Category: Blog

This blog post is based on two policy talks held at CDPR entitled, “Bringing Pakistan’s Tech Sector to the Forefront” and “Realizing Pakistan’s IT Export Potential“. 

Pakistan’s tech industry is shaping up. The country produces +20,000 IT graduates each year, it offers a domestic market of over 200 million, and has churned over 700 tech start-ups since 2010 of which close to 70% are functional even today. The industry has the ability to provide a fundamental boost to the country’s economy, especially in this time of fiscal restraint.

Several college graduates and young entrepreneurs are dreaming of the next billion-dollar idea. This conception is not far-fetched. A group of young Estonians developed Skype in 2003 which was eventually sold to Microsoft for $8.5 billion in an all cash deal! In fact, all tech giants across the world today have had humble beginnings. WhatApp was sold to FaceBook for 19 billion dollars, almost three times Pakistan’s defence budget. Such is the scope and potential of this sector.

On the flip side, statistics say nine out of ten startups are bound to fail. Those that succeed do so because of the right product fit. They have ideas that tap into a real market need and create innovative products that simplify lives. How do they make the right product? If their product is removed from the market, it will be sorely missed. This is when they have hit the jackpot.

Pakistan’s success story so far

With latest technology and access to faster internet, the tech industry is producing services and products, across sectors, that are increasingly more dynamic and revolutionary. The industry’s access to seed, private equity and venture capital funds is also improving.

Patari, an online streaming application and a household name for music lovers, made headlines when it secured $200k in seed money in 2017. In 2015, Eatoye, an online food delivery service, was acquired by one of the world’s largest food portals, FoodPanda and continues to expand across Pakistan. More recently, Airlift nabbed $12 million in Pakistan’s largest Series A funding – a company’s first significant round of venture capital financing – ever for a startup in all of South Asia. It is a ride-hailing startup which connects passengers with buses on a fixed-rate, operating in Pakistan’s largest cities.

These prominent app-based startups and many more cater to the domestic market, are part of the local economy and form an important element of the tech eco-system. There is another major component of this sector which caters to the international market (through software development and business process outsourcing) and is deeply embedded into the global value chain. However, most Pakistani firms provide low value products and services. Despite this, IT exports reached the billion-dollar mark in 2017-18, with software exports comprising $700 million. In fact, IT experts place the total exports at $2.5 billion (incorporating an estimated $1.2 billion earned by freelancers). This is however still much lower than India’s exports at approximately $125 billion for the same year.

Rising exports and domestic success stories show the immense potential of this sector. But two fundamental constraints are limiting this potential – restricted supply of skilled labor and lack of a supportive ecosystem.

Skilled workforce

The tech industry is highly skill and knowledge intensive. It may be able to withstand disruptive energy supply, but it will not flourish without an adequate supply of skilled labor.

Official statistics confirm that at least 10,000 IT graduates enter Pakistan’s workforce each year. At the same time Pakistan also ranks much better in cost than most lower-middle-income countries group. The average annual cost of a software engineer in Pakistan is one fifth of the cost in USA and Europe^[1]. However, of the total graduates, just under a thousand graduates are products of Tier 1 universities and of these around half meet the skills requirement for specialized input needed by the industry.

The tech industry relies on skills broadly of two kinds – technical/ specialized skills to develop and design IT products and skills to develop innovative business models and marketing strategies. One without the other will continue to constrain Pakistan’s access to a market for high value products.

The academic path to becoming a tech professional is not well defined. Product development relies on a workforce with more refined skill set, based on knowledge about product design, technology and marketing. Pakistan is not able to develop a niche in gaming (which is 80% of the revenue of Google and Apple Store) because its workforce lacks knowledge about game development and design.

At the same time, it needs creative minds that are able to come up with innovative solutions to problems put forward by international clients. Basic software development only requires writing codes towards an end-goal already defined by the client and therefore does not enable/require the workforce to become creative.

Since the required skills do not exist amongst Pakistani graduates’ firms, those wishing to capture the high-end market – have to also invest in skills development. In addition to a product risk (i.e. whether they have the right product fit in the market) the companies also end up facing an execution risk (due to inadequate skills).

The country also lacks creativity in developing innovative business models, regardless of how technically sound a product is. Developing scalable business models is a first crucial step towards attracting large sums of money or venture capital funds.

