flung areas.
The non-bank model has been found quite successful in Kenya and Philippine, where services like M-Pesa and G-Cash (respectively) have been offered solely by telecom operators without any sort of bank intervention.
And given Pakistan's resemblance to both these countries, perhaps the non-bank model can be adaptable in Pakistan as well. Branches per hundred thousand people in Pakistan and Philippine are 7.50 and 10.53 respectively, according to Financial Access, while a 2008 UN report noted mobile density in Pakistan is 10 percent higher than Kenya -- meaning that there is enough need and the potential to sow the seeds of m-banking in Pakistan.
Yet, one lesson that needs to be learnt from the non-bank Kenyan model is that telecom firms can't be left unmonitored in the sphere of banking. More recently, the conventional banking industry filed a suit against M-Pesa citing that its unregulated status puts customers at risk.
The crux of the issue isn't just cash conversion, i.e. how to set up a network of agents where you can get cash in and out of those accounts, but also that today's implementation of 'one bank-one telecom operator' model, might change to 'many banks-many operators' tomorrow.
The paradigm of the future is "if I want to send you money, the only thing I need to know is your mobile number," says Gerhard Romen, the director of financial services at Nokia. Details like which bank, mobile operator, or even brand of cell phone you're using won't matter, he says.
So, in short, the Joint Regulatory Committee formed by the State Bank of Pakistan and Pakistan Telecom Authority has plenty on its plate to deal with. But, while unnecessary haste in an uncharted territory may lead to bad policies, an unnecessary delay may create an unwanted monster. Last year's trends show that the industry is going to gather pace soon. And so must the regulators step the foot on the gas.
Perhaps, the setting up of a separate m-banking regulatory institution can also be considered in this context, while asking those telecom firms that are venturing into m-banking to list themselves at the bourses for better disclosure and public accountability to help avoid the too-big-to-fail syndrome.

======================================
Per-transaction coss by bankin channel
======================================
                                     $
======================================
Branch                       1.19 to 4
POS                               0.40
ATM                       0.62 to 0.85
IVR                       0.28 to 1.25
Internet                          0.10
Mobile                            0.08
======================================

Source: CGAP & Gemalto
One of the few sectors that managed to somehow weather the financial and economic storm of 2009 was telecom. It was a year full of competition, growth, introduction of new services, consumer and operator friendly regulations and industry consolidation.
In the wake of declining subscription growth rate since 2007, the price war between cellular firms greatly benefited consumers who were being offered attractive new packages and value added services.
This near-saturation level in the backdrop of slowing growth and the initiative launched by Pakistan Telecommunication Authority (PTA) to block unverified SIMS kept the growth in subscriber base under pressure and will keep it such in the near term.
During the year, the cellular industry saw their consumers juggling in and out from one operator to another. Rivals in the industry created waves by launching packages, such as per second billing, free SMSs, late night offers, etc, while the facility to change network without changing number, has eliminated the non-cash cost of switching, and pushed the competition among mobile operators to a boiling point.
Being the first country in South Asia to implement Mobile Number Portability (MNP), Pakistan continued to witness consistent growth in porting activity. With over 1.14 million subscribers having availed the facility by June 2009 since the implementation of MNP project, increased porting is forcing operators to offer enhanced quality of services.
The sector added more than 6 million new subscribers on a net basis during fiscal year 2008-09. The leading mobile operator in terms of numbers of subscriptions, Mobilink faced a set back and lost almost 3 million subscribers in 2008-09.
The main contributor to this net increase was Telenor, which added about 2.8 million subscribers, while Zong and Warid added 2.4 million each during the last year. Ufone had a net addition of 1.9 million. However, during the past few years, Mobilink and Telenor had been adding more than 7 million subscribers on an average to their networks.
All those heavy marketing expenses failed to attract new cellular subscribers as the growth in cellular subscription remained lackluster near the end of the year. With mobile density virtually stagnant between July-Nov 2009, there is now little room to grow volumetrically in the conventional cellular business. Operators have limited options to compete; price wars, better network service and the need to create a niche through value added services and retain costumers dominate the industry.
But considering that price war would be zero sum game, especially knowing that there is little room to improve on voice service provision, there is a chance that cellular companies would follow the model of collective dominance currently in practice in many European countries and elsewhere in the region. This behaviour can lure companies to indirectly synchronise the pricing and policy decision they make. That, however, is an if-and-when case.
So, if cellular firms must increase subscription, they will essentially have to do three things; a) explore new markets, b) new products and c) lower their cost of production.
Data released by PTA show that there is still room to penetrate further in the low cellular teledensity areas of Balochistan and N.W.F.P. And while the idea that voice segment has been saturated may be partially true in the short-term, there is still plenty of room available for subscription growth in the medium to long term owing to the tilt in population demographics towards young and middle age people amid increasing urbanisation.
The industry also has the potential of tapping late technology adopters such as housewives and elderly people by means of easy to use technology, like the usage of local language, interactive telephonic services in the future. Plus, declining mobile set prices, particularly, with the arrival of inexpensive Chinese mobile phones, the subscription rate in rural untapped community can increase substantially.
BROADBAND
Telecom industry also needs to experiment with new products such as broadband. Globally, latest wireless technologies like WiFi, WiMAX and EvDO, are catching up fast with the conventional wire line methods such as DSL and HFC, primarily because they provide a competitive alternative to broadband wire line technologies in geographies that don't qualify for loop access
In Pakistan, Mobilink has also started broadband services via its brand "Mobilink Infinity" in Karachi which has been an instant hit in the city. Then there are emerging companies like Wi-Tribe which were even offering free trial periods of up to seven days to catch the attention of potential customers. WLL operators like Wateen have also smartly diverted their resources to Broadband expansion in 3.5 GHz and invested on new technology like WiMax.
Intense competition in the market is also compelling the companies to broaden their scale of advertisement in print and electronic media and improve quality of service. Another benefit of this competition has been the reduction of Customer Premises Equipment (CPE) charges which can be a huge factor in wireless broadband proliferation in Pakistan.
Though the signs of growth are in -- just last year broadband subscription grew by 150 percent -
Pakistan has to go a long way in broadband sector. There are less than half a million broadband subscribers in Pakistan as compared to over 80 million subscribers each in China and US. A recent survey by the U.N revealed that there are about 19 million users of internet in Pakistan with many still using dial up connection - implying that there is a great growth potential in the sector.
With the popularity of WIFI and the spillover of technology that can substantially reduce DSL rates, Business Monitor International expects Pakistan broadband subscribers to reach 21 million by 2013.
But if broadband grows, and increases its proliferation, the industry cannot rely only on wireless networks, as fixed line sector remains an important tool in this regard. The PTCL has to perform the uphill task of reviving the sector by introducing revolutionary reforms on urgent basis and improving its infrastructure.
VALUE ADDED SERVICES (VAS)
Internet access, mobile banking, ring-tones and voice and Multi-Media Messaging Service are other few of the value added services already available in Pakistan. With 3G just around the corner, an entire new array of services would now be possible.
Value Added Services are most likely to become the new ground for competition, with cellular service providers vying with each other for customers through their service offerings. With teledensity at a stated 62 percent, value added services are the alternate route for creating revenue and pushing the ARPU upwards.
Unique services such as faster internet access, greater download capacity, news and email are some of the services that are currently being looked into. A large number of the VAS under consideration are heavily based on internet access through cell phones. It is expected that high-speed third generation air waves, which cell phone operators will bid for, will provide the needed technology to bring these services intro reality.
India is already preparing for 3G, with telecom firms rapidly coming up with new ideas to use the internet for downloading and uploading large files through cell phones. Nearly one third of the cell phones used in India have video capability and firms are using this statistic to generate music, pictures and video services. 3G technology would allow high speed access to the Internet and let cell phones become vehicles for application such as video conferencing. Moreover, many Indian telcos are hopping TV-on-PC entirely in favour of mobile TV.
TRIPLE PLAY
Yet another direction for telecom companies to take is Triple Play, a combined service of phone, TV and broadband. That is a TV service similar to cable TV, but with the added benefit of users having greater control over the content. The service is provided by ensuring a dedicated link to the subscriber so that he/she can interact using Electronic Program Guide (EPG). The technology delivers television programs through a broadband connection using IPTV (Internet Protocol Television) technology.
Wateen, WorldCall and PTCL are currently offering Triple Play in Pakistan. WorldCall was the first to introduce this service in Pakistan and PTCL has recently been pushing it Triple Play package called "SMART TV".
THE FUTURE IN DATA
Telecom is a diverse industry, but having the same focus; to increase communication. Till now, attention has been predominantly paid to the cellular sector. But as the parent companies behind many cellular firms begin to develop a variety of offerings within telecommunications, chiefly the provision of the internet through a variety of mediums, the scope of telecom in Pakistan is increasing.
The interest shown by telecoms already operating in Pakistan and international telecoms looking to make their presence in the country indicate that as a sector overall, telecom is not stagnating. Telecom technology is here to stay and opportunities abound, it is merely a question of looking in the right places and predicting potential shifts in trends before they occur.
COST EFFECTIVENESS
But regardless of the fact that industry has the potential to find new products and new markets, the fact is that, the average revenue per user (ARPU) per month of cellular businesses has been under pressure, despite a steady growth in top line revenues. ARPU, in fact, has nearly halved in the past four years, thereby continuously squeezing the industry's gross margins.
This is partly because the subscribers are highly skewed towards low revenue generating prepaid packages with 98 percent concentration. And even within this segment, the major use is in non-voice services chiefly the SMS.
The tightening situation can be gauged from PTA's comments, made in its 2009 Annual Report, that out of all the five mobile operators, only Ufone registered a profit of Rs1.7 billion during 2008-09, and the rest of the companies recorded financial burden due to heavy running expenses.
These germinating conditions quite naturally require consistent investment in equipment and technology - something that is currently being imported by telecom operators. And this is where the future growth possibly lies.
There is going to be consistent demand for technology, not just based on current trends but also the fact that the telecom and technology industry is growing globally as well. Besides, attracting investment in technology and equipment manufacturing business can have a positive spillover affect on other industries that need technology to boost their business and come at par with their global peers.
But leaving infrastructural investment in technology to players better suited for the job, telecom operators have another way of handling the pressure on their margins. The domestic industry can take cue from other developing countries that have successfully implemented cost cutting and cost saving measures in order to remain profitable, while reducing tariffs to further expand subscriber base and to reach to poorest of the poor.
Among such low cost business models in use, "infrastructure-sharing model" has become a widely adopted business practice in both developed and developing parts of the world. In fact, in some countries, link tower sharing is compulsory, such as in China and Bangladesh.
One way to implement this model at home is that telecom providers can pool all towers in a single company, to reduce their infrastructure cost considerably - a move that is already, reportedly, under consideration in domestic telecom circles these days.
Likewise, telecom businesses can outsource most of their non-core functions in order to reduce cost, a practice that has gained currency in India of late. Under this model, for instance, I.T operations are outsourced to I.T solution providers, mobile network services are outsourced to mobile manufactures, while customer services, such as call centers, are contracted out to independent firms specialising in customer relationship management.
By implementing this model domestically, telecom providers can increase valued added services. For instance, if m-health services are introduced and mobile operators outsource this service to health consultant firm, not only customers and consultancy firm will be better off, but mobile operators will also mint money by serving as middle men.
But as other service evaluating parameters such as the efficiency of network and its outreach and pricing are generalised and made common to most operators, the challenge in infrastructure-sharing model will be beating the competitor through sheer value addition. Does Pakistani market offer such creativity, one has to wait and see.
Pakistan is widely considered as an agricultural economy, but its share in country's gross domestic product has been declining persistently. Back in FY00, agriculture accounted for 26 percent of GDP, a share which shrunk to just 21.8 percent in FY09.
Despite its declining share, agriculture still remains the single largest sector of the economy and an overwhelming majority depends directly or indirectly on the income streams generated by agriculture sector. The country's labour force is highly concentrated around the sector with a share of 44 percent, the kick start it gives to the aggregate demand in the industrial and services sector is besides that.
The agriculture sector is segmented into four sub-sectors of crops, livestock, fishing and forester. The crop sector is further sub-divided into major and minor crops. Historically, the crop sector has led the agriculture sectors, but with changing patterns of income and expenditures, the share of crop sector has dwindled of late. The share of crop sector which was as high as 65 percent in FY91 has now dropped to just 45 percent in FY09.
On the other hand, the share of livestock has shown incredible growth and now constitutes 52 percent of the sector compared to 30 percent back in FY91. Experts believe that global integration, rising incomes and rapidly changing dietary patterns across the regions have caused this paradigm structural shift in the sector.
FY09 was a surprisingly good year as far as agriculture sector is concerned which depicted a stellar growth of 4.7 percent, surpassing the target of 3.5 percent for the year. The improved performance owes big thanks to a sharp improvement in major crops production bar sugarcane - the sector grew by a commendable 7.7 percent as against the target of 4.5 percent.
COTTON CROP:
Cotton is a vital non-food cash crop and contributes significantly in generating foreign exchange earnings. In FY09, the commodity accounted for 7.3 percent of the value added sector and 1.6 percent of the GDP. The crop, however, missed the target by a good 15 percent as the producers could only produce 11.8 million bales against the of 14.1 million bales during FY09.
The major reason for this under performance was that the crop was sown on 2.8 million hectares of land, missing the target by 7.7 percent. On top of that, shortage of irrigation water, lesser application of the much needed DAP fertilizer, late picking of cotton due to higher support prices on wheat and devastating pest attacks on the crop made the matter worse and led to the target being missed.
On the global front, cotton production during FY09 declined by about 10 percent mainly due to reduction in world cotton area caused by increased competition from alternatives crops. Significant portions of cotton area were diverted to oilseeds and other crops which yielded more attractive prices.
On the prices front, things have not been that pretty of late, especially during the dying months of 2009. Global cotton production, according to the US Department of Agriculture, is expected to decline by 4 percent in a time when demand is seen picking by 3 percent. This is what has caused the cotton prices travel up north at a rapid pace.
The bumper cotton crop in Pakistan lured the producers to export the cash crop in order to reap the benefits of higher cotton prices and the high discount that prevails between global and domestic cotton prices. Domestic cotton price sky rocketed up by 15 percent in December alone to Rs4750/maund - critically, this sharp surge at home reduced the once yawning gap of 30-35 percent to the cotton prices to a mere 9 percent.
Tailgating the price of cotton futures in international market, the home grown commodity is likely to cross Rs5500/maund from its current price of Rs4750/maund. In international market, cotton prices have jumped more than 50 percent this year on account of falling global production as rebounding consumption breathes life into the market. This situation has prompted the textile associations to call for a ban on cotton exports to save the local industry.
SUGARCANE CROP
Sugarcane is another vital cash crop which accounted for 3.4 percent in value added sector and 0.7 percent share in GDP. The cane crop posted a disappointing performance during FY09 as its output fell by a staggering 22 percent to 50 million tons.
The major reason for lower production and missing the target were the crop been sown in 17 percent lesser area, shifting of area to rice crop, less than optimal usage of DAP fertilizer, shortage of irrigation water and the non-payment to farmers by the sugar mills on time for previous year's crops.
The major product of sugarcane i.e. sugar remained in the headlines during 2009, unfortunately, for all bad reasons. To recap it quickly, it was just before Ramazan when the millers started hoarding sugar and created artificial shortage. The move led to a drastic increase in the product prices - which soared from Rs35/kg to as high as Rs100/kg in some areas.
