Investment opportunities in Pakistan

ZoomkawalaFollowing is the text of an exclusive interview of Saifudin N. Zoomkawala published in Eurasia Review. He is Chairman EFU General. He joined EFU General after graduating from Institute of Business Administration (IBA), one of Pakistan’s most prestigious business schools.


Shabbir Kazmi: What is your opinion about Pakistan’s economic potential?

Saifuddin N. Zoomkawala: To begin with I will say Pakistan enjoys enormous potential. It is a market comprising of a population of 200 million people belonging to different income groups, some enjoying substantial income and others not being equally blessed. Agriculture is Pakistan’s forte and industrial infrastructure is also reasonably robust. Textiles and clothing contribute nearly 60 percent to the total export of the country. Pakistan is a natural corridor for trade and energy supply. It is the gateway to Central Asia and three of its deep sea ports, two in Karachi and one at Gwadar are capable of handling all sorts of cargo. Pakistan has been offering the transit trade facility to Afghanistan for nearly six and a half decades.

Over the years, a mid-country refinery has been established near Multan and two pipelines have been constructed to handle black and white oil products. The TAPI gas pipeline will also pass through Pakistan and allow the country to draw agreed quantity of gas that on one hand will increase overall availability of gas in the country and on the other hand enable Pakistan to earn millions of dollars as transit fee.

Overseas investors have shown keen interest in establishing crude oil refineries in Pakistan, mainly for exporting POL products to the neighboring countries. Lately, Chinese investors have shown keen interest in acquiring textiles and clothing units operating in the country. Enhanced gas availability will meet the full demand of fertilizer plants and make the country self-sufficient in urea production and also help in earning extra dollars by exporting 1.2 million ton exportable surplus. There also exist facilities to produce and export substantial quantity of ethanol.

SK: How do you review the performance of incumbent government headed by Prime Minister Nawaz Sharif?

SZ: Last year an elected government completed its full term and the incumbent government headed by PML-N Chief, Nawaz Sharif came into power. During the term of the previous government, the entire world experienced financial crisis and Pakistan was not an exception. Due to economic recession, especially in the United State and the European Union, being major buyers of ‘Made in Pakistan’ products, country’s exports remained subdued. Situation in the Middle East and North Africa (MENA) remained highly volatile and crude oil price touched a record high level of US$147 per barrel.

Since Pakistan’s energy mix is highly skewed toward fossil oil, the country also witnessed accumulation of huge inter-corporate debt because economic managers were reluctant in passing on the full increase in the cost of electricity generation to consumers.

Accumulated payables of the energy sector touched nearly half a trillion rupees or US$5 billion. With power plants running on lower capacity utilization electricity outages (planned load shedding) not only economic activities in the country were subdued, but Pakistani exporters were also not able to compete in the global markets.

Granting GSP Plus status to Pakistan by the European Union is likely to have a positive impact on the country and people are thankful to the Union for this goodwill gesture. The Prime Minister’s economic team soon after coming into power introduced policies aimed at accelerating GDP growth rate and also to overcome those structural weaknesses that had developed due to ‘War on Terror’ being fought in Afghanistan. This war had not only serious impact on Pakistan’s economy, but also upset the social fabric of the society.

SK: Will the efforts of incumbent government for accelerating GDP growth rate yield the desired results?

SZ: As I stated earlier, the biggest challenge for the incumbent government remains overcoming ‘looming energy crisis and resolving the circular debt issue’. Soon coming into power the government released over half a trillion rupees to clean up the circular debt. The inter-corporate debt had reduced electricity generation to around 15,000MW as against an installed capacity of over 28,000MW in the country. Out of this bulk of electricity generation is being contributed by independent power plants (IPPs) operating in the private sector. The Government of Pakistan (GoP) has guaranteed minimum purchase of electricity and also fuel supply. Therefore, honoring the commitment was of prime importance to pass on the message of comfort to the existing as well as the prospective investors.

Over the last few years follow of foreign direct investment (FDI) remained low in the aftermath of global financial crisis as well as because of geopolitical conditions prevailing in the region. Lately, Chin has shown keen interest in the construction of nuclear power plants in Pakistan as well exploitation of Thar coal. The work is going on at a fast pace and once the country is able to overcome energy issue, fresh investment will flow to Pakistan. It is necessary to mention that Nawaz government is trying to create a conducive working environment. The business community has reposed its confidence in the policies.

SK: What key initiatives have been taken by the present government?

SZ: In the aftermath of the 2008 global financial crisis Pakistan faced a precarious balance of payment situation. Entry into a standby arrangement with the International Monetary Fund (IMF) has provided some breathing space. When Nawaz Sharif became Prime Minister of Pakistan for the third time, country’s foreign exchange reserves were depleting fast due to high oil and fertilizer import bill. Therefore, it was considered prudent to once again approach the lender of last resort and Pakistan’s request was honored. Disbursement of funds by the IMF helped in containing further erosion of paltry reserves and depreciation of Pak rupee value against the leading currencies.

The recent extension of US$1.5 billion loan by the Saudi Arabia has also helped in building foreign exchange reserves to a level required by the IMF. Finance Minister, Senator Ishaq has fulfilled his promise to bring down the exchange rate to Rs96 to a dollar. The changed scenario has reversed rupee depreciation and it is expected that in the days to come POL prices as well as electricity tariff will be brought down. These measures will facilitate in bringing down inflation rate in the country and making local exporters competitive in the global markets. It is expected that once Pakistan succeeds in overcoming the energy crisis and ensuring uninterrupted supply of electricity and gas at affordable cost, investors will be able to focus more on productive activities and make new investment. Containing budget deficit and resolving overcoming current account problem will help in further reduction in interest rates.