Developing good business models and creative products is only possible if the firms are supported by a strong educational/ training system. At the moment very few universities focus on subjects like entrepreneurship, computer design or branding which can help entrepreneurs when they start on their own and enable them to add value to their products. Pakistan also lacks a strong cohort of tier 2 universities.

Overall, the multifaceted nature of producing IT products/services requires a multi-disciplinary education. Currently, Pakistan’s education system does not nurture this kind of thought process or encourage innovation.

Having the right ecosystem

The country hasn’t yet created an ecosystem where an entrepreneur is born, raised, and educated in Pakistan and will go onto register his or her company in Pakistan and make it big. Young Pakistani entrepreneurs struggle to develop their ideas. At the same time, they are unaware of how to operate in the local market and how to attract foreign investors.

Pakistan has a thriving freelance industry. Globally it is ranked 4^th in terms of number of freelancers engaged in software development and technology[2].

Does this really demonstrate success for this sector, or does it indicate the industry’s failure to absorb the large number of graduates and provide them with gainful employment? And unless this talent becomes part of the formal economy, its growth will always remain constrained.

Access to funding is a significant bottleneck. There is only $0.06 per capita of venture capital money in Pakistan per year, while Bangladesh has $0.07, Nigeria $0.18 and India $3.72. In 2017, only nine Pakistani startups received venture capital funding compared to 34 in Nigeria, 38 in the UAE and approximately 790 in India. Overall, Pakistan’s tech startups raised under $30 million in 2018 compared to countries such as Indonesia (excluding unicorns^[1]) raised over $274 million in 2018.

The issue is two-fold: regulations make it cumbersome to set up a fund inside Pakistan; regulations make it hard to get money out of the country.

Global venture capital investors find the process of investing, having shares issued and registered riddled with red tape. Approvals are required from various government departments such as the Securities and Exchange Commission of Pakistan, Competition Commission of Pakistan and State Bank. This would put off anyone who has the option to invest elsewhere in the world. Due to over-regulation investment funds choose to operate from outside of Pakistan.

Foreign payments are heavily regulated and offered at unfavorable exchange rates. Pakistani startups prefer to route foreign funding using alternative means (such as register the company abroad) or keep the funds overseas.

Lack of recognized international payment gateways especially impacts smaller businesses as larger players rely on banking channels for their transactions. Absence of recognized payment gateways such as PayPal also make it difficult for new clients to trust young entrepreneurs, whether individuals or companies.

What more can be done?

Pakistan may have been slow to catch on but there is now wide recognition of the significance of this sector for the country’s economy. The government is carrying out initiatives and rolling out policies that are highly supportive of the ICT space in Pakistan. It has proposed a regulatory structure, though yet to be implemented, that intends to boost both the outward-looking and domestic ICT industry by providing an enabling environment.

The new government has established a 17-member task force on IT and telecommunications comprising members of the tech sector to advise policy changes and develop strategic plans to strengthen the technology ecosystem of Pakistan. In terms of execution progress remains slow.

Pakistan also approved its first ever Digital Pakistan Policy in 2018 to transform IT and other sectors of the economy. Under the landmark policy, the country aims to double its overall IT exports by 2020. However, this policy is not accompanied by a time-bound plan.

Pakistan has now launched a Digital Pakistan initiative, aimed at giving a comprehensive cover to government’s multidimensional objectives, such as job creation, ending corruption and supporting and promoting the economy. Underpinning this campaign are the five core pillars of the strategy: access & connectivity, digital infrastructure, e-government, digital skills, training & innovation and entrepreneurship.

Start-up incubators and accelerators are also springing across Pakistan run by both the public and private sector to support development of spinoffs and improve access to financial and technical resources. At least 20 incubators have been established in collaboration with Plan9 – a PITB run technology incubator. So far, it has created 1400 jobs and made an investment worth $5.8 million, with over 180 startups now graduated.

Initiatives have also been taken to ease tax regulations to encourage investment in this sector and make entry simpler for startups. The government also approved licenses for Pakistan’s first Private Equity and Venture Capitals funds. There has also been an agreement with South Korea to create a technology park in Islamabad.

