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BR Research Newsletter
Inside this:
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Malala from Mingora makes Pakistan proud
ANALYSES & COMMENTS BY
•
Land reforms and agri-lending
BR RESEARCH
•
Sliding oil prices – Good news or bad news
•
Parsing branchless banking growth
BR Research is the research wing of Pakistan’s premier financial newspaper, the
daily Business Recorder.
Plus
Interview with Mohsin Khalid, CEO, ITC Logistics
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Monday, October 13, 2014| BR Research Newsletter |
BR Research Newsletter
Malala from Mingora makes
Pakistan proud
It’s a great pride for Pakistan that a 17-year old girl from Swat has become the
youngest-ever in the world and only the second Pakistani Nobel Peace prize winner.
Malala Yousafzai, since her childhood years, has inspired the world owing to her love
and passion towards education in a region where it was a norm to not send girls to
schools. Even many among those who wanted education did not have the access.
Malala miraculously survived a point black range shooting in 2012 and has since
gracefully committed herself even more to education activism. Now there are great
expectations on those fragile shoulders, that she will make a huge social impact.
Pakistan needs Malala, its hero. According to the latest Pakistan Demographic and
Health Survey, about 40 percent of Pakistan’s population is below 15 years of age –
that means there're roughly 80 million under-fifteens in Pakistan. It is estimated that
up to 20 million kids are out of school in the country. Malala is an education activist
with strong local roots, and she can be an immense force of good in nudging
government and civil society towards total enrolment.
Pakistan can make social gain from Malala's heroism in various ways. There is
immense spotlight on Pakistan right now, due to her grit and compassion, which can
be helpful to the country in a diplomatic context to formulate and present a futuristic
position on issues like extremism and human rights.
Being a girl, Malala enjoys direct emotional entrée to millions of disadvantaged girls
in Pakistan. Malala gives them and their mothers the voice for education and
women rights. “One child, one teacher, one book & one pen can change the
world,” said Malala at her UN speech last year. Put simply, Malala touches a cord
with the females and that can be a start of basic empowerment for some of them.
If security improves in Pakistan, here is hoping she would come back soon and be a
force for social change for millions of girls and boys that are out of school. But
domestic environment, her responsibilities as a global activist and even her own
academic schedule may hold her back for some time from returning to her soil.
2 | BR Research Newsletter | Monday, October 13, 2014
Her winning Nobel Prize should be welcomed in Pakistan where good news is
becoming rare. Ironically, many ‘so called’ educated in Pakistan, especially those on
social media, are seen taking her achievement with a pinch of salt. They're,
unfortunately, in plain denial to acknowledge the potential gains in educating kids
and eradicating extremism, which can be achieved from the symbolic glory of a
little girl.
Pakistan is already guilty of ostracizing its first Nobel laureate. Let’s hope we don’t
repeat history. Let Malala's achievement unite this country, not divide it.
Recall that Malala was shot by militants for raising voice for girls’ education in Swat.
The tide is now turning in the country against militants, who are on a back foot after
the launch of full-scale military operation in North Waziristan and targeted operations
in cities. Malala stands tall but militants are now subdued. That should rally public
support for ending religious extremism in society.
Malala has jointly shared the peace prize with an Indian, a 60-years old Indian child
rights a activist –Kailash Satyarthi. The timings of the award announcement
coincided with the border military tension between the two arch rivals. Indian
premier has used strong words against Pakistan on firing by Indian troops on the
border while at home the government is giving a silent but measured response. The
two peace ambassadors, one from each side of the border, can pave way for
initiating peace negotiation amongst two countries. They both decided to invite the
two prime ministers in Oslo on 10th December and to plea for peace in the region.
The need of educating children and deprivation of their basic rights in India is no
different than of Pakistan. The mission of joint Nobel Peace Prize winners is that every
kid in the region shall go to school and get the quality education. Let’s join hands
with these courageous activists to shape up a better society in the region!
BR Research Newsletter
Land reforms and agrilending
Another point of contention in the land reform debate is whether land reforms (in the
context of their limited implementation and cumbersome impact analysis) have
gone on to improve formal agriculture lending for smallholders. But that is a more
difficult question to answer compared to the impact on literacy (explored in “Land
reforms and literacy,” published on October 3, 2014 in this space).
Some researches indicate a positive relationship between landholding size and
chances of acquiring formal credit. By the same logic, smallholders would have
lesser chances of formal credit, thus resorting to informal credit.
The Pakistan Agriculture Census (2010) data show that about 90 percent of farm
owners in Pakistan had below-subsistence holdings (up to 12.5 acres in Punjab and
Khyber Pakhtunkhwa; up to 16 acres in Sindh). This smallholder group collectively
owned 42 percent of the farming area but individually they would have a hard time
finding formal credit.