SK: What are the key threats and opportunities for insurance sector in Pakistan?

SZ: Over the years insurance penetration has remained low, but changing weather conditions resulting in torrential rains and deluge cause huge economic losses every year. This risk has been partly covered through credit insurance of more than Rs350 billion (US$3.5 billion) extended to farmers annually. With increased participation of the private sector and extension of credit by financial institutions to other segments of the economy all sorts of risks likely to be faced by the country will have to be mitigated. It is encouraging that with the growth of Islamic banking in Pakistan Takaful business, Shariah compliant risk mitigation is also growing in the country, but conventional insurance companies continue to enjoy the lion’s share in total premium collected in the country.

SK: What role do the insurance companies play in boosting GDP growth rate in Pakistan?

SZ: In Pakistan insurance companies play two key roles: 1) risk mitigation and 2) capital formation. Every year insurance companies mobilize billions of rupees premiums. EFU group comprising of three companies, EFU General, EFU Life Assurance and EFU Allianz collectively enjoy the largest share in total premium collected in the country. Insurance companies also invest a substantial portion of premiums collected in the shares of listed companies. Thus, on one hand, provides liquidity to the market and on the other hand helps in price discovery. At present the benchmark of Pakistan’s stock market KSE-100 index is inching towards 30,000 levels. As the government intends to divest shares of state owned enterprises, size of free float will further increase. It is believed that KSE-100 index may breach 30,000 level over the next few months if the right impetus are offered.

SK: Tell us more about the history of the EFU spread over more than 85 years.

SZ: The EFU Insurance Company was established in 1932 by some Muslims in India that included Abdul Rehman Siddiqui, a politician from Bengal and the late Agha Khan, the present Agha Khan’s Grandfather and the Nawab of Bhopal. These men along with others created an insurance company because at that time there was no such entity owned by the Muslims in this part of the world. The sponsors felt they had to reach out to the Muslims in India to help them get jobs as well. After partition when the Muslims got their own country, it was natural for EFU to shift its head office to Pakistan. In 1989 EFU General generated premium of about Rs340 million that reached Rs14 billion for the year 2013. It announced to pay a percent dividend for the year ended 31st December 2013. EFU Life Assurance also collected Rs14 billion gross premiums and paid 65 percent dividend.

SK: Tell us more about the EFU saga.

SZ: EFU’s history is spread over 85 years and the Saga explains the dedication of late Roshan Ali Bhimjee and his associates. After the death of Bhimjee two of his sons Rafique and Muneer have continued the legacy. Honorable Roshan Ali, the biggest insurer of Pakistan, is not only my mentor, but many of the key personalities of insurance industry in Pakistan have been groomed by him. He was a man of vision and a very patriotic Pakistani. EFU had its head office in Mumbai but it was moved to Karachi immediately after Pakistan got independence.

The history of EFU can be divided into two distinct eras: 1) from commencement of life insurance business to the nationalization of life insurance by the GoP in the seventies and 2) formation of EFU Life Assurance, once the government allowed the private sector to also establish life insurance companies. At present EFU Life Assurance could be termed the largest life insurance company operating in the private sector. EFU Allianz is also the only specialized health insurance company operating in Pakistan. These years can be termed most eventful because of persistent and quantum growth in premium collected and also huge investment made in the shares of companies listed at the local stock exchanges that is also evident from enormous growth in balance sheet size of the three companies.

SK: Please unfold the story from birth of EFU to nationalization of life insurance business in Pakistan.

SZ: EFU’s long history needs to be read by every budding entrepreneur and business executive. It has been compiled by Wolfram W. Karnowski and its title is ‘The EFU Saga’. Karnowski remained on the EFU Board of Directors for a long time. This book spread over about five hundred pages explains the making of an institution within the context of the creation of Pakistan. After making a humble beginning in undivided India, EFU became the largest insurance company of AfroAsia, excluding Japan. As I stated earlier, it was the vision, dedication and hard work of Bhimjee, his associates and of course the employees of EFU companies that have created the history, which may not be easy to replicate. Bhimjee was not disappointed at the nationalization of his business and often used to say “The government can nationalize our business, but it can’t nationalize my entrepreneurship and brains of my associates”. He proved this true once again when the GoP allowed the private sector to establish life insurance companies.

SK: How would you describe the journey from nationalization to becoming the largest risk insurer in Pakistan?

SZ: After nationalization of insurance business in Pakistan Bhimjee established insurance business in the UK, Saudi Arabia and UAE. He managed the business prudently and successfully in highly competitive markets, but ultimately came back to Pakistan, his homeland when the conditions changed. Being the largest believer in Bhimjee legacy, I with the help of the EFU Board of Directors and employees, whom I prefer to call ‘EFU Family’, have taken the beacon of light forward. I joined EFU General after graduating from Institute of Business Administration (IBA), one of Pakistan’s most prestigious business schools. Bhimjee reposed confidence in me and my more than four decades association with EFU has taught one lesson. “We don’t sell insurance cover, but claims”. The prompt payment of claims, whenever these are submitted, help our clients continue their business as usual.

SK: What is the outlook for insurance companies in Pakistan?

SZ: Keeping in view low insurance penetration in the country, I am confident the sector enjoys an enormous growth potential. While it may be true that players will have to redefine their business model, but they also need support of the government. With the changing business environment and emerging risks the country needs stringent regulatory framework. However, the objective cannot be achieved without the creation of supporting environment. The GoP has recently announced Roadmap for Insurance industry and players are getting ready to meet the confidence reposed in them.






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