Business Today

Business under siege

Reeling from an onslaught by the Taliban and crippled by an electricity crisis, businesses in Pakistan are forced to survive in a world fraught with risk and uncertainty.

in Karachi        Print Edition: November 15, 2009

The first thing you notice when you land in Karachi, is that for a supposed failed state, things look surprisingly ship-shape. This Islamic Republic is also doing a poor job suppressing its female population as a large number of the immigration officers are attractive women.

Making my way to the city, I notice that the roads are superb and the traffic—largely populated by Honda and Toyota 4-door sedans—orderly and patient. When we get to the upmarket neighbourhoods of Defence and Clifton, the wide streets are lined with palm trees and fronds, giving the whole area a vaguely Mediterranean feel. This is the life, I think to myself, as I sit back and polish off some extraordinary kababs from the legendary Bundu Khan. And then the lights go off.

KARACHI’S CURRENT BUSINESS WISDOM
Build as much cash reserves as possible.
Keep receivables to almost nothing.
Payment cycles shouldn’t exceed a month.
Lend your suppliers money to buy generators if you must.
Treat debt like it’s a disease.
Be ready to shut down your business tomorrow with minimal losses.

This is no ordinary power outage as the power goes off and comes back on in one-hour intervals all night long, giving me a taste of the biggest obstacle to development and growth in Pakistan, other than terrorism. Every house—make that mansion—in these posh neighbourhoods has a generator the size of a small car without which life comes to a halt. Amazingly, just five years ago, Pakistan was a power-surplus country but things seem to have gone horribly wrong since then.

The country is short of 3,500 MW today, causing major rioting in many cities. Meanwhile, a bomb goes off in a Peshawar market and an audacious attack is staged by insurgents on the Pakistani army HQ in Rawalpindi as retaliation for the army operation in Swat. How on earth do businesses survive in this kind of environment? What sort of psyche does a Pakistani business owner have in order to manage such immense risk and uncertainty?

“You have to be prepared for a scenario where everything shuts down overnight,” says the head of a local consumer products company— let’s call him Imad—that makes local face creams and hair products. One of his key strategies, says Imad, is to build up as much cash reserves as possible. He also ensures that his receivables are next to nothing and his payment cycles are no longer than one month versus seven or eight in the industry.

Imad is also big on trade between India and Pakistan. “Disarm both country’s nukes, give Kashmir to India, who gives a damn,” he says. “We wouldn’t need to buy cars from Japan. Imagine how much money Tata could make.” Right now, Imad gets most of his raw material and machinery from the UK and Europe whereas sourcing them from India would give him significant cost savings. Fact is, apart from eight or so essential items, direct trade between India and Pakistan is banned. “Construct a free-trade zone between the two countries and peg the Pakistani rupee to the Indian one. This will be phenomenal for both India and Pakistan,” he adds.

PAKISTAN IN NUMBERS
2-3%is the expected rate of GDP growth for 2009-10 - down from the average of 6% a year for the last five years.
One US dollar is equal to 83 Pakistani rupees - after falling 30% in 3 years.
85 is the country’s rank in the latest World Bank’s Ease of Doing Business report, ahead of India (133) and China (89).
3,500MW is the total power shortage. Cuts of 8 hours a day are not uncommon.

The head of local cement giant— let’s call him Razak—says that while his company has seen tremendous growth in the past decade, he’s unable to even consider muchneeded mergers and acquisitions that could make his company a true global player. “Our whole system is under pressure. Two or three years ago we were optimists, but now the appetite for risk is not even there, even though the money might be. We don’t even have clarity of what might happen for the next four to five days,” he adds.

Razak is thinking seriously of shifting much of his manufacturing outside of Pakistan. So how did things in the country go belly-up so fast? The answer to this invariably points to the controversial general who presided over the country for much of the last decade. “Musharaff’s first three years was the golden era,” says Khaled, the local head of a foreign investment bank. “He was serious about battling corruption and had a good team who genuinely wanted to help. But 9/11 changed the whole landscape,” he adds. Most businessmen I spoke with concur that Musharaff’s era was the most stable in recent times, with more transparency and quicker decisionmaking than ever before. A few lambast him for emphasising trade instead of manufacturing, forcing the closure of steel and textile mills and leaving behind a legacy of shortages.

Those early Musharaff years are a far cry from today where the Pakistani rupee is now at 83 Rs to the dollar compared to 60 Rs back then, and GDP growth has been a paltry 1-2 per cent. Musharaff’s biggest blunder was his inability to plan for the huge surge in energy needs of the country. Power shortages have taken the biggest toll on the population—around 53 per cent of Pakistanis go without power for at least eight hours a day, according to a recent Gallup poll.

This has virtually decimated SMEs, and manufacturing output according to local reports has fallen by at least eight per cent in the first 10 months of the fiscal year. Those who can afford it pay Rs 30 per KW hour for diesel-generated power versus Rs 10 per KW hour charged by local utility KECS. “We’re in a pretty bad situation,” says Shah, the head of an engineering and alternative energy-solutions provider. “Businesses are getting squeezed with a 30 per cent increase in costs due to power alone and companies are shutting down. What has really gotten suffered is routine business,” he adds.

It is therefore easy to picture Pakistan’s economy in an imminent state of collapse, but in fact, the country’s economy is and has always proven to be remarkably resilient due to its largely (86 per cent) demand-driven nature. Despite power setbacks, the global recession and chronic insecurity, sectors such as oil and gas, fertilisers and pharmaceuticals are booming. The stock market is up 60 per cent, and while many say that it doesn’t have enough depth, most companies are trading at attractive PEs and a 30-40 per cent discount to their regional peers. Many dish out attractive dividends every quarter.

The country’s current account deficit has come down from $2.68 billion to $527 million and foreign exchange reserves have climbed to $14.36 billion compared to $6.6 billion in November of last year. How much of these gains are a result of an improving fiscal position—tax collection is notoriously inept—and how much of this is through a juggling around of aid money ($7.4 billion of which came from the IMF last year) is tough to determine.

In spite of the unpredictability of life—or, perhaps because of it— people in Karachi party with relentless zeal. Bars are banned so private homes become de-facto watering holes. A local troupe recently launched a month-long production of popular Abba-themed musical “Mama Mia” with a big party at a farm house. A local grunge band kicked things off with a set that would have made Kurt Cobain nod appreciatively (Pakistani rock music is huge and has brought us global stars such as Junoon, Vital Signs and Strings.) A DJ’s grooves finally pushed everyone onto the dance floor, amply fuelled by a free-flowing bar that eventually closed at 7 a.m. Apart from two private security guards hanging about, I couldn’t spot a single cop or mullah barging in to disentangle various skimpilydressed young men and women grinding away the night, despite the gates being wide open till sunrise.

Pakistan is a land of paradoxes. It is an Islamic Republic, but much like Gujarat, has a thriving underground booze economy. While Karachi brings to mind Danny Pearl, few know that it has some spectacular, world-class beaches, a vibrant music scene and a hot contemporary art landscape.

On the literature front, Pakistani authors have become global darlings amongst critics. While several segments of society are conservative—like ours—much of the educated, younger generation are whip-smart, savvy, hungry for opportunity, and disillusioned by a world which treats them like pariahs.

One jaded graphic designer gave me his perspective: “When I watch the news about a bombing, some reports say it’s RAW, others point to ISI-funded Taliban elements. I don’t know who to believe anymore. So I try not to watch the news,” he says. These youth, around 50 per cent of who are under 21 years, “are our biggest opportunity and our biggest threat,” says investment banking head Khaled. For Pakistan to thrive in the years ahead they need to transform this demographic into the former.

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