But on the positive side, formal agri-lending data (from the State Bank of Pakistan)
show that within farm credit, subsistence holding has more than 50 percent share.
Similarly, ZTBL, the specialized agri-finance institution, has for years shown that bulk of
its loans go to small farmers (classified as up to 25 acres by ZTBL).
However, the scale of formal lending seems woefully small. ZTBL reported in its 2012
annual report that they served 0.4 million borrowers. However, that represents just 5
percent of nearly 8 million farm owners with below-25 acre holdings in 2010.
More specifically, SBP data show that agriculture “crops” accounted for about 10
percent of GDP (at current market prices) but “growing of crops” only had 1.7
percent share in the economy’s total outstanding credit/loans and a 6.4 percent
share in loans to private sector business as of August 2014.
It seems that there is unmet credit demand, which is most likely plugged by informal
lenders and family and friends. However, it also seems that formal agri-credit access,
as low as it currently is, may have improved. After all, agri-lending has been among
3 | BR Research Newsletter | Monday, October 13, 2014
top priorities for successive governments in the post-reform period. Disbursements are
also growing and ambitious targets are being assigned to banks. But conclusive
evidence is awaited.
BR Research Newsletter
Sliding oil prices – Good
news or bad news
No one would want to experience the oil peak of 2008 again. It is truism that steep
fall in crude oil prices – a southward direction from the more feared oil spikes - is a
blessing for the consumers of oil whether primary or final. For a country like Pakistan
that imported around $14 billion worth of crude oil and petroleum products in FY14, a
decline in prices warrants a respite in the overall import bill and current account
deficit.
However, it must also be noted that such steep discount are not favorable in a few
ways. First, crude oil producers are not elated at all with shrinking returns and energy
exploration and production companies around the world are forced to hedge.
Similarly, earnings of the E&P sector in Pakistan companies are likely to dampen
where around 45 percent of the revenues are oil-based now.
Secondly, though the oil marketing companies and refineries are the consumers of
oil, they face inventory losses in such scenarios.
Third, over short term, a decline in crude oil prices actually reflects the consumer
affordability. In reality, the cost of production varies from country to country, whereas
there is a standard crude oil price globally. So instead of showing a fall in the cost of
production (extraction and drilling), a steep decline in global crude oil prices show
that there is less demand for the commodity, which does not mean that its use has
decreased but the falling affordability of consumers.
Where oil prices go from here depends on how the industry responds to the prices.
Right now production is ramping up in OPEC and the US. As per the latest monthly oil
market report, PEC pumped 30.47 million barrels per day of oil in September 2014,
which is the most since August 2013. Production from Libya, Iraq, Angola and Nigeria
has also increased. And while instantly lifting the economic growth in emerging
economies is a little too hard, all eyes would be set on OPEC’s meet this November
where some important production decisions are expected.
Oil production coupled with economic slowdown sums up what’s going on with oil
prices. And of late, this price slide has become more of a speculative activity as
market fundamentals like fizzling global economy, ample supply and slowing risk
appetite has forced players to bet for bearish prices. So far this year, West Texas
Intermediate (WTI) is around five percent down, whereas Brent crude oil has slipped
by 16 percent.
4 | BR Research Newsletter | Monday, October 13, 2014
BR Research Newsletter
Parsing branchless banking
growth
reached 4.23 million as of June end. It seems that even the new BB providers are now
convinced that m-wallets hold the future for profitable business continuity.
But this growth needs to be kept in the proper context. Sector infrastructure has been
expanding in a circle, it seems, and not outwards. More than 140,000 active BB
agents were performing BB transactions as of June end. But due to one-agentmultiple-provider phenomenon that is seen in most of the BB franchise space, unique
agents are expected to be much lower than this. Providers need to extend their
footprint beyond lucrative corridors such as Karachi, Lahore and Multan into more
second- and third-tier cities and towns.
Then a singular focus on m-wallet registrations, which was previously lacking, will not
be enough. It should be complemented with incentives for users to put money in
their wallets for saving and/or spending purposes. Otherwise, inactive accounts’ ratio
will only grow. In the Apr-Jun quarter, m-wallet transactions held a 14 percent share
in transaction volume but only 8 percent share in value – that’s a serious mismatch.
To address that, incentives for m-wallet could include offering attractive saving rates,
bringing in m-shopping platforms, and levying very low or zero transaction charges. A
few players are encouragingly moving in that direction but more must do so.
Pakistan’s branchless banking (BB) landscape seems to be expanding by the day.