This situation asked for the Supreme Court intervention which ordered the government to ensure sugar retail price for Rs40/kg. Without any surprise, the authorities badly failed to implement the SC order and the millers in result hoarded the product and it vanished from the market for a good period of time.
There was no one ready to take the blame of the crisis as growers complained of their produce being wasted in the open as millers are delaying cane purchase, millers on the other hand complained of high cane prices charged by the growers - over and above the support price and TCP, the government's trading arm remained a mere spectator in the game.
Sugar prices did cool down a bit in November but panic set in again as fears of reduced sugar production globally resulted in price war again and prices bounced back to Rs75-80/ in the retail market. The government finally acted by deciding too import duty free sugar in Mar-Jun 2010 instead of importing it now. There seems to be no logic in this decision as the best time to import the sweetener is today when the prices are still at affordable level and would cost around Rs55/kg.
Sugar future contracts also signal a bullish trend in the product prices going forward, so it is highly unlikely that sugar imports in Mar-Jun period might cost around Rs80/kg. Adding to the woes is the fact that sugarcane production for FY10 is going to again miss the target - causing another sugar price hike. If only the government could be proactive, the issue can be handled more effectively.
RICE CROP:
Rice is another vital cash crop and is one of the major export items of Pakistan. It accounted for 5.9 percent of value added sector and 1.3 percent of GDO in FY09. Pakistan grows ample quantity of rice to meet its domestic requirements and also export the high quality rice around the world.
Rice, unlike sugarcane and cotton, was sown in 18 percent more area during FY09 as sugarcane's loss turned out to be rice's gain. The production also soared by a commendable 25 percent that helped Pakistan earn sizeable foreign exchange revenue.
Following a healthy year of rice exports that accounted for nearly 11.21 percent of total export receipts last year, traders along with Trade Development Authority of Pakistan are formulating strategies to increase export volume to 3.5 - 4 million tons in current financial year from 2.9 million tons achieved last year.
Supply factors on the domestic front look favourable enough for overseas sales as growers have achieved a bumper production of rice (6.4 million tons) so far in this crop year. Add to this the carried forward stock of 1.9 million tons from last year, and leave 2.5 million tons for annual domestic consumption and we are set to have a total surplus of 5.8 million tons this year.
Global rice demand is increasing this year as rice output is expected to fall owing to bad weather in Asia, especially, Philippine and India, owing to which FAO forecasts that global paddy production will fall by 13 million tons to 675 million tons or 1.9 percent less than that in 2008.
Besides, India's ban on the export of non-basmati rice will help Pakistan to increase market share in rice export market. This trend is already evident from 26 percent year-on-year surge in the export of Pakistani IRRI rice in the first five months of current fiscal, according to the food ministry spokesperson. In addition, government's support in the form of 100 percent financing facility to rice exporters would boost international sales.
These factors suggest that while international rice prices may dent export profits relative to last year, playing on sheer volumes alone and plugging the global demand-supply gap will help Pakistan earn more revenues from overseas rice sales.
WHEAT:
Wheat is the main staple food item and largest grain crop of the country. The crop contributed 13.1 percent to the value added sector and a significant 2.8 percent to the GDP in FY09. The size of wheat crop and are under cultivation both increased by 12 percent and 6 percent respectively, during FY09.
The main reasons for bumper wheat crop in FY09 were many which include attractive wheat support of Rs950/maund announced before the sowing season, timely rains during December, January and March and other supportive measure like setting of higher wheat procurement target by the public sector and enhancing fertilizer subsidy specially on DAP fertilizer when the prices crossed Rs5000/bag in the peak season.
The sugar crisis which led to late harvesting of sugarcane crop has delayed the wheat sowing which would hurt the crop production this year. Therefore, there is a need to minimize the size of what could potential be a bigger crisis than sugar by curbing smuggling and implementing procedures to enhance wheat yield drastically.
In addition, proper water supply should be restored because acute water shortage for wheat would make it impossible to achieve the target. Wheat crop requires ample water supply at all crucial stages of harvesting and sowing, so unless the issue of water shortage is resolved, wheat production target is bound to suffer.
Lastly, a vital factor that needs to be addressed is the smuggling of commodity, which roughly accounts for more than 15 percent of the total wheat produced every yea. Surely, one doesn't want all that excess produce being secretly sold outside the country leaving the government without exchequer and leaving consumers with costly bread.
The country needs a repeat of last year when the proper utilisation of agriculture credit led to 10 percent improvement in yield owing to quality seed and fertilizer usage. The current credit disbursement to the agriculture sector which has increased so far by 9 percent shows a bright picture - all what is needed is proper utilisation of the resources.
In this modern agriculture era, fertilizers are the basic ingredient to boost farm yields. Balanced fertilisation contribution towards increased yield ranges between 30-60 percent in different crop production regions of the country.
All of Pakistan's soil is deficient on Nitrogen, 80-90 percent is deficient in Potassium, while 30 percent in Potassium. Moreover, widespread deficient of micronutrients is also found in different areas across the country. Soil fertility is continuously depleting due to mining of the essential plants nutrients from the soil under intensive cultivation.
Mineral fertilizers have played a key role in overcoming the problem of nutrient deficiency. However, the major constraint in exploiting the full potential of the soils has been the imbalanced use of fertilizers - especially in terms of large amount of Nitrogen application in relation to Phosphate.
The Nitrogen-to-Phosphate ratio, commonly known as N:P ratio has been alarmingly high in Pakistan despite serious efforts from the government to bring it down. Ideally, the N:P ratio should be 2:1, which has been in excess of 4:1 on an average in the past many years.
The major reason behind inefficient application of Phosphate fertilizer in Pakistan has been the major price differential between urea and DAP fertilizer prices and lack of farmer education as they fail to weight the cost and benefit of applying Phosphate nutrients to the soil.
From the manufacturing ring point of view, Pakistan remains a net importer of all fertilizer categories from urea to DAP and other related products. Pakistan imports more than 1 million tons of fertilizer every year - majority of which is shared by urea and DAP depending on market factors. Urea is a highly used product in Pakistan and the demand exceeds the production by around 600-800 thousand tons per year, which is met through imports.
Urea prices in Pakistan have been historically lower than those in international prices as government subsidizes the sector through subsidy on imports as well as that on the major raw material feedstock gas. The subsidy on feedstock gas has enabled the urea manufacturers in Pakistan to reap healthy profit margins and the yawning price gap between domestic and international prices allows them to pass on any increase in raw material prices.
Urea off-take in 2009 remained satisfactory and increased by a solid 8 percent owing to favourable prices and bumper wheat and rice crops. The prices dipped by 4 percent on year-on-year basis as gas prices remained almost stable throughout the year.
On the other hand, DAP fertilizer scenario is a bit different as there is only one DAP producer in Pakistan i.e. FFBL which caters for roughly 30-35 percent of Phosphate fertilizer demand in the country. The rest is all imported and DAP prices in the global market have generally been volatile pending on a number of other factors of which Phosacid is the most vital.
Phosacid is the raw material used for DAP manufacturing and the sole producer in Pakistan has to get it imported all the way from Morocco. This exposes the DAP prices to not only Phosacid global demand/supply as the commodity is scarce but also to the ever fluctuating exchange rate and hence leads to increased volatility.
Unlike urea, 2009 proved to be a much better year for DAP application as the off-take doubled to 1.5 million tons, however, it was more because of the low base effect of the previous year as DAP off-take in 2008 almost halted due to incredibly high prices.
Although, DAP prices remained on the lower side in 2009 but they are on a rapid rise again in the last two months which could again cause a 2008-like situation as this time round there is no subsidy on DAP which could be disastrous for the agriculture output and thus the economy.
The fertilizer sector also had its fair share of controversy when the Completion Commission of Pakistan summoned notices to leading manufacturers accusing them of abuse of dominance by tying in sales of urea with DAP -- meaning the buyer, in many cases a poor farmer, must buy a bag of DAP if he wants to purchase a bag of urea. Albeit, the evidence available with the CCP suggests that different companies tied-in the sales in different ratios.
The commission's report on the issue has been based on numerous complaints from all over the country that led to the probe into the matter resulting in show cause notices being served to fertilizer manufacturers, as the tying-in of sales is deemed illegal in the view of competition ordinance.
What the numbers reveal is shockingly consistent with CCP's finding to a large extent despite their claim that the companies delay the invoicing of DAP sales in order to minimize the chances of tie-in sales practice being traced. The sales figures of the top three companies - FFC, FFBL and ENGRO -- signal an improved urea-to-DAP ratio in the harvesting seasons rather than the sowing seasons.
This adds unnecessary burden on the farmers as they are forced to procure DAP along with urea regardless of whether they need it or not. Not only does this squeeze their pockets but also at times deprives them of even applying the much-needed urea to their crops, as dealers refuse to sell urea without selling DAP along with it.
This explains to a fair extent why farm yields haven't improved despite all those subsidies and support prices. The unfair practice hasn't only been hurting the farmers but has also been diluting the impact of government subsidy, paid by taxpayers' money. Regrettably, however, the representatives of those taxpayers seem to be in cahoots with each other to amend the CCP Ordinance instead of strengthening it.
In a nutshell, the fertilizer sector seems to be in good health especially with more urea capacities expected to come online by the end of 2010 by Engro and Fatima fertilizer. The N:P ratio improvement however, still remains an area of concern as in the absence of subsidy, farmers will always be reluctant to purchase expensive DAP. The government surely needs to find some way out - reducing subsidy on urea to direct it to DAP might just be one way out.
The story of textile sector is as blue as one could think. Marred by rising cost of production, energy shortage and weak global demand amid lack of competitiveness, performance of the country's biggest export revenue generating sector remained damp. Even the much hyped Textile Policy announced in the second half of CY09 failed to trigger a turn around as years of neglect continued to weigh on businesses.
Despite a bumper cotton crop, cotton prices went up exorbitantly high during the year, as traders found attractive opportunity in selling the commodity in international market where cotton was turning into gold in the wake of short supply. This threatened the gross margins of textile makers, as 35 to 40 percent of their cost of production comprises of cloth and yarn.
In the early season, the price hike primarily stemmed from short of target arrival of the commodity in domestic market amid rebounds in international cotton prices. Cotton arrival for CY09 clocked at 12.2 million bales as against 10.3 million bales in the corresponding period last year.
Data from cotton yielding provinces revealed that despite a 19 percent yield increase in Sindh, prices remained upward as delay in cotton arrival from Punjab together with lower provincial output (down 5.5%) dampened supply and forced millers to import cotton aggressively.
But that was early in season. Later, however, even when arrivals improved, prices were being driven by demand by traders who remained persistent in fetching attractive prices abroad.
The trend between local and international cotton prices shows that country's cotton production and arrival estimate generates a variation between the two. In 2005 and 2006, when cotton output was at a historical peak of 14.3 million bales and 13 million bales respectively; domestic prices traded on average discount of 20 percent to international global prices. But with gradual decline in production numbers, this discount squeezed to 7 percent by May 2009.
It is pertinent to note here that higher discount between global and local cotton prices is favourable for textile industry as it helps them to maintain their competitiveness in international market and enjoy higher profit margins at the same time, thereby contributing to the national exchequer.
But despite the urgency to arrest cotton price hike in order to remove pressure from textile businesses, it was unfortunate that the government failed to control hyped-up raw cotton exports to the point that the industry was caught in a broil by the end of the year.
The year-end saw a series of pleas by All Pakistan Textile Manufacturers Association and other related textile associations, to ban the export of raw cotton - but unsurprisingly it was left in vain.
COTTON OUTLOOK
While, 2009 was a troublesome year for textile producers in terms of cotton reports suggest that the future is also worrisome. In its monthly demand-supply outlook, the US Department of Agriculture recently projected world cotton production at 103 million bales in the year through July 2010, down 4 percent from the previous year. Global consumption, on the other hand, is expected to rise 3 percent year-on-year to 114.5 million bales, drawing down global stockpiles.
The International Cotton Advisory Committee is of the similar opinion, saying that global cotton stocks this season will see the largest annual decline in seven years.
At present, most farmers or ginners who sell their crop far in advance - in Brazil or West Africa - have almost sold out their stock. Therefore, like other commodity markets, price moves in cotton have raised suspicions about the impact of commodity investors world-wide, who buy and hold futures as a way to diversify their portfolios and guard against inflation or currency weakness.
Consequently, countries that normally sell on immediate shipment - India, Pakistan and Greece - are attractive avenues for now. Pakistan's largely cotton-based textile industry has in recent weeks intensified its efforts to get cotton exports banned. From its own perspective, the industry was justified in demanding a prohibition on exports as local prices rose to levels uneconomic for the industry.
FLIGHT TO BANGLADESH
Faced with cotton crises, many of the textile makers started shifting their set up to Bangladesh, while many others are in the process of relocation. And this is no surprise, considering that it's natural for the capital to move towards better opportunities.
According to a UNDP study, Pakistan - despite being a cotton producer -- fares badly in Asia Pacific region's textile exports compared to Bangladesh which does not even produce cotton.
The reason is quite simple: labour cost is only 23 cents/hour in Bangladesh whereas in Pakistan labour costs around 41 cents/hr, according to another study. Likewise, energy cost in Bangladesh was less than 2 cents/kwh in 2007 whereas in Pakistan it stood at 6.72 cents/kwh - a differential that has increased quite significantly since then.
The biggest concern is that these trends are likely to gather pace owing to lack of economic competitiveness. According to the latest global competitiveness report, Pakistan failed to improve significantly on any of the basic determinants of its competitiveness. The country was ranked 104; in institution, 89 in infrastructure, 114 in macroeconomic stability and 118 in basic and higher education.
But for those manufacturers who, instead of walking away, wish to survive in current environment, which might persist in subsequent years, here is a small tip: think of how to build capacity to compete with cotton traders and exporters in the marketplace.
Establishing backward linkages and contract farming is also a good option, if textile makers wish ensure smooth supply of cost effective raw material in future. But surely, the industry has a lot of homework to do instead of relying solely on the government that has paid a deaf ear so far.
FINDING A WORKABLE SOLUTION
In addition to the need of exploring backward linkages to ensure the availability of raw cotton at adequate prices, textile players and the government have to find other means to boost the industry's performance.
Clearly textile sector is one the leading contributors in country's aggregate economic output -- nearly 9 percent according to last available statistics. Its contribution to total exports has averaged nearly 60 percent during the last six years, albeit tapering a bit to near 52 percent during FY09.
More importantly, given that textile industry nearly accounts for one-fourth of total large scale manufacturing (LSM) output, it becomes more imperative to facilitate the industry in the upcoming trade policy, considering negative LSM growth in the last fiscal year.
Hence, there is a need for market diversification, as the central bank rightly noted last year -- citing that the global recession highlighted the risks attached to over dependence on developed countries as export markets brought home the importance of greater export market diversification.
In this context, Pakistan should endeavour to enter into trade agreements with other regional countries, where in view of greater concentration of country's exports in textiles, it should attempt to acquire more access for its textile and clothing exports through preferential trade arrangements.
And just like, the government is trying to woo banks to generate financing for the power sector; it must do the same for textile industry. This is because ever since the recent financial crises began, many lenders have become cautious towards the sector owing to rising number of bad loans.
This can perhaps help them invest in latest technology which has fallen sharply in the past many years. Central bank data show that monthly imports of textile machinery slid persistently between December 2004 and February 2009. However, the fact that textile machinery imports managed to grow in CY09 in the face of tough economic conditions, signals that the industry wants to shape up its infrastructure.