However, to fully realize the potential of this sector, Pakistan needs to remove the core obstacles that limit growth. Despite all the positive reform efforts, an overarching IT policy is still missing. Convergence to a central policy document, will help avoid overlap between the various policy actors and help assign clear responsibility to each player.

Secondly, government should open up procurement for the private sector to encourage the tech industry to build their portfolio, get exposure to large scale projects and pitch for similar projects in the foreign market, apart from creating more jobs. Some big successes can be seeded on their back, making international venture capital sit up and take notice.

Improving the labor supply is a long-term goal. However, some quick fixes can be implemented to partially relieve this market constraint. Pakistan can create innovation clusters where industries and universities can come together to form specialized research hubs. Pakistan also needs to improve its learning by doing culture as most graduates take up to a year or more to fit into the industry. Finally, the higher education commission needs to take some serious decisions about the role it can play in promoting a culture of innovation, creativity and entrepreneurship.

Pointing out that Pakistan needs to advance on all these dimensions is neither news nor helpful development advice unless it is accompanied by a time-bound action-oriented plan that delineates responsibilities. The Digital Policy recently announced must be supplemented with a plan of action, with short to medium to long term plans on how the core set of objectives can be achieved with assignment of responsibilities across various stakeholders.

 

Zara Salman is the Senior Research Associate at the Consortium for Development Policy Research (CDPR) and Hina Shaikh is a Country Economist at the International Growth Centre (IGC) in Pakistan. 

 

[1] A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion.

[2] To put it briefly, incubators provide a fully equipped space for entrepreneurs to nourish and execute their start-up and provide mentoring and networking sessions. Whereas in an accelerator, the start-up is given a specific amount of time and a small investment to make it work.

[3] A technology incubator (named after the first free-share operating software by Bell Labs) was launched in 2012.

For the past several months, in Lahore and cities nearby, climate anxiety, or distress caused by environmental change, is at its highest. This is due to the pervasive health and environmental emergency brought on by dangerously high levels of toxicity in the air that have crossed all critical thresholds.

Pakistan is ranked 169^th on global environmental performance and 7^th on the global climate risk index. At least 135,000 people die annually in Pakistan due to health complications arising from air pollution and this is likely to increase. Following advocacy efforts by the international human rights watchdog, Amnesty International, and the civil society to raise awareness of the scale and effect of this crisis, the government is now at last beginning to respond.

The smog crisis not new. It has been several years since the air quality has visibly worsened especially in the months between October to January. Despite the hazardous conditions, the government’s response has been slow. It has been the civil society that has taken the lead in informing citizens about the sources and impact of polluted air. The government’s initial stance was to place blame on neighbouring India. While smog travels to Pakistan when post-harvest crop stubble is burnt in Indian Punjab exacerbating the issue, it is not solely responsible for Punjab’s air pollution. In fact, Pakistan’s Punjab follows the same agricultural protocol. Furthermore, it is important to clarify that the air quality problem has been erroneously dubbed as the Lahore smog – it is a regional environmental failure extending from Peshawar to Dhaka.

The Consortium for Development Policy Research brought together a panel of experts to discuss this issue, its cause, the ensuing health emergency and policy responses. The year 2019 saw for the first time, a surge in intellectually informed discussions across the most afflicted cities of the country, drawing upon evidence from research done by the World Bank, the Food and Agriculture Organisation (FAO) and the air quality data being provided by Air Visual, a citizen-led air monitoring application operating in several countries. Availability of such foundational research on what air pollution is, what it does and how it is caused has enabled a vast range of stakeholders to join hands with a consensus on the steps to be taken collectively, going forward.

Currently, the Government of Punjab has four high-quality air monitors operating across Lahore district – the Met Station on Jail Road, Gulberg, Township and Wagah Town. There are also monitors installed (one each) in Gujranwala, Faisalabad and Multan. But these are too few to provide a reliable picture of the air quality both within cities and across the province. According to monitors in Lahore, the worst air is found at Wagah Town situated close to the Indian border, characterized by unpaved roads and a hub for the steel industry. The Environment Protection Department (EPD) in Punjab recognizes that the steel industry does not have mandatory pollution control equipment, such as dry scrubbers, installed, to remove the tiniest and most dangerous particulate matter from their emissions. Cross-border sources of emissions and dust worsen the air quality around this area. The cost of purchasing pollution control equipment is prohibitively high, restricting its use. Government support is thus needed in installing pollution control equipment at factories.