Latest SBP newsletter on this converged telco-banking segment, which only started
out commercially in 2009, suggests continued momentum in the latest period data
from the Apr-Jun quarter this year. There are three specific highlights from the
document that are worth mentioning here
First, the BB transaction value had reached Rs326 billion in Apr-Jun, a solid growth of
17 percent over preceding quarter. That wraps up FY14 with Rs1063 billion – nearly
$11 billion per annum – of liquidity flowing through the system. Quarterly transactions
seemed to flat-line at 71 million, but that was helpful in increasing average
transaction size by about 13 percent to Rs4581 for the quarter.
Second, BB deposits underwent a solid 27 percent quarterly growth to settle at Rs6.2
billion in the quarter. That perhaps marks growing trust in the system. Granted, agents
hold the bulk of such deposits for their liquidity management, but this impressive
growth signals an anticipation of business growth.
Third but perhaps the most important data feature was the robust 11 percent
quarterly growth seen in BB accounts, or mobile wallets. These accounts had
5 | BR Research Newsletter | Monday, October 13, 2014
It needs to be pointed out that BB agents’ own bulky transactions cast a long
shadow in the system, so the transaction mix is not entirely customer-driven. For
instance, BB agents’ in-house transactions were 4 percent of total volume but a
whopping 42 percent of the value (about Rs138 billion) in Apr-Jun. Their share in
deposits is also out-sized.
Over-the-counter transactions – which is the mainstay of BB volumes with 80 percent
share through transactions like fund transfer, bill payments, mobile top-ups, social
transfer receipts – had only 50 percent value share. That’s a more realistic picture of
the segment, besides the m-wallet snapshot.
However, the agents’ big halo may not remain a big worry for long. Right now, the
BB segment is in its growth phase and new players are banking heavily on higher OTC
volumes to generate business through agents. As the agent footprint expands and
BB providers start differentiating from plain-vanilla fund transfers, more customers
could be served more financial products in more areas. Besides, the providers are
also keen to reduce their reliance on agent-based model through increased activity
on m-wallets.
BR Research Newsletter
“Logistics industry will soon see a boom”
Mohsin Khalid is the CEO of ITC Logistics, a regional transportation and supply chain
provider with operations in Pakistan & Afghanistan. He is also currently the Executive
Director of Ittehad Steel group, a Pakistani conglomerate with interests in steel,
logistics and renewable energy.
In a short career span Mr. Khalid has held several leadership positions both in the
public and private sector. He is a former President of the Islamabad Chamber of
Commerce & Industry, and also a former Chairman of the Islamabad Electric Supply
Company.
Mr. Khalid has also served on the Board of Directors of several public organizations
and corporations including the Islamabad Stock Exchange. He currently sits on the
Board of BMA Capital and the Overseas Employment Corporation of the
government of Pakistan.
In this interview with BR Research, Mr. Khalid talks about the business he runs, his
motivation to venture into logistics industry, and also about the overall dynamics of
the logistics business in Pakistan. Below are edited transcripts.
BR Research: Tell us something about your company.
Mohsin Khalid: ITC is fundamentally a dry cargo logistics company that
provides logistics services to blue chip companies like PSO, Nestle and Engro
among others. Take the case of transporting bottled water to the retail
shelves; it involves a whole supply chain between the product leaving the
factory floor and getting it onto the retail shelf. That’s where we come in. This
happens for literally everything that is on the shelf, be it bottled water, milk,
washing powder, soaps etcetera that needs to be transported via container
or truck and distributed to central hubs or retailers.
We are a young company; just 6 years old, while the other big boys, mostly
based out of Karachi, have already entered their second generation in
logistics. Even in terms of fleet size, we have around 50 vehicles, compared
to the giants some of whom 300 vehicles or more.
6 | BR Research Newsletter | Monday, October 13, 2014
BRR: How big is NLC’s fleet size and how does it operate?
MK: On paper NLC’s fleet is sizeable. But what does it actually do itself?
Afghan transit trade’s entire business is technically handled by one
company which is NLC, but it does not employ a single truck of its own to do
that. All of that business is carried out by sub-contractors or what in NLC’s
language are called “Hired Mechanical Transport” or HMT. NLC just acts as
a broker.
Most of NLC’s business is proprietary
business; business that it gets without
even bidding. But their freight business
still runs in a loss. It’s their multi billion
rupee investments in construction and
other areas that save its bottomline.
BRR: Can we say that the freight business
has been hijacked by NLC?
MK: NLC’s role in destroying the logistics
business is the same as Pakistan Steel
Mill’s role in hampering the steel
industry’s growth. They destroy the entire
industry’s economics to protect a single
entity. Government policies are geared
at protecting its interests alone, not the
industry as a whole. The Finance Minister
is the chairman of NLC board. Imagine.
NLC does not even need to bid for contracts. If NLC wasn’t in between, the
industry today would have had large companies who would be serious
regional players.
BRR: What motivated you to get into this business?