Moreover, stakeholders should discuss the potential of man-made fiber, which can easily be used as a good alternate to cotton. At present, the usage of cotton to man-made fiber is 80:20 in Pakistan, which is way short of its global average (60:40) - partly because of higher fiber prices at home and partly because of lack of proper market.
The textile ministry should consider structuring a proper market mechanism to ensure that Pakistani textile producers benefit from this low cost alternative, which may come in handy if and when cotton production falls.
Another way of achieving higher textile exports is to increase the rate of cotton conversion into value-added products, which is currently much lower in Pakistan compared to regional rivals, India and China. However, a more important step in the long-run, is to establish brands (or buy some established brand like the case in India) to extract maximum margins on cotton production and help arrest the problem of high external deficits.
Given the magnitude of these tasks, consolidation seems to be the only way forward in Pakistan's textile industry. At present the industry is loosely structured with small production units: for example, Pakistan's largest composite Nishat Mills Limited had only about 2.5 percent share in the country's total export sales in FY08 - the rest going to many smaller players. This sort of fragmented share makes Pakistani textile makers uncompetitive against giants from global and regional markets.
CONSOLIDATION IS THE ANSWER
Most acknowledge that Pakistan's textile industry confronts four major, partly interrelated, problems: an energy crisis, lack of value addition and branding, technological standstill and over burdening debt.
But central to these is a fifth impediment: 'fragmentation crisis', particularly evident by the industry's rising marginal cost of production and failure to compete in the international market despite gradual currency depreciation.
Therefore, policy measures should be directed towards consolidation of the sector using both the principles of market and moral suasion.
For the past many years, the industry has been receiving various sorts of benefits, subsidies, incentives, or other types of support programmes from the government. While many such programmes fell short of meeting the industry's demand, many were also poorly placed "band-aid" style measures which aimed at treating the symptom and not the cause.
But it wasn't the government's fault entirely. Many of the well-intended programmes, such as those for supporting research and development (R&D), export refinancing schemes, and low priced loans, were ill-used by the industry. Sources reveal that a great amount of such funding found its way to unproductive avenues such as real estate and stock market punting, or otherwise used for trading and hoarding practices.
Hence, the case for consolidation is not just based on gaining the economies of scale, but also that regulatory oversight becomes easier and cost effective if the subjects are not countless, small and dispersed.
In this context, five basic elements should constitute the policy framework:
-- Send long-term price signals to promote vertical & horizontal integration and boost value addition in the industry. These measures may include:
-- Pegging R&D support to both the size of the firm and the level of value addition it has.
-- Providing tax incentives. For instance: allowing a 'n'-year tax discount to firms following their amalgamation
-- Set up a special textile specific cell in the Securities Exchange Commission Pakistan to promote sector consolidation. Such a wing should work on listing, monitoring and ensure effective regulation amongst other ancillary measures.
-- Likewise, the textile ministry should set up a body to liaison with banks - keeping the central bank in the loop - to come up with ways and means to resolve the industry's debt burden by means of refurbishing and restructuring. However, this should come with strict supervision to ensure that textile businesses do not misuse the facilities.
-- Revamp labour laws such that labour unions do not become a deterrent for sector consolidation.
-- Bring together those textile players that need power and those that have spare power generation capacities. A special cell can be established to facilitate inter-industry transmission/distribution of power.
One way to resolve this is to ask discos like KESC and Wapda to act as intermediaries, set up transmission/distribution lines, and charge fees for their services. Yet again, such a system would be more feasible if the industry is consolidated.
Like most processes of change, the proposed flurry of mergers and acquisitions will not be taken with open arms, but creating synergies is the only way forward. No consolidation means no serious innovation at scale, resulting in fewer success stories.
If these small and scattered Pakistani textile producers continue the way they are at present, they will not have the capacity to compete with their global peers. It simply isn't logical to have a bout between a feather weight and heavy weight boxer, is it? At least not in the post-WTO free-market regime.

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DOMESTIC COTTON ARRIVALS
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%(Bales (mn)     CY09     CY08    %(+/-)    CY07   %(+/-)
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Punjab            8.1      7.5       8%      7.6      -1%
Sindh             4.1      2.8      46%      2.3      22%
Pakistan         12.2     10.3      18%      9.9       4%
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MOHAMMAD FAROOQ AFZAL
First of all, I would like to thank God, Almighty who blessed us with the strength to contribute for the economic development of Pakistan through organising of textile exhibitions in Russia in collaboration with "TEXTILEXPO" Moscow and introducing more than 50 textile manufacturers and exporters from Pakistan.
As the events are international, hundreds of buyers from 80 regions of Russia, 15 East European, 6 Central Asian, 12 CIS and 3 Baltic States attend exhibitions organised by Integrated Textiles Network (ITN) group of companies Karachi and TEXTILEXPO, Moscow. Many ventures, partnerships and joint ventures between Pakistani and Russian entrepreneurs find their roots through participation in Federal trade fair for Home textiles. Our events also improve Pakistan's image in RF as an enlightened moderation state. The prominent textile exporters and manufacturers of Pakistan have been visiting the Federal Fair for Home textiles Moscow since several years and are entirely satisfied with the outcome of the fair.
As ITN organises two textile exhibitions every year in Moscow, it is now widely regarded as 'Pakistan's Number One Event Organisers' in Russia. The international marketing office in Moscow, St.Petersburg and Barnaul the capital of Altai Region in Siberia., strong network of agents, use of modern management techniques and continuous support and encouragement from our partners in Russian and Pakistani business community are some of the factors that has enabled ITN group of companies to achieve distinction in performance as is reflected through its phenomenal growth.
TRADE ACTIVITIES:
In June 2004, we started our business activities in RF with zero budgets and no support from Government and private trade bodies/Associations.
We started business by establishing joint venture with "Textilexpo" JSC in June 2004. The aim of this joint venture is to provide exhibition facilities to Pakistani textile exporters in Moscow and St.Petersburg.
Riva Tex: The aim of this joint venture is to provide trade facilities to Pakistani textile exporters such as: Textiles Sourcing, Custom clearance, warehouse facilities and distribution of goods across Russia.
"PAVA-ROS": The aim of this joint venture is to promote Pakistani food products in Russian and CIS markets and to arrange match making meetings between the traders of two countries.
Beside this for export promotion we held meetings and exchange of views with the Moscow CCI, Moscow City Govt; St. Petersburg CCI, St. Petersburg City Govt, Heads of foreign economic relations of Republic of Tatarstan, Bashkortostan and Altai Region.
We also Organised meetings between Russian Trade representative of Russian Trade office, Karachi and PHMA, REAP and PTEA ect;
COUNTERPART TRADE BODIES:
The ITN have identified counterpart bodies/organisations in Pakistan with whom we would like the sectoral alliances to be established with their Russian counterpart bodies/organisations. Subsequently we assisted in signing MoU between Pakistan Textile Exporters Association (PTAE) and Russian Union of Entrepreneurs of Textiles goods & Light Industries(RUETGLI)
IVANOVA CCI:
Pakistan is the 3rd largest textile exporting country in the world where as Russia is the 3rd largest textile importing country in the world after USA & EU. Faisalabad city is the textile hub of Pakistan where as Ivanovo is the textile hub of Russia. These facts are providing tremendous opportunities for the promotion of textiles between the two countries. That's why we visited Ivanova and exchanged views with the President of Ivanova CCI for the promotion of textiles in this city. The President assured to provide us help in all aspects.
BARNAUL CCI:
Siberia comprises the vast territory of Russia and it offers tremendous opportunities for promotion of Pakistani exports goods. Taking this opportunity we visited Barnaul the capital of Altai region of Western Siberia. The President of Barnaul CCI also assured us to extend their co-operation in promotion of Pakistani good in the region.
Subsequently in Barnaul we signed a contract with the 14th largest food importer of Russia "PAVA-ROS". PAVA-ROS is interested to purchase rice from Pakistan through ITN from 3000 to 5000 MT per month and soon we will send the inquiry to REAP.
In September, 2006 we established our office and warehouse in Moscow and representatives in St.Petersburg and Barnaul, Siberia.
Presently we are in process with our partners to provide the facilities to Pakistani exporters to work in Russian market on LC basis or 100% advanced payment. Negotiations are underway with Sialkot sports goods Association for the promotion of Pakistani sports goods in Russian Federation
ENHANCING THE EXPORTS:
With its population of 145 million people and its annual purchasing power of 2.076 trillion dollars, the Russian Federation is a market of great importance. This massive population, together with the neighbouring countries, forms a potential market in the field of Textile and Garments, Therefore in spite of our all efforts we alone can not provide the trade facilities to our exporters, therefore I will request the Govt. and private sector to come forward to work jointly in providing the trade facilities on huge scale and to initiate dialog with Russian Govt. in removing the trade barriers, which are hampering our exports.
During the visit of Minister for Textile Industries Mr Mushtaq Ali Cheema in the 28 Federal Fair for Home textiles Moscow, in March 2007, the R&D cell of ITN informed the Minister that Russia is importing more than 40 textile items worth 20 billion dollars annually, and if due facilities are provided to our exporters from Moc than we can enhance our textile exports up to 500 million dollars annually.
FOR THAT WE SUGGEST THE FOLLOWING TO THE MINISTRY OF TEXTILES, COMMERCE AND TDAP:
1. Establishing of warehouse, display centre and a bank in Moscow.
2. We request to MoC to extend freight subsidy for Russia as this will enable Pak textile to become competitive in Russian Market.
3. Frequent interaction between the members of textiles trade bodies of both the countries.
4. Declare Faisalabad and Ivanovo the twin cities.
I am confident that after taking these measures it will make a breakthrough in enhancing the trade volume between our two countries.
During the last 4 years we have introduce 50 textiles manufacturers and exporters in Russia and Alham-Du-Lillah, most of the exporters are now exporting directly to Russia.
DUE TO DIRECT EXPORT THE TEXTILE EXPORTS TO RUSSIA INCREASES:
a) Cotton fabrics: From 0.148 million dollars to 20 million dollars
b) Bed wear: From 0.181 million dollars to 5.162 million dollars
Leaps like these, however, don't happen by accident. They happen because our people are there on the ground, deeply involved with companies, regions and cultures. We're there working closely with the companies providing strategic advice and helping them win business.
It is due to our dedicated management and skill workforce for their efforts, which are highly commendable in achieving successes, despite the adverse conditions faced by us. We always stress on our quality services extended to our clients which is the main key of our success in the very competitive global market. At the end, I would like to say, the road that we may have to travel may be somewhat uphill at present but with courage and determination we mean to achieve our objectives in Russian market which is to enhance trade volume more than one billion dollars in next few years. May Allah be with us in our endeavours for the progress and prosperity of our country!!
Marked by shelved projects and downsizing in certain organisations, electronic media industry in Pakistan and many of those involved with it started 2009 with a sigh.
Since the industry is closely related to the overall economy, it saw profits getting clipped in the face of slowdown that marred the economies world wide. Although, the impact of the meltdown was not as severe in Pakistan as elsewhere, fears of a possible financial crunch coupled with the war like situation in the northern part of the country discouraged spending - resulting in overall economic slowdown.
"Major advertisers withheld their marketing and advertising budgets making the phenomenal growth of TV Ad spent of almost 30 percent on an annual basis to 10 percent" in the year 2009, noted the director's report of Eye Television Network (ETNL), a KSE-listed company which boasts four entertainment TV channels including Hum TV and Masala TV.
Although, this decline in earnings was visible across the board; in absence of industry wide data, the financial performance of the country's two listed media firms, ETNL and Media Times Limited provides a clue.
A quick look at the graphs show how, after growing leaps and bounds between 2006 and 2008, revenues, net profits as well as earning margins slid in 2009. While the fall in revenues was to due to slashing of advertisement allocations by FMCG and MNCs the decline in margins can be attributed to rising cost of production.
Margins also fell because of high depreciation expenses charged on technological equipments purchased for live coverage and other purposes, which the media companies weren't able recover on account of falling revenues.
Industry sources say that revenues per channel in news category also decreased due to excessive competition in the sector, as most new channels focus on news and current affairs, which broadly speaking have a common.
These dynamics dampened the confidence of investors; hence only about seven new channels were launched, including Style360, Oye, Express 24x7, Samaa and Dunya, opened in during 2008-2009 as compared to 15 channels launched in the year before.
A few channels, some of them almost complete like Geo English, were shelved and not launched due to difficult economic conditions. And, while some media groups implemented a hiring freeze, others, including some big names, underwent major downsizing - a phenomenon seen even in this month.
Print industry also felt the same heat; however, there were lower number of reported downsizing in the industry.
Contrary to global trend, where print journalism is witnessing a dying trend - especially after the century-old Christian Science Monitor discontinued its print operations in 2008, domestic print industry still seems to survive. In fact, a few TV channels are being supported by their respective group's newspapers within their bouquet of offerings.
Another trend that saw initial signs of traction was the growing interest of foreign media in the country. Indian media started looking in Pakistani market with joint-venture like programmes such as 'Aman ki Asha' recently aired by Geo TV.
Moreover, reports abound that International Herald Tribune signed up with a local venture to launch a newspaper soon, where as BBC Urdu is also planning to start its operations in the country.
But looking ahead, the growth of news media seems to be slowing, whereas that of entertainment - targeting mostly the burgeoning population of youth and women -- is seen growing manifolds. The increase in the number of food, music, fashion and drama channels in recent years points to the same direction.
The quality, however, would remain a big question. According to poll by Gallup Pakistan, some 42 percent of Pakistanis believe the dramas produced today aren't as good as produced three or four decades ago.
If this is what the real picture is then it means that Pakistani entertainers do not just have a room to grow but also a lot of room to improve.
But here is the catch: the business of entertainment media lies in 'investing our lives with artificial perceptions and arbitrary values' - a kind of 'escapism' greatly demanded by a common individual in the current times of turmoil.
Yet, on the flipside, as long as the law and order situation is critical and the economy remains dismal, businesses will keep shying away from sponsoring entertainers, no matter how much their demand is. Perhaps that's what kept the stock price of listed media firms rather flat since long.
Q 1. How effectively marketers are using media to grow their
business?
Q 2. What is missing from the media side which the advertisers & advertising agencies require that can help to move the advertising to its full potential in the industry?
Q 3. What is the role of advertising agencies in the advertising
technology landscape?
Q 4. In your opinion, what will be media and advertising industry outlook in year 2010?
Ahmed Jamal Mir, Managing Director & CEO, Prestige
1 In a challenging economic conditions the marketers have taken the view of value savings vs. strategy and creative media utilisation. Marketers are primarily seeing media as a trading led business where price discounts are more important than innovations.
2 The media needs to develop bold strategies and creative thinking in content building to be able to provide media value to its clients. Media needs to collaborate with the agencies and the clients to built better program content in order to create distinct time bands for its audiences. Also the regulatory body should ensure the true media players enter the market and not adhoc players who put undue pressure on margins and thus marginalize the quality of programming available. It is essential for the growth of the industry that all stake holders (media, clients and agencies) work together to improve the content as we are constantly challenged by regional media and program producers for share of the market.
3 The economic downturn has put an enormous pressure on the agency business and thus our emphasis is on the creative side. There may be a few initiatives on the technological side but not enough to establish an expertise or any cutting edge development.
4 It will be conservative and keeping afloat till the political and economic of the country show a strong rebound. It is extremely sad that while the momentum is being built a sudden halt has been experienced and continues to stay soft.
Ahmed Kapadia, CEO, Synergy Advertising
1 I think marketers are using media to grow the size of the media rather than using it effectively to grow their own businesses. If you take a look at the numerous new TV and Radio channels that have mushroomed in Pakistan and the advertising clutter on the leading channels, it will support this argument. A similar trend is being observed in Radio and Online media, which have suddenly gained strong patronage from marketers. I am not averse to above the line advertising, but definitely believe in accountability to justify media spend. I'm afraid, most marketers follow their gut rather than using effective tools to optimise their media spends.
2 There is a lot that can be improved media, advertisers & advertising triangle. The starting point is always the big idea development which has a major role changing brand perceptions. Unfortunately, this is the weakest link in the chain, whether it is quality ads or programming or intelligent use of media. We also need to understand that big ideas are not an accident or fluke but rather a result of following a creative process which is mostly missing in Pakistan. In an ideal situation, the brand essence / positioning is the nucleus of the communication process around which big ideas are developed and executed. It takes two to play, therefore this is only possible if both the marketing and advertising teams understand their roles and respect each other's domains, which is not the case. Media can also play an active role in improving the value of advertising by producing content that gels with brands to create new opportunities such as brand placements, interactivity etc.
3 If I understand your question correctly, you are referring to the role of advertising in influencing technology usage in the country. Advertising can change opinions and perceptions; which means that it has the power to influence people in how they see things. Having said that, Advertising cannot fill the gap of low literacy levels that exist in our society. For e.g. through advertising it is possible to excite customers to buy a cell phone, but it cannot make people use SMS, email and internet if they do not have the ability to do so.
4 The present indicators do not look very positive, particularly in view of the law and order problems and the political instability. Though Pakistan has been less affected compared to the West, however, we don't have a very large spend in proportion to our population. A lot will depend on external factors that directly influence policies on taxation and disposable income; which does not look too good. Furthermore, certain industries like real estate, banking and automobiles are showing a considerable slow down as compared to end 2008. We might also witness some tapering off in Telco media spends, bringing a squeeze in the overall industry.
Anis Khan, Managing Director, Manhattan Communication (Pvt) Limited
1 Marketers today are making very good use of all available media to grow their businesses. This happens to be a very good time as far as spread and choice of media is concerned. Unlike the limited opportunities that the traditional print, TV and radio offered, with the desired message often being wasted in peripheral audience segments, the new social and out of home media offer very precise and cost-effective coverage of target markets. There is also a much wider spread of media available catering to a vast range of consumer segments.
2 Perhaps media can further facilitate advertisers and advertising agencies by providing them more precise audience feedback and response for various categories of products and services. At present, in their enthusiasm to generate higher revenues, both print and electronic media solicit and accept advertising regardless of whether it is relevant to their particular audience segment and reach. This is where the advertiser's money is wasted unnecessarily and the desired advertising objectives are not achieved.
3 Advertising agencies represent the end-user group in this context. As such, they are in the lead in implementing any new technology that is introduced. In fact, the success of new technologies depends on how creatively and effectively ad agencies use them and how they transform these techniques into marketing success of products and services. As users and implementers, ad agencies can also give feedback to the technology developers about their usage experience and about areas where further improvements are required.
4 Both these sectors are driven by the health of the world economy. After the severe recession that hit the globe in 2008, things are now crawling back to some kind of normalcy. One hundred percent recovery is, however, way too far ahead. This will obviously be reflected in the way both the media and advertising sectors progress in 2010. With particular reference to Pakistan, our economy is still not out of the woods. However, this will certainly be a year of increased ad spends by Pakistani marketers though caution will be the rule rather than the exception.
Gibran Mir, CEO, Circuit DRAFTFCB
1 In my experience most marketers realise that they need to advertise on various media to grow their business. This especially applies to Telecom and FMCG sectors. However I believe that marketers, especially those working for or running local companies do now truly understand the concept of a holistic approach to the use of media i.e. using a combination of media in conjunction to reach their target audiences effectively.
2 There are three things that could definitely use improvement. The first being better ratings and demographic information which would allow advertisers and advertising agencies to better understand exactly where their money is going when it's being spent on media. The second thing is content. While I understand that the mindset in the media industry has led to the creation of cheap content for the sake of "filling time slots" or "filling pages" this will be the downfall of many of the smaller television channels and publications as it will lead to lower ratings/readership and subsequently less advertising revenue. Lastly the media buying practices currently being entertained by television channels is hurting them, agencies and advertisers as well.
Today the game is all about spending power and not about thinking power. If an advertising agency/media buying house has a telecom as its client it might as well be god as far as media is concerned. That agency or media buying house is able to use that buying clout and win other business simply on the basis of airing rates. What happened to planning? Each client should be treated as a separate entity by the media and given rates accordingly. This is the way it's done world-wide and will be beneficial for the media, the agencies and their clients if applied here.
3 Advertising agencies employ of some of the smartest people you will ever meet. That's because it's our job to think up something new every day. I think that advertising agencies regularly contribute to advancements in innovative ways to reach the consumer. However in Pakistan agencies do not pay much heed to advertising processes, techniques and research as clients are not as interested in these things as you might think. Clients need to start realising that their agencies can do more than design a flyer for them and when they do, and start paying for it, is when you will see some real innovation from the agency side.
4 I'd like to say two things here. Firstly there's the way I think things should be, which is that advertisers need to realise that slashing budgets is not a long term solution. Yes you save a significant amount of money now, but in the long run its just going to hurt your sales, market share and consumer perception. Even in the given scenario if you plan to remain in the market for the long term then you must advertise. If advertisers heed that warning then things will be much better than last year.
Then there's the way I see things actually going, which is that advertisers are scared to invest in a market with so much political instability and security risk. You can't blame them. Unless our country sorts itself out with regards to security things aren't going to get any better. The slump will continue, media and advertising agencies will streamline themselves further to face the growing cost of business versus falling revenues and business will become more cut-throat. Only the toughest will survive.
Hashim Abidi, Account Director, Insync Marketing & Advertising
1 This really depends on the campaign & its media strategy. I'm sure given budgets are utilised to maximum effectiveness in each medium, be it print, electronic or OOH.
2 Media Rates, to start off with, have been rising constantly. These high-tariffs leave less opportunity for medium sized clients to invest their share of business to the respective media. Consequently affecting the role of advertising agencies as well. Secondly, I believe clutter-free advertising should be promoted under all constraints. If we can offer distinctive placements we can definitely ensure much effective results.
3 Advertising Agencies are generally considered to be a one-window operation for their clients. Hence, in such technology specific era, Agencies should not only be well equipped to handle such tasks but also be well versed with all that is happening in the tech world further enabling them to better utilise the same for maximum results.
4 It is a fact that even in the recessionary period of 2009, the month of Ramadan alone broke all previous advertising records, especially in the Electronic Media. So yes, there is hope for resilience in 2010, provided that the political and economic conditions improve along with a marked down slide in security threats.
Masood Hasan, MD, Publicis Pakistan
1 There is however a change in media spends and events/road shows/etc are getting more budgets. With load shedding TV seems an expensive & unreliable media.
2 Absolutely no reliable updated information on all the key inputs - circulation/readership/viewership/comparisons - media planning in Pakistan is looking for a needle in a hay stack with a matchbox.
3 Agencies are continuing to remain in touch with new trends - internet is growing impressively but the depressed economic scenario and another lean year ahead are not giving much comfort - there are about 58 serious agencies - there are hundreds of briefcase/3-man show outfits. The serious ones are likely to take more hits than the lean, alpine-model outfits.
4 Advertising is a boom time art/science - Pakistan is booming but with bombs. There is no power, water, gas or any serious economic development - industry is dead or in its last stages - the GOP is heavily in debt and the new order is furthering that debt - I think we are in for another bad year. Pundits say things will get better after July. How? As far as we are concerned, what's going to change in July? No more power/gas load shedding? This is not a time for pessimism - we have to be realistic and understand that unless we are prepared to make serious sacrifices and change our mindsets, we will go downhill.
Rustom J Boga, Chief Operating Officer, IAL
1 The effectiveness of marketers really depends upon risk taking. During recession, it is important to realise that advertising budgets are a miniscule part of the marketing budget. What we see is that for savings, marketers are cutting down on advertising and utilising niche areas for communications.
For example, BTL and activations have become bigger, Traditional channels continue to work but are not being used effectively in terms of more interactive programming on platforms that are entertaining yet outstanding. We see reality based show and talk shows but they are moving towards unentertaining yet more interactive module. This brings the brand name out but negatively impacts the equity. In addition as far as Outdoor is concerned is a cluttered bunches of boards with small fonts and no clear message. Effectiveness can be enhanced by utilising the brand architecture in formatting the program and increase the entertainment value and production values immensely.
2 The one thing that is missing is that the knowledge of the brand is with the agencies while the writers and producers on the media side are more concerned with their own expertise without giving due consideration to the brand itself. The gap must close and a closer mutually beneficial relationship between the two should be forged.
3Advertising agencies are the ones evolving the advertising technology landscape!!! For example, branded programs, digital advertising, mobile advertising, activation as a format of mass communications, and OOH as mass media vehicle are all contributions made by advertising Agencies. Content Integration is another newer area that is taken up by Ad Agencies as an initiative. Radio was revived by Ad Agencies. Satellite Radio will be the next big thing!
4 Advertising non risk takers have to be jumpstarted to realise the potential that exists in the year 2010. The media costs are going down. Media owners are more flexible to innovative ideas. Utilising this and all of the above ideas shall make 2010 a very interesting and entertaining and almost record shaping year in Pakistan.
Sajjad Gul, CEO, Evernew Concepts
1 Very effectively...with the advent of unconventional mediums such as internet advertising & the mushroom growth of multiple channels,FMs & publications... marketers now have multiple options both in term of value for money & reach... now you can have tailor-made designed media solutions to cater various needs of the marketers.
2 Proper tracking & accounting... Lower tariff rates... an effective regulatory authority... code of ethics.
3 Advertising agencies should be proactive in suggesting & using unconventional mediums....they should be updated with latest trends & technology used in the global arena & should be capable of giving out of box yet cost effective solutions with maximum impact.
4 Advertising agencies outlook is pretty bleak... with the advent of media buying houses & other specialisation houses... along with the reduction of agency commission & clients fixing retainer charges... the overall ad agencies is limiting its role to a design house... unfortunately, now clients have their own design houses(in house). Media industry will grow...but only big players will survive.
Syed Jawaid Iqbal, President & CEO, CMC
1 Ever since mass media became mass media, marketers have naturally used this means of communications to let a large number of people know about their products. There is nothing wrong with that, as it allows innovative ideas and concepts to be shared with others. In this regard media plays a pivotal role for the growth of any business. Depending on the product type and its target audience, a marketer picks the media channels to reach the desired audience. It is a marketer's choice to exploit the medium as per his requirement. As compared to the international counterparts Pakistani marketers are not fully utilising the media axle to raise their sales. I think with the passage of time the media will further spread its wings in terms of technology and coverage. The same will obviously increase the growth of the businesses.
2 There are number of issues that media needs to address in the current scenario. Above all the media should create an investment friendly air in the country and shall especially avoid the sensational or unconfirmed news regarding the public and private organisations. The media houses shall also train the journalist to improve the reporting skills so that it prevails the accuracy of report writing.
3 Agencies will always lead the ramp since they are the expert with respect to the 'Advertising' as their sole objective. The quality of advertising would diminish if there are no agencies. Most of the times people sitting in the marketing or product department of any company fall in love with their products and get captivated in a monotonous perception, consequently they are unable to analyse the bigger picture with the perspective of a consumer. Agencies on the other hand think out of the box providing their clients an unbiased market analysis and positioning which is far more effective in terms of advertising. In the present picture agencies too have a tight competition resulting in a better quality of work and the need for innovation.
4 Although the Media clutter would increase disabling the consumer to focus on just one product attributes. But overall outlook of the media is going to improve with the induction of new electronic channels especially the regional channels. With the increase in competition Advertising will be more focused on innovation. On the other hand agencies are also concentrating on different advertising techniques with more trained staff. Foreign based ads will decrease and will be adopted locally. There will be an increasing technique of advertainments (advertising disguised as entertainment) and advertorials (advertising disguised as news).
One thing that must be acknowledged is the new dimension of advertising through public relations for e.g. there is a rising drift of product endorsement events and other BTL activities. In 2010 I perceive PR will be an increasing trend altogether.
Mrs. Seema Jaffer, CEO, Bond Advertising
1 Marketers in Pakistan are using conventional media. Mostly Television, Print, Radio & Outdoor. There is a large potential to exploit the new media specially when targeting youth. Social networks like facebook & twitter have a lot of potential that lies untapped. Moreover there is a need to also look at conventional media differently and use it as an effective means of marketing and perhaps move away from the regular 30 sec spot formula.
2 I feel better information from the media. More interaction in programming, &/or advertorial materials. Flexibility from the media to the advertisers & agencies creative & marketing needs. All agencies seek to break through the clutter & have their products be seen & heard. Media needs to work more closely with agencies to maximise visibility & ROI.
3 Ad agencies have to be a part of the new communication technology. Agencies by their very being have to be at the pulse of trends. They have to catch the social network wave and ride it and become trend-setters in using social networks to their Clients advantage. I think agencies understand this very clearly. However in Pakistan the computer literacy levels are still very low. What will be exciting is the mobile phone which is penetrating down to larger & larger numbers & how agencies can play a role in bringing this technology into their media mix.
4 I am an optimistic. The numbers were not good for the industry in 2009 but I am extremely bullish on the scenario for 2010. The telecoms will dominate, as will television advertising, but financial advertising & fmcgs will also play a pivotal role in bringing the bounce back in advertising.
Shoaib Qureshy, CEO, Bullseye Communication
1 Marketers predominantly still look at media as vehicle on which they can ride with their advertising. This has not changed since decades while the world around us, business practices, media consumption habits and consumers have evolved totally. So in my opinion they are still stereotypically using media and this has to change dramatically if they are to bring in more effectiveness.
2 Media is all about content. People consume (read, listen or watch) a media for that very reason. Therefore it is imperative that media starts thinking content integration for brands as the next big marketing thing. Brands are currently seeing the declining power of advertising (print ad or TV spot) given the increasing clutter on media, so there has never been a better time to start thinking content and opening up possibilities for brands to be creatively woven into it.
3 Advertising agencies also need to evolve with time. Everything has changed but the agencies. They are too stuck in the ancient business model that relies on an ad being made and released to media. So what do they do if there is no advertising? Go out of business? Brands are looking for ways to be built beyond traditional advertising and they need to take on amore brand need centric role rather than their own business centric role.
4 2010 will be great year only for the progressive media groups and agencies. Companies that are eyeing the future and adapting to the needs of the time will always remain in good business.
Tauqeer Muhajir, CEO, Millinium Media
1Unfortunately, research in Pakistan and data availability as still in its infancy. Combine this with the clutter of the electronic media and you see advertisers loose the efficacy of their advertising rupee. I am advocating print because the reader chooses his prime time and there is very little wastage. The small to medium budget advertiser needs to change strategy as the Ad rupee hardly seems to be giving the marketers value for money.
2 I think one of the main shortcomings from the media side is trained human resource. Trained resource will approach issues pertaining to data, selling, more effectively. I also feel that the media and Ad agencies need to develop & partner SME'S as advertisers with special incentives. This will help consumers with choice of products, contribute more to the exchequer, and expand the advertising cake.
3 Quality of Ads in terms of technology has improved in Pakistan. Agencies realise the need to be tech-savvy and have invested in technology. It is only in commercial productions that we need to make investments to catch up with the region.