MK: We wanted to enter into the services business particularly into a
segment with a high growth trajectory that followed the population growth
BR Research Newsletter
of the country. Also, it needed to be based on indigenous domestic
demand. So two segments caught our attraction, one was cigarettes and
the other was logistics. We settled on logistics since the market wasn’t
dominated by any one, or two, large players.
We started with our first lot of seven trucks, and fortunately it worked out well
for us and we were able to get good contracts right from the start because
we took a new, professional approach to supply chain that our clients
appreciated. We hired professionals, our fleet was new, we paid our drivers
well, service and safety was everything. And therefore we got the results.
BRR: How did freight industry develop over time and what proportion of the
industry is informal?
MK: Road freight has always been there. But the industry flourished because
freight shifted from trains to road. The positive change that’s happening in
the industry now is that the fleet operators are getting professional and more
corporatized. For example we’ve just formed a body of corporate fleet
operators called FOAP which has around 30 members. But sadly, still only 10
percent of the industry is corporate and the remaining 90 percent is semiformal or informal, which puts the corporate players at a dis-advantage.
BRR: How are you affected specifically by this informal economy?
MK: The problem starts with basic economics i.e. the price structure. We
can’t quote competitive prices when competing with the informal sector.
And most clients are price sensitive. For us, we have to take into
consideration taxes, social security, EOBI, vehicle permits, registration, safety
and so many other issues. Informal dealers are able to quote cheaper rates.
The client just wants to ship the product from one place to the other. He
doesn’t care what your costs are. He just wants to keep his distribution costs
in check. It’s not that blue chips go with informal operators, but they
compare prices with them. It kills the margin, the margins required for real
improvement in the industry in terms of service delivery, efficiency, systems.
The entire industry is operating at dirt cheap rates. At the end of day, the
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price is still being driven by the informal sector because that makes up the
major part (85%-90%). So we have to match their rates irrespective of what
the real costs are.
In this context, I believe that the removal of diesel subsidy was the best thing
that could have happened to the logistics industry in the long-term. When
diesel was subsidized and cheap, it made up such a small portion of
operating costs, nobody bothered about it. Nobody cared about efficiency,
weight, loads, routes etc. The efficient and inefficient were all equal. After
the removal of subsidy and diesel coming to a price of Rs100-110, diesel’s
cost component became so huge that efficiency became critical, essential
and inefficient trucks like Bedfords’ gradually became obsolete because of
sheer economics.
BRR: What is the scope for vertical integration?
MK: Long term survival of all fleet operators lies in expanding the pool of
services they offer. Because if I continue to be only a truck service provider
then eventually I will be taken over by the pricing power of informal sector
because unfortunately at some level I have to compete with them. So until
you add some value and differentiate yourself, you won’t be able to
compete. So you got to offer multiple solutions, like warehousing, or
packaging, consolidation, or just great technology.
BRR: Why is it that logistics firms are not very much interested in clearing
business?
MK: Some logistics companies offer customs clearing and similar value
added services to clients. Some like Agility, DHL, do it as part of their global
product portfolio. But there is not much money to be made in customs
clearance and freight forwarding as such. But some clients do demand onestop shops or one window solution for all their logistics needs, due to which a
few companies have to offer such services.
BRR: Besides one-stop shops, what other major changes might drive the
industry?
BR Research Newsletter
MK: There’s a retail boom taking place in Pakistan. This will bring many
positives for the logistics industry. Big retail brands like Al-Karam, Gul Ahmed,
Servis, etc have hundreds of outlets and are continuing to expand and
nothing happens without logistics. Even if Amazon wants to sell something on
the internet, it needs a very solid logistics backbone. So we’re targeting new
industries that are expanding including e-commerce and retail segment. I
believe, with e-commerce and retail industry booming, logistics industry is
also going to witness a significant boom in the coming years.
BRR: Is there any potential in logistics business between Pakistan to
Afghanistan on to Central Asia?
MK: Honestly, we are not focusing on that area. It’s not a priority for us. We
have done our workings, studies, route analysis and cost analysis on this and
to my understanding there are certain issues. Like Pakistan is not a signatory
to the Carnet regime; the TIR, where a truck is able to have a legal
document that takes it seamlessly across borders, alignment of loads, road
rules freight stations etc. Until these kinds of things happen the market will
never take a quantum leap for us to be interested, though things will
continue to happen sporadically, in bits and pieces.
BRR: And how do you see the potential of the so-called Pak-China trade
corridor?
MK: It’s a medium to long-term potential; five years at the minimum.
Meanwhile, it will only remain a peripheral opportunity, but not large
enough. It will take a lot of time and effort and infrastructure to translate into
a notable size to be a mainstream segment or to become a viable business
opportunity.
8 | BR Research Newsletter | Monday, October 13, 2014