4 2009 was a bad economic year for the world. Pakistan was also effected, though not impacted directly by the global economic turmoil. Our problems were mostly self-created. If we can gain the upper hand in the war against terror and the destabilised law and order situation improves, we should bounce back. As such, the media outlook in my view is stable to positive. After all, we are the sixth largest domestic market in the world and consumers need to be enticed, so advertising will grow.
Waqar H. Haidri, MD, KIMCO Advertising
1 Today, media is all about growing businesses, finding new ways to communicate with the customer and oozing fantasies by creating product hype. Media works where direct selling (person to person contact) becomes impossible. Along with the substantial growth of the media through the last few years advertising budgets have also increased, which reflects a strong relation between media and other businesses.
2 I think flexibility is the issue that agencies are facing from the media side. To grow business, agencies always require support of media, which should be unconditional sometimes. Moreover, there's a lot of space in adaptability to creativity especially in print media, though electronic media has already taken a step forward in this direction.
3 Advertising is on its path to technological advancement; hence the landscape is broad and will keep extending. Therefore, the industry has to stay updated with the latest technologies. There is still a lot of room to play around.
4 Currently, the industry is going through a financial crunch, which is an indirect result of the global recession. It is expected to have a stiffed initial quarter and will improve later in the year, if overall law and order situation remains satisfactory, as we say in advertising "*Conditions Apply".I believe no matter whatever today is, the future is promising.
When the going gets tough, the tough gets going. This age old adage seems to fit as the best message to the cement industry of Pakistan, which is trying to find new methods of survival under the lead of two leading players, namely Lucky Cement and DG Khan Cement Company Limited.
Having felt the pressure of falling construction demand in 2008, the industry was able to find its feet as the broader economy gradually found its way on the path of recovery. The recovery was partially supported by slowing coal prices - a key input cost - as well as improvement in overseas sales.
Pakistani cement makers - which boast about 29 cement plants with an installed capacity of around 44 million tons of cement, according to industry officials - had already been proactive enough in the past decade to benefit from alternative fuel sources, using primarily furnace oil and gas.
However, limited gas availability and the rise in price of primary fuel source (furnace oil) made them realise the potential of coal as a cheaper alternative and they started converting from fuel-fired to coal-fired plants in 2002.
The industry incurred a total cost of around Rs3.5 billion, with 90 percent of the industry shifting to coal-based power plants. Consequently, their gross margins rose by 24 percent (in real terms) between FY03 and FY06.
At present, coal, furnace oil/gas and electricity typically averages a ratio of 90:5:5 respectively in the sector's total fuel cost. And that's the reason why the rise in electricity tariff seen last year didn't do as much to squeeze industry margins. Positive correlation between coal and fuel oil prices may have had an unfavourable impact on industry margins, as higher fuel price shifts demand toward coal.
But it is important to highlight that there is a 40-day lag between the rise in fuel prices and consequent increase in coal costs. This provided cement manufacturers with a breathing space to mitigate the impact of coal price hike with rapid shift to Refuse Derived Fuel (RDF) having high calorific value such as synthetic carpet waste, plastic waste etc; while some turned to Tire Derived Fuel (TDF) made by shredded rubber tires and rice husk fodder.
According to industry sources, nearly half million tons (0.3 - 0.5 million) of fodder is being used per day by those cement firms which are based in the country's north. Sources say that about 30 to 35 percent of the industry has already incurred capital expenditure to be able to switch to RDF with immediate effect, if using coal becomes inefficient.
Aside from this, the sector also received a budget relief in the budget FY09-10, after the government slashed excise duty by 22 percent to Rs700/ton. In addition, the likely softening in monetary policy, interest costs of these relatively high leveraged cement firms came down - thus easing pressure of their bottom-line profits.
Tracking these conditions, the industry's performance at the Karachi Stock Exchange was remarkable. Share prices of listed cement firms rose 87.9 percent year-on-year on an absolute basis - beating the benchmark index by 26 percent.
BARRIERS IN THE WAY
Two major issues, however, checked the industry's performance. One, the breaking of the cartel by the Competition Commission of Pakistan - which slapped a fine of Rs6 billion last year - forcing prices to go down. And second, the dicey situation in terms of the cut in the Public Sector Development Programme (PSDP).
While prices are seen stabilising as demand picks in the near to medium term, it's the cut in PSDP which is a bit troublesome. Historically, PSDP and local cement sales have shown a strong correlation, as government spending contains a healthy allocation for infrastructural development.
Although, actual cement demand is triggered roughly after a lag of 8-10 months between allocation and actual spending, trends reveal that PSDP allocation and local cement sales grew by an Annualized rate of 21 percent and 12 percent respectively between 2004 and 2008.
Yet, there is hope. But that hope will materialise if the planned construction of low cost housing units under PM's housing scheme is actualised and the reconstruction of conflict torn north-western region begins after the end of ongoing military operation.
At the fag end of the year 2009, and following the decrease in cement prices in both local and international markets, domestic cement makers started demanding 50 percent subsidy on inland freight charges in their quest for survival.
DEMAND FOR FREIGHT SUBSIDY
Given weak demand at home, cement manufactures had no other option than to increase exports. But international cement export market is also getting grimmer as capacities in the region and elsewhere have been coming online in the face of sluggish construction activities across the globe. The FOB price of cement in international market slid to $52 per ton in recent months from $80 per ton a year ago.
The decline in cement export prices was alarming for Pakistani exports. Since 80 percent of total cement capacity is situated in northern part of the country and almost 70 percent of all exports are made through sea ports, cement makers have to incur an additional $11 to $17 per ton in order to dispatch cement to seaports in the south.
On an average, cement manufacturers incur about $32 per ton manufacturing cost, which coupled with an average freight cost of $14 ton translates into total cost of more than $46 per ton, excluding administration and finance costs, making exports expensive.
Industry sources reveal that some of the cement manufactures started exporting at loss just to cover their portion of fixed expenditures, while many small manufacturers suspended their operations.
These conditions seemed to justify the demand for subsidy. However, for successful implementation of subsidy, if provided, the government needs to come up with proper cost monitoring system that will track actual cost of transportation since transportation cost per kilometer differs for different producers who are located at different places.
There are just two problems though: one, that transporters' monopoly, in some regions will make it difficult to measure the actual transportation cost and curb the chances of the overuse and ineffective use of assistance, and two, there are little chances that the fiscally challenged government would dole out funds for the cement sector, when others are perhaps more needy.
SCHEMES FOR SURVIVAL
Under these germinating conditions, therefore, cost efficiency and market diversification become the key, and will remain so in the foreseeable future, for local cement makers.
Having cushioned itself through exports against the fall in domestic sales, Pakistani cement industry has been able to maintain its revenue growth so far. But changing market dynamics in the region demand a proactive business management.
By and large, the industry was able to survive on the back of 47 percent growth in overseas sales in fiscal year 2009 that more than offset the impact of 14 percent drop in domestic sales. But this can potentially flip in subsequent years.
Reliance on exports will no more be an easy option because that market is likely to become more competitive in the coming years due to increased output capacity in the region.
With plant expansion in many Middle Eastern countries, along with India, China and Iran, due by 2012, a price war is on cards. The excess capacity in these countries is mostly aimed at tapping export potential given that existing capacity in many countries such as Iran and Saudi Arabia is enough to meet their current as well as future domestic demand.
This means that in order to maintain their export growth trajectory, local players are under pressure to be competitive, achieve economies of scale and maintain low cost of production level.
With 60 percent of their cement production cost stemming from energy bills, Pakistani cement makers are currently challenged by those in the region, where energy expenses account for half the amount.
Currently, the industry is largely dependent on imports of coal from Indonesia and South Africa and, thus, prone to increase in coal prices and rupee depreciation. But there are a number of ways out. One such measure, for instance, to reduce this inefficiency is by switching to alternative fuel from waste, including Re-fuse Derived Fuel and Tyre Derived Fuel (TDF) mechanism.
In addition to the energy problem, Pakistani cement manufacturers have to find ways to reduce distribution costs. While those in the country's south already enjoy efficient distribution, it's the firms in the north - which account for 80 percent of total production - who need to reassess the options.
The exports through land route, to India and Afghanistan are not only limited but also threatened by plant expansion by China and Iran, whereas that from sea route is costly due to freight charges.
So, while major exporters such as Lucky had to start taking proactive steps to reduce production costs, they also had to begin searching for new export avenues in order to survive in the troubled waters ahead. And since achieving energy efficiency in Pakistan is still a long way to go, tapping new markets becomes a more immediate need.
THE COAL FACTOR
Tracking the hike in crude oil prices, international coal prices have risen 30 percent of late, from their low of $55 per ton in March 2009 in the face of growing demand from India and China.
The surge means that domestic cement manufacturers would be taking a massive hit on their margins, as in present times of price-elasticity; cement makers would not be able to pass-on the impact of higher input cost to consumers.
Since, coal forms more than 40 percent of the total manufacturing cost, a $1 per ton rise in coal prices pushes the cost of production up by around Rs12 to Rs14 per ton.
Therefore, with aforementioned 30 percent increase in coal prices, production costs would be escalating by about Rs200 per ton or Rs10 per bag. Moreover, industry sources reveal that the recent 18 percent increase in gas tariffs has jacked up the cost of producing cement by around Rs2 per bag.
Thanks to inventory storage and forward contracts, the impact of soaring coal prices would be visible with a lag of 3 to 4 months - i.e. the period starting fourth quarter FY10.
But adding to the woes is the 15 to 20 percent fall in domestic cement prices that ranged between Rs240 to 250 per bag during 1QFY10, mainly due to weak domestic demand and the removal of cartels. Since then, the industry has not seen any adjustment in domestic cement prices. Moreover, the export prices of cement have also remained under pressure throughout the first half.
Therefore, the impact of depressed retention price in the form of reduced margins would be clearly visible in 2QFY10. In the prevailing situation, the pass-on ability of the local manufacturers seems frail. However, the likely revival of demand with the lapse of winter may provide some space to manufacturers for a price hike. Until then, the industry is left with no option.
Yet, two firms bucking these pressures, LUCK and DGKC, would be in a better position to capitalise the expected recovery in demand after winter season, given their better market positioning, diversified business streams and leading brand names.
STRATEGIC SHIFTS BY INDUSTRY LEADERS
The Lucky model
Lucky Cement, being the industry leader, started planning to shift its focus from revenue-centric to cost-centric by adding capacity and by adopting other cost saving techniques like heat recovery.
Commencing its operations in March 2009 likely, the firm's Karachi plant will be able to produce cheap electricity through heat recovery project, whereas that in Pezu will start using its heat by the end of fiscal year 2010.
The purpose of the project is to provide cheap electricity using the heat energy from kilns -- which previously was left unutilised -- thereby substantially reducing the firm's major cost of gas used for power generation. Secondly, the company also has potential to mitigate the impact of coal price upsurge with rapid shift to Refuse-Derived-Fuel (RDF).
Placed both in north and south of the country, the company has much brighter prospects than its peers. Not only its export potential is attractive but it also benefits from about 15 to 18 percent lower logistic costs.
In an interesting move, Lucky started exploring the option of setting a plant in Africa after many of the big world cement players including Lafarge, Holcim, Cemex and Italecemnti established their presence in northern and Sub-Sahara African countries.
As a part of their market expansion strategy, Lucky's global peers have so far set up plants in the underdeveloped sub-Saharan countries like Sudan and Ethiopia. Others who have chosen to acquire majority stakes in local cement firms have eyed the politically stable developing countries in northern part of the continent including Egypt, Libya and Algeria. And this is where the real opportunity lies.
In the future, cement makers in North African countries would enjoy an advantageous position than their rivals in sub-Saharan and South African counties mainly due to three reasons.
First, massive capacity expansion in the neighbourly GCC countries especially U.A.E, Qatar and Saudi Arabia would trigger regional price wars - making the market highly competitive for Sub-Sahara African countries. According to consensus estimates, cement capacity is expected to increase by 39 percent, 27 percent and 114 percent in Arabia, UAE and Qatar respectively by the end of 2011.
Second, northern Africa offers the opportunity to tap the European market where the cost of CO2 emissions will act as dampener for their local cement industry - creating room for import from North Africa due to inexpensive sea route. This geographical positioning, of course, is neither enjoyed by South African players nor by those in sub-Sahara. Third, the region's reliance on oil income and population growth signals a boom market ahead for construction industry.
Lucky - which mainly sells cement in east Africa at present - is not the only one eyeing the market. Its Indian rival, Binani Cement, has already acquired nearly 50 percent stake in clinker manufacturing plant in Shandong, China - to capitalise on economies of scale - with the sole intension to export low cost cement to East Africa through sea route.
Although, Lucky is eying viable options it has also started feasibility study for the purpose. Considering that it takes about 20 to 24 months to set up a cement manufacturing plant, the firm's managers must make a quick decision - an acquisition instead of setting up a new plant cannot be ruled out, given the small window of opportunity.
But in another good move by Lucky's management, the firm signed an MoU with Oracle Coal Fields for the supply of indigenous coal from Thar - confirming that the firm has the ability to explore solutions in the face of tough market conditions by spreading its wings in the right direction.
Quite naturally, it is this trait, which has made the company not only the leader in terms of market share, but also a highly profitable one, compared to other local players. With high saturation in domestic market, reduction in FOB cement prices to $52 per ton from $80 per ton during the economic boom and escalating energy prices have forced local cement manufactures to look for recipes for survival.
In this regard, Lucky has been so far lucky, as it has taken some innovative steps: First, it capitalised on its plant near the port city in order, targeted export market and save transportation costs. Next, it started planning to expand its business into Africa amid capacity expansion and over supply situation in Asia. Finally, it is now eyeing indigenous coal resources to give relief to its profit margins.
Although, Lucky uses coal as an input and gas for power generation, spiralling coal prices have been pressuring the profit margins of other cement makers to a large extent as coal is used both as a key input for cement as well as for power generation.
According to company officials, if coal exploration at home is successful then they will use the commodity for power generation as well, as on an average both coal and energy account for 60 percent of their production cost. They say that the coal field currently under exploration by Oracle contains coal with low sulphur content, which is feasible for cement production.
Dependence on local coal will also reduce the company's exposure to exchange rate losses, since continuous depreciation of local currency has made imported coal expensive. It will also improve the firm's cash cycle as easy access to local resources will help the company to maintain lower inventory levels than in the case of imported coal, for which manufacturers typically keep seven to eight months of inventory.
Cumulatively, these benefits can help bring down the cost of cement production as local cement manufacturers incur about $32 per ton (industry average) manufacturing cost -- which is quite high in contrast to many Asian countries -- while reducing the pressure on imports.
DGKC has an answer too
A few months after Lucky expressed its intentions to set up a plant somewhere in Africa, DG Khan Cement, another leading manufacturer, disclosed its plans to expand its outreach.
DGKC said it plans to set up two plants costing $360 million; one at Hub Town near Karachi - a place closer to sea port - with a capacity of 3 million tons to target African market and another in Sri Lanka with a capacity of 2 million tons.
Setting up a plant near seaport would undeniably open door for export avenues through inexpensive sea routes, because the company's two former plants located in northern part of the country make its exports expensive. Company sources reveal that it takes about $15 per ton to transport cement from plants to sea port for overseas sales which increases the cost of sales by many bounds.
The more interesting part of the story, however, is why Sri Lanka? First, there are very few cement manufactures on the Indian Ocean island, leaving the country largely dependent on cement imports. Second, the country has a positive population growth - meaning steady demand for housing and business - and an impressive GDP growth, which is expected to be 5 percent next year, according to IMF outlook.
Third, the end of decades-old ethnic clashes has left an infrastructural gap which is likely to attract foreign investments. In fact, Sri Lanka is being widely quoted as the 'Hong Kong of India' by financial pundits in global banking circles.
The pace of development can be gauged from the fact that forty of the Fortune 500 companies in the USA have already expressed their willingness to invest in Sri Lanka in support of the country's effort to reconstruct and rebuild, according to the country's government officials quoted in Sri Lankan media.
Finally, Sri Lanka's close proximity to eastern part of India and Bangladesh, which are big cement importers, would give DGKC a healthy export advantage. Although, cement capacities are being expanded in India, it is still considered an attractive destination for cement exports owing to high population and economic growth.
Knowing these exciting indicators, many Pakistani cement exporters are considering Sri Lanka as the most lucrative overseas destination, where DGKC alone is currently exporting more than 10,000 tons of cement per month on an average.
The only glitch is that DGKC will have to be extremely competitive on pricing without compromising on quality as low-cost Chinese cement has already captured a large chunk of Asian market.
And given that the world leading cement exporting countries - such as China, Thailand, Japan, Taiwan, Pakistan - are located in the region, only those manufacturers would survive in the long-run who are benefiting from low cost energy resources. But keeping in mind the ability of Mansha group to capitalise on opportunities reflected through their past successes, one can expect DGKC to make hay while the sun shines.
So, in short, desperate times have called for desperate measures in the domestic cement industry. Leading players have already started exploring some exciting new options, and one hopes that others would follow suit.
One area, however, yet unexplored by the industry, and which perhaps should be capitalised, is Pakistan's geographical proximity with Central Asia by seeking market access to the fast growing economies of the region. But for that they need a diplomatic push.
Pakistan health sector overview:
Pakistan's economic health is in shambles and experts partly attribute this to declining state of physical and mental wellbeing of its citizens that has both direct and indirect impact on national productivity amidst other factors of socio-economic growth.
Being the sixth most crowded country in the world, Pakistan's population is growing at the rate of 2.1 percent - surpassing the regional average of 1.5 percent. Likewise, the fertility rate of 3.5 children is also higher than global average of 2.5. In the last two decades, the country has also been witnessing fast paced urbanisation, with urban dwellers rising to 36 percent of the total population in 2007 from 21 percent in 1990. These trends present growing challenges for the government owing to rising demand for health services.
Despite government efforts over the years, Pakistan still lags far behind its global and regional peers in healthcare facilities. Health infrastructure is poor with only 58 percent of the population having access to quality sanitation as against the global average of 78 percent. Although governments' efforts of clean drinking water access to the public have reaped fruits as Pakistan matches the global standards.
Although, life expectancy in the country has risen from 58 years to 63 years between 1990 and 2007, it is still far behind the global average of 71 years. Meanwhile, neo-natal mortality rate (death of new born babies) continues at alarmingly high levels, as poverty and limited access to maternity centers remains pervasive in the country. Statistics reveal that only 39 percent of births in Pakistan are attended by skilled personnel - sharply lower when compared with the global average of 93 percent.
There are just twelve healthcare attendants (physicians and nursing staff) for every 10,000 people, whereas WHO standards suggest that countries having fewer than 23 health professionals per 10,000 persons are highly unlikely to achieve adequate coverage rates for the key primary health care interventions prioritised by the Millennium Development Goals.
Nearly 25 percent of adults have high blood pressure and 41 percent of Pakistan's male population smokes, making cardiovascular diseases the biggest reason in total number of adult deaths. This implies that heart problems deserve more attention than infectious diseases that account for 27 percent of death in Pakistan.
Despite the magnitude of these problems, per capita health expenditure in Pakistan - a meager $47 -- is nearly as dismal as seen in West African countries. The government allocates just 3 percent of its total expenditures to health sector due to its poor fiscal management. Consequently, the shortfall is plugged by private spending which makes up 84 percent of total health expenditure, paid at the point of accessing health services.
Since the concept of pooling risks is largely absent from the society, social security systems do not exist, nor are there any effective forms of disease awareness programmes. This, coupled with illiteracy and cultural factors - such as myths, tribal traditions - keep people away from preventive medication leading to higher health expenditure when the problem compounds.
Although, the government's Program on Immunisation (EPI) is being implemented and is directed towards the poor with a special focus on under-privileged rural population, much remains to be done. There is a dire need for public health reforms to not only improve general health conditions but also to reduce the burden on private health spending.
In this context, the healthcare system in Pakistan has to be revamped in its entirety, with special focus on infrastructural institutional reforms and incentive schemes for medical professionals to bridge the yawning gap between demand and supply of health care facilities.
Pakistan's pharmaceutical industry has grown exponentially over the last five decades. From being merely a trading sector in 1950s, the industry now boasts over 500 manufacturing units with the lion's share held by some of the leading multinational companies (MNCs). This sharp growth is largely attributed to technological spillover, evolution of quality control market institutions and raw material capacity building.
However, in the last decade, especially from 2002 onwards, the pace of growth has rather slowed. Excessively regulated product prices amid soaring cost of production have squeezed profit margins across the board, compelling a few big MNCs to wind up their businesses. This gave room to domestic players to increase their market share by more than double - rising to almost 50 percent by 2009 - despite the fact that many big local firms also found it difficult to cope up with squeezing margins.
Meanwhile, in the absence of strong regulatory check on quality, small time low quality drug producers and counterfeiters captured a sizeable market share. These changing dynamics can create big problems for drug consumers who will have to either risk their lives by purchasing low-prices but low-quality/counterfeit drugs or purchase quality drugs at much higher prices.
The problem does not end here as there are issues with the drug distribution network as well. Pharmaceutical firms allege that distributors make healthy margins on pet products and misguide masses on pricing in many cases.
In addition to these problems, there exists a parallel export market, which buys different products from domestic wholesalers at regulated prices and sells it in deregulated neighbouring markets where prices are much higher. These players do not only eat the consumer's pie - the intended beneficiary of regulated price - but give an illegal competition to manufacturers looking to capitalise on export potential.
KEY FACTS OF THE INDUSTRY
At present there are about 455 licensed pharmaceutical manufacturers in Pakistan including 29 multinational companies (MNCs). In addition to this, 212 drug importers also form a sizeable part of the industry.
Local manufacturers, about 170 of them, are represented by Pakistan Pharmaceutical Manufacturers Association (PPMA), whereas their counterparts, MNCs, are being represented by Pharma Bureau Pakistan (PBP). The country's annual drug market was worth Rs110 billion ($1.35 billion) as on March 31, 2009.
There are about 42,000 brands representing around 1,500 molecules registered under the Drug Registration Board, a Health Ministry body. Nearly, 12600 locally manufactured drugs are registered with the ministry, in roughly 125 categories including all kinds of vitamins, anti-allergies, syrups, ointments etc. But it is pertinent that although all local manufacturers and MNCs have got product licenses for a large number of drugs; only a few are marketed owing to a variety of reasons.
Pakistan imports most of its raw material -- which constitutes 30- 40 percent of total industry revenues - from two different markets; (a) the expensive but high standard Western and Japanese markets, and (b) low quality neighbouring countries, India and China.
With steep rupee devaluation, life has become more difficult for quality big players, as prices of most products remain unchanged. This has given more roads to small players to penetrate the market by importing low quality raw material.
The pharmaceutical industry of Pakistan is technically capable of formulating almost all forms of drugs and medicines like tablets, capsules, injected drugs, etc. Unfortunately, despite the development of the formulation industry, there has not been any corresponding growth in the raw material manufacturing segment. This is largely attributed to lack of incentive for consolidation and poorly governed patent laws.
MARKET CONCENTRATION
Despite the gradually growing penetration of low-quality/fake drugs, the market is still led by big companies, both local and MNCs, with the top 50 producers capturing 84.5 percent of market share. The share of top 50 domestic companies stands at 45.5 percent, whereas, that of MNCs is believed to near 53 percent, with GlaxoSmithKline (GSK) being the market leader with 10.54 percent market share.
Among the locals, Getz Pharma leads with a share of 3.64 percent. However, the share of local producers has increased to 65 percent in terms of number of drugs produced, mainly due to the huge differential between local and MNC drug prices.
Out of the many types of drugs produced in the country, pain killers constitute the largest drug segment, which is followed by anti-stress and anti-depression drugs - a tendency common world-wide. But unlike global trends, drug demand in Pakistan does not follow a seasonal pattern. Drug sales throughout the year remain almost similar because of poor health and environment conditions.
Majority of the pharmaceutical firms in the country produce systematic anti-infective, anti-rheumatic non-steroidal and broad-spectrum penicillin. According to Ministry of Health of Pakistan, total capital investment in pharmaceutical sector was nearly $0.5 billion (as of March 2009) with more or less equal share amongst MNCs and local companies.
The industry dynamics requires aggressive marketing strategy to be put in place, as the market is saturated with a surplus of identical products. Typical of such tactics is the "push strategy" rather than "pull" which results in high costs in terms of promotional activities at both distributor level and retail level.
THE LUCURATIVE SUPPLY CHAIN
The distribution mechanism is the same as that of most other countries in Asia, where drugs move from the manufacturer through its carrying & forwarding (C&F) agents to the stockist. From then onwards, it is bought by distributors who then sell it to the retailers and finally to end consumers.
However, in some cases the distribution value chain might change with inclusion or elimination of either of the element. Many times there is only one layer between the manufacturer and end customer, which is the distributor, who generally maintain minimum of four to five weeks of inventory throughout the month to meet market demand.
In such cases, manufacturers directly appoint distributors in different cities of the country to facilitate the reach of their products to all retail pharmacies and wholesalers. In Pakistan, there are around 40,000 retail pharmacies. To cover these, there are almost 350 national and small distributors working in different cities.
Most distributors are working on the basis of cash transaction, which means that they generally purchase stocks from the manufacturer after making an upfront payment. However, some manufacturers offer credit facility of up to 30 days.
At its heart, all distribution activities are directed to ensure that a specific product is available at the pharmacy nearest to the doctor. This is because a doctor's prescription can quickly change into another brand if the recommendation medicine is not easily available.
Here, the role of chemist becomes important; as many of the drugs marketed have the same principal molecule chemists change brands on the basis of available stocks. Then there is a recent trend of giving more benefits to retailers in terms of extra discounts or credit facility offered by distributors, which entices chemists to sell a brand different from the prescribed one. The competition at retail level is getting increasingly fierce day by the day because of a number of new brands launched in recent years.
Most pharmaceutical importers in Pakistan have their own local partners. The principal purpose of the partner is to get the foreign company and the product registered in the country. The manufacturer allots a fixed percentage to the partner, according to a pre-agreed contract between the two parties.
But profit margins in the supply chain vary for different participants. C&F agents generally operate at company policy and their margins range from 2 to 6 percent, while the stockists operate at 4 to 5 percent margins. The highest margin is earned by distributors which go as high as 10 percent.
The retailers' margins are fixed as per industry standards on maximum retail price which can be in the range of 10 to 12 percent. Retailers enjoy greater margins on Over-the-counter (OTC) drugs which can be as high as 20 percent. In addition to margins, manufactures offer provision of free samples and cash & kind discounts to the supply chain.
REGULATIONS
Pharmaceutical industry in Pakistan is working under various rules under the Drugs Act 1976. Over the course of years, many changes have been made to this act by issuing amendments. While the act is very broad in concept and application, there are certain rules that affect the day-to-day functioning of the industry. The most important rule, under the Drugs Act 1976 is the drugs (licensing, registration and advertising) rules 1976.
Although, in line with global practices, these rules are further subdivided on the basis of interaction between health ministry and the industry; the devil lies in the details. It won't be wrong to say that it is in these set of rules (both in application and interpretation) where the real irritants lie.
Another quandary here is that medical devices industry is also regulated under Drugs Act 1976, whereas everywhere else in the world medical instruments industry is treated separately and has specially designated bodies to regulate them. This makes them vulnerable to many of the problems faced by pharma industry, including pricing policy, sales tax and delays in registration, counterfeiting among others.
STRINGENT PRICING
In contrast with the pricing formula devised by the Economic Co-ordination Committee in 1996, which accounted for both inflation and depreciation, drug prices have been largely frozen for the last six years. Although, the sale price of 300 brands - merely 0.6 percent of the total number of brands - was increased in November 2008; broadly speaking the industry has not been allowed to raise prices since 2002. This freeze eroded gross margins by 6 percent during 2002 - 2008.
Although, there was a light price revision of 15-25 percent in the last quarter of 2009, but that only covered 250 drugs, which is peanuts considering the size of the pharma industry. The pharma manufacturers again find themselves fighting hard for their cause but so far so little has been done in this regard and the threat of closure of smaller pharma companies is growing strong with every passing day.
Despite 9 percent increase in sales volume during the period, many MNCs have already wrapped up their businesses and left while many others are on the verge of closure if the government does not do away with this pricing policy. Had the ECC formula been implemented, a minimum 4 percent increase in prices every year would have given MNCs some breathing space and an incentive to continue their operations in Pakistan.
Factors such as economic pressures posed by unprecedented inflation, depreciation of local currency and the constant increase in the Active Pharmaceutical Ingredients (API) prices from the regional sources call for a revisit to the drugs pricing mechanism in Pakistan.
In order to guard the industry from such shocks, a concerted effort must be taken to ensure the rationalisation of pricing structure on fair and equitable basis for products coming from MNCs and local pharma industry.
A more practical approach to this problem could be to form a three-tier system making all stakeholders to bear a certain proportion of cost increase. This should include out-of-pocket payments by the customers, government contribution and finally the companies.
In addition to price regulation, pharmaceutical companies are compelled to pay 15 percent sales tax on packaging - which they are not entitled to pass on to consumers, as drugs in Pakistan are exempted from sales tax. The irony is that this practice is against the international rule of collecting sales tax from those businesses that can not pass it on to end consumers.
PATENT & COPYRIGHTS
Copyright & patent laws are openly violated in Pakistan's pharma industry and copyright is generally termed as 'the right to copy'. Moreover, the Health Ministry's lack of expertise in patent results in exploitation and invalid objections raised on the registration of competing products.
Linkage between patent laws and drug laws is also a matter of concern for MNCs, as the local industry is not part of the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). There is a concern among MNCs that patent linkage will create unnecessary delays in the registration of pharmaceutical products, thus, creating hindrances in easy access to medicines.
Similarly, TRIPS agreement stipulates only data protection and not data exclusivity, which is a requirement of TRIPS-plus and remains unadvised for the time being. However, data exclusivity could pose an obstacle to effective use of compulsory licenses, as the entry of generic products would be delayed for the duration of the exclusivity period or for the time it takes to undertake a new compilation of test data. It is feared that data exclusivity will create illegal monopolies and prevent generics from entering the market.
Then there is the problem of counterfeit medicines. World Health Organisation (WHO) fears that 40 to 50 percent of drugs in Pakistan are fake and spurious. In contrast, Pakistan Pharmaceutical Manufacturers Association believes that this figure is over stated and there are no more than 0.5 percent fake drugs in the market. Although, these numbers can not be verified with accuracy, the fact is that there is always a shadow backstreet outfit, which dumps a batch of spurious copies of a well known brand in the market and disappears quickly.
Consequently, these issues give birth to a much bigger problem related to research and development activities which are currently very low in Pakistan. Fears of drug formula being leaked, introduction of fake drugs and getting inadequate product prices have so far discouraged MNCs to engage in R&D of a considerable size. In addition to this local companies also face financing constraints as R&D is highly capital intensive and requires as much as $800 to $1000 million for just one medicine. It is also believed that the system of Drug Inspectors does not help the cause rather it only worsens the situation because of corrupt practices in the system.
CONCULSION
Export size of pharma industry is currently $101 million and has the potential to grow many folds to at least $1000 million. But pricing and other regulatory constraints have discouraged the industry players in general and MNCs in particular to tap that potential. The simple yet effective solution is to implement the existing Drug acts 1976 in its true spirit to curb ill practices in the industry.
There is a dire need for the government to step up and look into these matters on a priority basis before it is too late. Recently, the government in its latest Health Policy 2009 has given indications of establishing National Drugs Relating Authority that will work to rationalise registered drugs in the country. However, this step does not seem to be enough as the body would not have the authority to regulate the pharma industry, which may only add to the complexity.
It is also important to bring all the stakeholders on board and derive a new workable pricing formula for pharma companies. The government needs to give incentives to those who are putting considerable effort and money in R&D.
Experts say there is also a need to formulate a separate regulatory body for pharma industry. At present, the ministry of health is the sole governing body responsible to regulate pharma industry. But, having so much on its plate it is unable do justice to everybody as it has more important public sensitive areas such as hospitals and general healthcare to look at. An autonomous body along the lines of Oil and Gas Regulatory Authority or Securities and Exchange Commission of Pakistan should be formed by the government to help the industry grow and prosper.
Admissions in universities in Pakistan is often as tough a task as to find a compatible match as number of educational institutes at home is highly insufficient to meet the need. Dearth of universities can be gauged from the fact that there are just 124 universities for 162 million people in Pakistan - the slowness of the pace is evident from the fact that Pakistan has managed to build a mere 16 more universities in as many as two decades.
As a result, acceptance rate for most of the universities is below 5 percent, which is horribly low when compared with 10.4 percent for Harvard University, 11.4 percent for Yale University and 12.7 percent for Princeton University.
Scarcity of good educational institutes has led to rise in competition and students have to pass through number of entrance test and interviews. Although, it is a good practice but students from rural areas are usually left behind in the race since they don't have money and access to good coaching centers, which provide preparation for aptitude test.
Moreover, students that pass A-level, also face difficulty in getting admission in public universities as they have limited quota compared to the total number of seats.
However, attaining admission alone does not mean the end to the problem road for the students as non availability of resources together with inadequate teaching facilities create many hurdles in the way of acquiring quality education.
Just like the price hike elsewhere, education sector does not lag behind, it rather surpasses the trend on most occasions as admission fees are increasing at an alarming rate. For instance, per semester fee of average rated private business school ranges between Rs50,000 to Rs100,000. While the same for private medical and dental universities can go as high as Rs600,000 per year. This is other than the huge onetime payment of registration or admission fee before being the part of the privileged institution.
The problems mount as lack of courses or dearth of modern disciplines in universities also forces students to opt for fields that do not necessarily sit high on their priority list. Moreover, in some cases course material and books taught in universities are outdated due to unavailability of current books and lack of teachers training.
Besides, a large number of university faculty members lack appropriate experience and practical knowledge about the subject they teach. However, interestingly, student teacher ratio of 16:1 is satisfactory in both public and private universities.
Finally, non availability of proper classrooms, laborites, lack of electronic communication tools, internet connectivity, and computers create difficulty for students and also make them highly uncompetitive when they enter the world of professional life.
Likewise, universities are also severely under funded with meager resources for research and as a result students become inept to compete with students who have studied abroad. Even multinational companies in Pakistan prefer to hire foreign grads, thus undermining the local grads.
As a result, the local grads find it difficult to get appropriate jobs since unemployment rate for post graduate and under graduate is 26 percent at home according to World Bank. Consequently, some time job description does not coincide with specification resulting in under paid salaries and unmatched jobs.
Facing such tough conditions, those who can afford are rushing to study aboard. However, studying abroad in not that easy as continuous depreciation of rupee has made tuition fees and lodging and boarding expensive. In addition, strict background checks and visa policies after the incident of 9/11 have also added to the students' woes.
Previously, universities in US were the top most priority, but students now prefer to study in less strict host countries such as Sweden, Norway, Cyprus, Ireland, Australia, New Zeeland and Malaysia.
Pakistani students in the US have continued to decline sharply from around 8,600 in 2001-02 to 5300 presently. On the other hand, Indian students in US reached 103,260 in 2008-09 from 66,836 in 2001-02.
These host countries are expanding their universities to attract more foreign students as they bring hefty tuition and lodging fees. It is estimated that international students bring £3.5bn to UK universities each year and up to £10bn to the British economy.
In long term, the brain drain of students is a serious loss for the "exporting" countries as these students prefer to settle outside home country. In this regard, government need to solve the issues associated with higher education, because Pakistan cannot develop and grow without value added input from its youth.
Universities can not grow without proper backing from government, especially public universities, because limited availability of funds is depriving students from quality books, research laborites and other amenities. Education expenditure as a percentage of GDP is lowest in Pakistan when compared to many developing countries, just 2.9 percent, according to World Bank.
Pakistan lags behind other industrialized countries in industrial technical base largely due to wide gap between industry need and academics. Research in universities can be fostered through involvement of corporate sectors. On one hand, it will improve student's practical knowledge and provide valuable research to industries on the other. Above all, in the end the ultimate benefit of quality research will be transferred to industries.
There is dire need to increase co-ordination between universities in Pakistan, to ensure effective resource sharing. Moreover, in this regard, assistance can also be taken from foreign universities on the lines of University of Peshawar which is currently running Academic exchange program with Washington College of Law at American University.
To boost the use of technology in educational institutes, government needs to provide laptops, computers, multimedia, software and multimedia at subsidised rate. With establishment of more open universities, rate of literacy can be substantially improved, since these programs are relatively inexpensive for both students and educational institutions.
This can help education living in rural areas, especially females. Previously, distance learning was not considered as an effective mode of teaching due to improper communication infrastructure. But now many telecommunication companies have launched broadband service that will likely underpin distance learning growth.
In order to make private universities affordable to students, government needs to closely monitor their cost and fee structure since high fee structure shows that these institutions have been commercialised. Maybe, there is a case for Competition Commission of Pakistan to step in and play its part.
Similarly, NGOs and philanthropists, both local and foreign, can play pivotal role for the improvement of higher education. For instance, Namal College built by Imran Khan is an Associate College of the University of Bradford, one of the leading Universities in United Kingdom. Likewise, last year Khushhali bank and USAID awarded number of scholarships to students of Masters belonging to the Federal Administered Tribal Areas.
Given these problems, Kerry Lugar bill which set aside $1.5 billion funds for improvement in education and health is a ray of hope for students, but its success depends on how effectively it is implemented.
Above all, National education policy, which issued in 2009, has strengthened expectation of different stakeholders as government has planned to increase education expenditure as a percentage of GDP to 7 percent by 2015 and 5 percent of GDP by 2010.
Every nation knows that one of the key to success is education. But now time has changed since education has now become compulsory for survival of any state. In this regard, primary education holds utmost importance since strong education base of society stems from good schooling.
It is a pity that enough attention is not being paid to improve standard of primary education at home as a result of which, approximately 20 million school age children do not have access to quality education, according to USAID estimates.
The major reason for the shortage is that during the past two decades, just a few thousand primary schools were constructed, 158,000 primary schools in 2009 from 130,000 in 1992. In contrast, population is growing at an alarming rate with almost 36 percent of the population below the age of 15 years. Consequently, gross enrolment ratio in primary schools is just 52 percent and net enrollment ratio 66 percent--- way below many Asian developing countries.
Student-teacher ratio is also continuously increasing; reached at 56 in 2008 from 43 in 1998, which invariably leads to decreased quality of education.
Besides, no proper mechanism has been employed by government to increase students' survival rate in schools as only 68 percent of male and 72 of female students enrolled in primary school reach fifth year.
Moreover, primary completion rate for the poorest quintile is just 11 percent since major portion of poor population prefer to send their children for work. Similarly, high fee structure also forces parents to take their children out of school.
In addition, inadequate infrastructure, poorly trained teachers, low morale of primary school teachers, non-availability of text-books, inadequate funding, hesitation of female teachers and students to go to schools, etc impede efforts to improve education.
Unfortunately, there isn't any quick recipe on offer to improve the structure of primary education in short to medium term. But to improve it, government needs to increase school funding first as it will improve and expand schools infrastructure. To improve quality of staffing, strict monitoring control system is required, because lack of check and balance results in low attendance of teachers and poor training.
Private sector can also play important role to enhance education since it accounts for 33 percent of education institutions in the country, according to USAID. Many private schools have become fully commercialised and are more focused to earn exorbitant profit. To streamline private education sector, government needs to award more school licenses as it will increase competition and break monopoly of private schools dominated by few big players.
Recently, number of NGOs stepped in to meet the needs of different socio-economic groups. For instance, The Citizen Foundation, which has progressed to 600 school units nation-wide, across 63 different rural and urban locations. Similarly, Zindagi Trust has established 29 operational schools and proving education facility to 2800 students. This shows, that government together with non- profit organisation can effectively improve education system.
Pakistan International Airline is targeting twenty percent higher revenue 2010 compare to the unaudited revenue of 2009.
The increases of revenue will be through scheduling additional flights, better customer services, improvement in real time passenger management system, improvement in cargo management system, monitoring of the route profitability and above all savings by exercising maximum austerity in operational matters by bringing about transparency into the system.
-- The PIA Board of Directors in its 323rd meeting at Islamabad, chaired by Chaudhry
-- Ahmad Mukhtar, Minister for Defence and Chairman PIA approved the Corporate
Budget for the year 2010 with the revenue target of Rs. 114 billion.
The Board of Directors also discussed different measures taking by the management to set-up Strategic Business Unit in the areas of maintenance, repair and overhaul of aircraft engines, Speedex and PIA Training Center.
The Board of Directors also approved improvement in the upgrading of aircraft cabin to make them more comfortable for the passengers.
The Board of Directors showed satisfaction over the performance of the national flag carrier and also discussed flight punctuality, regularity and route performance.
The Board of Directors was given briefing on cost cutting measures including depth swap, up fuel prices hedging, review of contracts, aeronautical charges and ATR fleet.
During 2009, Pakistan International Airline has also entered into Strategic Alliance with Pakistan Remittance Initiative to help boost inflow of foreign remittances through banking channels.
PIA has titled the alliance "sons of Pakistan" to catch the attention of Overseas Pakistanis for remittances through official channels to acknowledge their contribution for excelling the foreign remittance target.
"Aik chai laana" is one very common phrase heard in offices, cafes, restaurants, home etc. Diffusion of the tea drinking habit can be gauged from the fact that morning of almost every Pakistani starts from tea and it is compulsory for the host to offer tea to guest irrespective of the time, as a gesture of courtesy.
There exist a number of tea varieties, such as black tea, green tea and Kashmiri tea etc. Previously, it was commonly understood that only adults take tea but with the introduction of flavoured tea, sellers have been able to expand the market base. Furthermore, tea distributors and sellers have also tried to capture soft drink market especially kids, by offering delicious ice teas, and health conscious people, by offering green tea.
But unfortunately, Pakistan being third largest tea importer, imports 170 million kg annually and consumes 4 percent of world's tea production. To meet this demand, Pakistan imports from Kenya, Sri Lanka, Vietnam, Indonesia etc as tea production at home is negligible.
After independence, initially tea supplies used to come from East Pakistan, but after the separation, the entire supply of tea is fully dependent on imports. Given this, government of Pakistan in 1973 initiated a project called "Research and Introduction of Tea in Pakistan". And with the help of Chinese consultants, almost 60,000 hectare of land was identified suitable for growing tea in Mansehra and Swat district where net income from tea crop is estimated to be much higher than that from any other traditional crop.
So far many tea cultivation studies and pilot tea projects have been carried out in Manshera and swat district and tea processing plant was established in this region in 2001. However, besides all these efforts, tea cultivation in Pakistan remains negligible as compared to demand.
2009 remained tough for tea distributors at home as drought in major tea producing countries, Kenya, India and Srilanka, trimmed tea output and increased tea prices to $3.61 per kg from $2.61 per kg in the previous year. This together with rupee depreciation has increased tea prices at home.
Pakistan's tea import bill stood at $209 million in 2009, which reflects only 55 percent of the total import value, as other 45 percent which is traded in through unlawful channel is not included in bill.
In branded tea market, major players are Lipton, Brook Bond Supreme, and Tapal. Lipton alone captures 60 percent of the market share, while Tapal has the grab over 25 percent of the market. On an average, branded tea industry spends around Rs500 million on advertising every year.
Increase in tea prices have led to rise in tea smuggling, as the importers have to pay 16 percent general sales tax along with income tax and customs duty as well, and illegal tea traders pay nothing. As a result, government alone is losing more than $50 million in revenue and branded tea sellers are facing high cost pressure as smuggled tea is relatively cheap in the market.
To overcome this issue, tea distributors have asked government to take serious action against smugglers and adopt stringent monitoring measures for the survival of branded tea industry in Pakistan.
The history of the education of Cost and Management Accounting is evident from the fact that earlier in our region the Cost Accounting had a dominant emphasis on cost elements, its analysis and rationalisation. Therefore, need was realised to inject the idea of using costing information for managerial and strategic purposes. In early 1940s, Mr. Muhammad Shoaib, visualised the need for organised cost and management accounting profession in the British India. He was the founder of the Institute of Cost and Works Accountants of India in Calcutta. This was a precious gift by a Muslim to Indians. He later, became the Finance Minister of Pakistan.
In Pakistan Institute of Cost and Management Accountants of Pakistan (ICMAP) having legal status under the legislature. Institute was established in 1951 as the Institute of Industrial Accountants and has 58 years prestigious history of serving the business community. The institute received its Charter in 1966 by the Parliament. It was renamed as, The Institute of Cost and Management Accountants of Pakistan under the Cost and Management Act 1966.The objective of passing the act was to regulate the profession on sound basis, produce suitably qualified Cost and Management Accountants to serve the economy of Pakistan and to lay sound and solid foundation of a competitive and prosperous Pakistan. It has around 4000 qualified Associate and Fellow Members and today the total number of enrolled active students is 15000. It has been offering formal education to the students in various important cities of Pakistan. In addition to that the Distance-Learning Education is also being offered through its Internet Based Distance Learning Programme (IBDLP) and Correspondence Course, which provides education opportunity by providing quality professional education to all Pakistani students who wish to realise their desires and fulfil their potential. In fact it is serving as a first Open Institute in Pakistan for imparting the professional education in the discipline of Cost and Management.
The Management Accountants produced by the Institute have met the requirements of the industry and the business over the years, because we trained them to turn knowledge into value addition. Therefore, Institute has to take care in selection of students during the admissions. Entry into the Cost and Management Accountant profession requires passing entry test, which has been outsourced and is held throughout Pakistan on competitive merit basis. Exemption from entry test is for First Class Graduates, to encourage them to commence their studies. The study programme of ICMAP is divided into six stages, namely: Stage 1, Stage 2, Stage 3, Stage 4, Stage 5 and Stage 6. First three stages consist of four courses of study, while the last three stages consist of three subjects each. The total numbers of courses to be studied during entire study programme are twenty one (21) in all. The Institute's Head Office is based in Karachi and has fourteen centres in all major cities of Pakistan. Overseas examination is also being conducted at Saudi Arabia, U. A. E. and Canada (subject to availability of students).
The above education pattern is in accordance with the requirements of international standards setting professional bodies, such as International Federation of Accountants (IFAC) and International Accounting Standards Board (IASB). The syllabus of the Institute is upgraded on regular basis. It is competitive with the syllabi of other comparable professional bodies in Pakistan, in the region and in the world. The syllabus is also responsive to the needs of the employer in Pakistan. Most importantly, the syllabus is designed and adjusted keeping in view the needs of the students. It is also responsive to the changes taking place in the sphere of information technology (IT) and other external factors influencing the way business is done.
Since its inception, it has been our endeavour to turn and develop students into accomplished professionals. The first step is the screening process at entry point. The second one is the processing through quality teaching, extensive presentations by the students throughout their span of learning at ICMAP, arranging seminars on subjects of contemporary interest, holding of students Conferences and quality oriented external examination system. Continue improvements to achieve higher quality standards to serve the ever-growing needs of the society at home and abroad.
The role of Cost and Management Accountants is very unique and commendable. They help in increasing productivity, avoid wastages, rationalise cost structure, and help in adding or dropping products or market outlets, machines and money. They represent" products differentiated". They introduce productivity measurement and gain sharing schemes. They help in promoting the use of productivity sharing agreements (PSA). The implementation of all this, enables a company to become self-financing and anti-inflationary. They also serve in service sector and richly contributing to the noble cause of three Es, namely Efficiency, Effectiveness and Economy. Some of the Cost and Management Accountants are serving in teaching field through teaching in universities and academic institutions. Some are practising as Cost Consultants and as Cost Auditor. The secret of doing all such contribution, professional help and demonstration of excellence and competency of Cost and Management Accountants is because; they are fully equipped with proper quality education of the profession and rigorous field exposure of real life to their credit.
The Cost and Management Accountants have varied and versatile scope to serve Pakistan. Almost every sector demands their services and contribution; it can be agriculture, service or likewise many more. However, they can most effectively contribute to Industrial and Mining sectors in producing goods at economic cost level. They compute cost, analyse it and help in developing Cost Centers and Profit Centers.
In the scenario of global changes in business, cost accounting, management, use of technology in business, competence and the competition, the crying need of today's Pakistan is to increase efficiency and productivity in agriculture, industry, and the services sector, achieve optimisation in use of manpower, synergism of the efforts for obtaining 2+2=5 effect and generation of data to serve as decision support system. Therefore, improvement, innovation, creativity and changes in our syllabus and methods of teaching in line with the vision and mission of Institute of Cost and Management Accountants of Pakistan, has been our regular practice.
Institute of Cost and Management Accountants of Pakistan is a founder member of International Federation of Accountants (IFAC), New York, International Accounting Standards Committee (IASB) London, Confederation of Asian and Pacific Accountants (CAPA), Kuala Lumpur and South Asian Federation of Accountants (SAFA), New Delhi. It enjoys unique position of international linkages. In almost all continents of the World, its members are serving in a dedicated and meritorious manner.
Till the enactment of the Companies Ordinance 1984, it was not legally obligatory for process-oriented companies to maintain cost accounting records. The Institute of Cost and Management Accountants of Pakistan launched a movement to get the above enactment passed. Our Institute is extending full assistance in framing Cost Accounting Records Rules and the Federal Government has notified these rules for application to vegetable ghee, sugar, cement, fertilizer, thermal energy, petroleum refining natural gas and polyester fiber industry. The process in Government machinery is time taking. We are persuading the Government, Business and Industry to respond positively in this direction. Section 258 of Pakistan needs specialists in various fields. Cross border transactions are going to push several inefficient industries out of the scene. Survival of business will not be on cost plus concept but on target costing concept.
In order to meet the challenges ahead, and the competitive wave which WTO is going to unleash, Cost and Management Accountant is the specialist in his area who can help businesses to reduce costs, optimise the use of inputs, synergies the same and enable business to produce goods and services at affordable prices with quality orientation for the benefit of the consumers.
In this context, ICMAP is justifiably proud of its achievements in imparting knowledge and developing professional skills in our students, laced with enviable personality traits. The institute is positively responding to the situations by changing its syllabus, introducing field experience orientation, updating its members, producing high quality products and is productively engaged in a positive response to the emerging challenges.
ALI KHIZAR & SOHAIB JAMALI
In this interview, Finance Minister Shaukat Tarin sheds light on his roadmap to overhaul public sector entities, the circular debt crisis, margin financing at KSE, oil hedging, plans to counter water shortage in the wake of climate change and much more. The following are excerpts from the interview:
BR: Trading volume at equity markets has dried up, so have new listings and IPOs. How do you plan to deal with these issues?
We had announced some incentives for listings in the last budget, but when the overall economy, along with global economy was on a downturn, we weren't expecting a boom in IPOs. But now since our stock market has increased, world stock markets have also risen, we would like to focus on new IPOs and we will review the situation in the coming budget.
As for trading volumes, they have been affected partly because of the economic situation and partly because of lack of leverage products. But now things would improve as SECP will be launching leverage products like margin trading and others.
BR: Don't you think that the bank-to-broker level financing currently being considered for the margin system would just provide a legal cover to in-house financing. What else can be done?
We have to go beyond that. We have to go towards the retail side. Banks are currently reluctant, but that's why we have appointed senior banker Zubyr Soomro as KSE's chairman, so at least he would help SECP to work with banks.
We have to increase our investor base and that will increase when a common man would have access to the market and to credit as well. So we have to offer margin financing to both wholesale and retail.
BR: What about RAETs. Why hasn't it been able to take off so far, and how do you plan to resolve its issues such as lack of documentation, under invoicing and so forth?
I have met with the SECP in this regard and we felt that Rs5 billion was too high a number. We don't want to bring it to Rs500 million because obviously it has some tax concessions but we will certainly lower its threshold and in the meantime we will look at other issues you spoke of.
We want to start RAETs because it isn't just good for private sector but it is also good for public sector. We have blocked in a lot of our wealth through the real estate of the government and of the PSEs and armed forces.
BR: Can you explain the concept of VAT?
VAT is basically an end-to-end sales tax across the supply chain. In current practice, there are certain players within the field who don't pay tax --leaving the person at the end of chain with most of the burden.
In sectors, like auto or other big documented sector, the problem does not arise as such. But it's the sectors like retailers and wholesalers which escape from the tax net. So at the end of the day manufacturing sector is left holding the burden, which then evades taxes on the basis that it can't recover.
Secondly, the bigger issue is that we haven't automated our tax system. Then we have also zero-rated it, because we weren't able to give the returns. Similarly, there isn't any tax on smuggled imports, or domestic consumption of export oriented products. So I think, this wholesale zero rating has to be abolished.
BR: Then how will you tackle the issue of flying invoices?
Automation is the answer. We are currently testing the central system which will match the debit and credit entries of all the players involved in the supply chain without any sort of intervention.
BR: Will this be fully implemented from July?
It will begin in July but it will take a while before it is fully implemented. Even in the UK it took them about 3 to 5 years before it was completely put into action.
BR: Can you comment on the estimated tax evasion on part of businessmen who recently lost their shops due to Ashura riots in Karachi?
I will not go into the details, but such is the story across Pakistan. For example, the whole of country's textile sector pays only Rs4.6 billion in taxes, whereas its contribution in the economy amounts to Rs1200 -1500 billion.
BR: We have seen FDI continuously sliding over the past year. What plans do we have to attract future investments?
We have identified the indicators of quality and it's within our nine-point agenda that we must have growth in agriculture, manufacturing, and energy sector. We would also like growth in infrastructural sector on a public-private partnership basis. We plan to give fiscal incentives and hopefully as the economy enters growth mode and as global markets stabilise, foreign investors would also pour in.
You have seen NIT and NSS issuing a series of bonds and we plan to take these bonds abroad.
We plan to attract non-resident Pakistanis to come in and invest in Special Economic Zones, while trying to ensure that investment companies, like Pak Kuwait and Saudi Pak, bring in investments from their partner countries.
BR: What are our contingency plans, if international oil prices start shooting again?
We have made a hedging programme. But otherwise we have to think about conservation and development of our resources.
BR: Didn't we get any opportunity to hedge last year when prices dropped sharply to about 34-38 dollars per barrel.
Yes, we started hedging at $40 per barrel....of course, the government has its own way of working and we have presented the plan to the ECC and we have appointed Deutsche Bank as consultants who are now talking to other banks who will hedge it.
There are a couple of options on cards; we have to weigh between higher and lower upfront costs and its respective thresholds. We would be taking decision on this front any time soon.
BR: Land ownership issues are troubling foreign investors such as in the case of PTCL and Makro wholesalers of late. How does the government plan to deal with this?
As far as PTCL's case is concerned, both provincial governments have discussed the situation and we have reached an understanding with them. We will resolve this soon on a give and take basis.
Similarly, we are also trying to reach an understanding between the provinces and the railways while for cases such as Makro, we have to devise clear cut policy guidelines as regards who can grant approvals for commercialisation of cantonments lands and so forth.
BR: How do plan to turn around these so called white elephants?
The Cabinet Committee on Restructuring of Public Sector Enterprises has been formed. The committee will review eight big enterprises, namely Pepco, Pakistan Railways, PIA, Pakistan Steel Mill, Passco, TCP, Utility Stores and NHA, and try to assess how to turn around these money guzzlers.
BR: Isn't privatisation the ultimate solution for power distribution firms and other public sector entities?
Yes that's the ultimate. And its first step we took in the form of taking all their debt on our books by creating a holding company.
I think Pepco should empower these firms -- Pepco should not act like an operating company, it should work like a holding company and operating companies should be the distribution firms.
Discos should have their own empowered boards, empowered chief executives, they should be able to stand on their feet and then sell them off under public-private partnership, because only then we would get the efficiencies. But they must be sold to people who understand the business.
Turning these firms around is a must because right now we are just increasing prices because input prices are being increased, but on their hand we are not becoming efficient because of management failure.
BR: How do you propose to resolve the circular debt?
The issue at hand isn't simply that they don't collect their receivables. The bigger issue is that they can't match their inflows and outflows. They don't budget it properly and then they don't manage it.
Their revenue and expenses total about Rs1 trillion, yet some of them don't even have a treasury department. They don't have professional CFOs.
These discos are already corporatized. We have to make proper boards and CEOs and after that you tell them that you are on your own, because when their tariffs are determined separately, discos by disco, by Nepra, they should be held accountable for their performance.
And since their debt has been transferred to the holding company, their balance sheets have become clean. Now you tell them to do what you want; you want to take new loans, you want to do R&D, you want to revamp, or undergo maintenance - do what you do but earn your own revenues to meet your expenses.
BR: Global institutions forecast acute water shortage in the years to come. The consensus is that Pakistan will face huge floods after five years, followed by a drought like situation. So what is the government doing in that context, especially considering that India is persistently abusing the Indus Water Treaty?
They say that future wars will be on water. But we are exploring different options. As far as big dams are concerned, work is already under way and you know work on Basha will start this year.
We have also started allocating funds for small dams, while for water conservation we are exploring better canal lining, sprinkler system and also drip technology. We are also pondering over rain water conservation.
At the other end, we are also engaging India in composite dialogue; both Prime Minister of India and President of Pakistan have agreed to resolve the water related problems between the two sides. And we are also bringing our allies, the U.S and others, in the process.
So it is in our constant vigil that if we have to support agriculture, then water becomes our number one priority. Global warming is a world wide issue and we will try that by the time floods start we are prepared for that.
This is the second and last part of the interview. The first half was published in BR's January 20, 2010 issue.
It is surprising that despite being the third largest milk producing country in the world, Pakistan has not been able to consolidate its benefits fully since milk prices at home have been escalating at an alarming rate. As a result, consumption is forced to be met through imported powdered milk as evident by $77 million spent on milk and cream imports by Pakistan last year.
Importance of dairy sector can be gauged from the fact that dairy commodity accounts for 25 percent of total farming output and about 5 percent of the GDP. Demand growth for dairy products - in the context of slow income growth - is estimated by Nestlé Pakistan at 5.5 percent per annum.
On the other hand, live stock is an important source of raw material particularly for leather, carpet and woolen cloth industries, all of which are export earning sectors of the economy. Pakistan earned $717 million from leather exports in CY09. Likewise, growth in live stock sector will also give boost to the meat exports, as export contribution of this sector was negligible at $ 96 million in 2009.
Large portion of rural inhabitants consume milk of their own farmed cows. In big cities however, milk is delivered through two channels, one through milk sales point, whereas rest of the urban market buys packaged milk, which comes in the form of Tetra packaging.
Package milk in Pakistan started in early 1980's, with triangular shape packaging and gained quite a success on the back of rapid urbanisation and its multifaceted benefits. The biggest benefit it brings along is that it increases the life of the perishable commodity.
Second, modern dairy processing plants have made the consumption of milk safe and free from germs as they have deployed large industrial plants and have technical base to resolve hygiene issues. Third, Packaged milk is also fortified with Vitamin D and has less fats.
In UHT or packed milk market, Milk pack and Haleeb had enjoyed quite a large segment of the market share for more than two decade till Olpers entered into the market in 2006. Lately, market share of Milk pack stands at 40 percent, Olpers 15 percent, Haleeb 15 percent, Tarang 10 percent, while the rest 20 percent of the market is targeted by other numbers of small package milk suppliers such as Nurpur, Shakarganj and Good milk etc. On an average, milk companies are spending Rs200 million per annum on advertising, as per industry sources.
These market players have also expended their business into cream and low fat milk. While in packed yogurt market Nestle is so far the major seller (in branded category) and has introduced variety of products in this range such as dahi, Raita, flavoured yogurts etc. Likewise, Nestle's Everyday, milk powder used in tea, has also gained huge acceptance among tea consumers.
Engro has once again taken the challenge and stepped into ice cream market to compete eagerly with big players such as Walls, Hico and Igloo.
On average, 35.2 million tons of milk is produced annually, out of which only 6.8 million tons of milk is delivered into market and traded, while just 3.3 million tons is processed. This data clearly show that there is inefficiency in supply chain due to which less milk is delivered into market.
Given above scenario, it is important to rationalise supply channel and assist framers or rural community in order to expand dairy industry.
There are a number of issues due to which less quantity of milk is delivered into the market. First, poor market infrastructure facilities, as majority of cattle owners are small farmers especially female who have limited or no access to Village Milk Collection Centre. Likewise, lack of chilling centers, unhygienic milk container and improper transportation system are also impediments to growth.
Second, lack of credit facilities to farmer results in few cows per farm and also reduces purchasing power to buy good feed.
Third, lack of technical know how and assistance of research institutes results in low yield per cattle, One New Zealand dairy animal produces as much milk as three dairy animals in Pakistan, while one American cow produces as much milk as seven cows in Pakistan.
In this context, it is important to educate farmers about livestock health management, provide training regarding animal feed and food hygiene practices.
Besides, authorities and policy maker should study and adopt dairy benchmark model of New Zealand - the largest milk exporter which has achieved high competitive advantage in producing dry milk. This can help Pakistan tap the potential of exporting raw milk export, growing at the rate of 20 percent per annum.
On a related note, there is a need to streamline value chain, to reduce both cost of production and the cost of distribution to make Pakistani dairy goods more competitive in international market.
More emphasis needs to be placed over increasing spending on research and reap the lucrative returns on agricultural investment which can go as high as 57 to 65 percent, according to USAID. Given that Pakistan's expenditure on agriculture research is 30 percent lower than Bangladesh, India and Sri Lanka, there is surely plenty of room to invest in the sector.
Focusing on dairy will not just help the country diversify exports but also help lower unemployment. According to a USAID study, 3 percent growth in dairy output can create about 0.9 million new jobs and $225 million expenditure on dairy project will result in increase in average income of 1.5 million female farmers by $250 each year and per capita income would rise by 2 liters per year.