However, the most fundamental cause of air pollution in Pakistan remains the poisonous fumes that emanate from the use of extremely poor-quality fuel in the transport, energy and industrial sectors of the country – at least 80 percent of the critical levels of year-round air pollution can be attributed to these sectors. So far, Pakistan has been importing adulterated, low quality fuel consisting of high Sulphur content in coal and diesel. It uses Euro-2 diesel, which contains 500 parts per million (ppm) of Sulphur, releasing high levels of carbon monoxide (CO), as well as the life-threatening PM 2.5 pollutant. CO is primarily an outcome of incomplete combustion, due to substandard fossil fuel engines.

The recently announced government-sanctioned vehicular emissions checks for public sector vehicles is a necessary step but insufficient without an outright ban on the import and utilization of bad fuel. Mandating the use of only high-quality fuel is a first critical step in addressing this issue. The government is now setting the policy framework to take this step.

Moreover, EPD has only been able to convert 10 of the 157 brick kilns into Zig Zag-technology kilns, which operate at elevated productivity levels, resultantly emitting much less fumes. The remaining traditional brick kilns continue to operate in environmentally damaging ways, even using plastic and rubber as fuel.

However, the government’s policy of taking punitive action against the agricultural, industrial, energy, and transport sectors for emitting poisonous gases and particulate matter is perceived by many experts as unfair. The stance is rooted in an outdated approach towards regulation called control and command. The idea of imposing fines and bans on individuals for not conducting their livelihoods in greener ways is unjust when the state has not provided alternate choices. Instead of incentivizing individuals to switch to cleaner energy and technology, command and control environmental laws seem to hamper economic development. This approach has now become obsolete in most of the developed world.

An alternative and more effective approach can be the use of quantity-based environmental regulations such as a cap and trade system. Such a system would allow polluting industries to negotiate amongst each other the extent to which each will pollute given their emissions-reducing costs in order to remain within the combined upper limit of emissions permitted by the government. Another option can be the use of environmental regulation that is information-based, entailing naming and shaming the worst polluters by publicizing this data on public platforms. This could eventually create competition among firms to cut down emissions. The success of such strategies is reliant on easy access to and objective utilization of existing data and on-going research, as well as provision of real-time, curated data on multiple aspects related to air pollution. For such regulations to effectively work, this information has to feed into the national discourse.

The protocol set by the Clean Air Act of US establishes mechanisms to utilize data for devising evidence-informed laws to keep air pollution levels within globally accepted thresholds. This would entail that Pakistan, currently factoring in only 6 pollutants to measure air quality, include all 9 globally identified pollutants to effectively determine healthy air. As a next step, the legitimacy of the real-time and forecast data provided by the Air Visual app showing the air quality index of cities across Pakistan should be officially acknowledged as an additional resource, apart from the government-generated data available through the EPD. Though not always accurate, the Air Visual data can provide a strong base for awareness and used as a policy tool to create democratic consensus for providing a regulatory framework that ensures everyone’s right to breathe clean air and their right to information.

The official stance on measuring air quality is to use a rolling average of the daily air quality rather than measuring it at one point in time. The rolling average, provided by government monitors, is calculated by allowing pollution levels at different times of the day to be diffused with air that is away from an emission’s source, thereby giving a more realistic depiction of air quality in an area. Though the science is sound, this point becomes moot due to the insufficient number of high-quality monitors installed across the province.

The Finance Minister in his additional role as Chairperson of the Smog Monitoring Committee stated that the government has recently acquired a loan of $273 million to systematically address all environmental concerns in Pakistan. Taking stock of the data pointing at poor fuel quality as the main culprit for the heavily polluted air across Pakistan, the incumbent government has formulated an intensive strategy. There will be an immediate leap from the currently imported Euro 2 quality fuel to the import of Euro 4 and by the end of 2020, only Euro 5 fuel will be imported, which contains around 50 or less ppm of Sulphur content as opposed to 500 ppm – this will help decrease air pollution by up to 90 percent. Further, domestic oil refineries will be forced to shut down unless they upgrade their oil quality within three years. Moreover, a more ambitious intention is to incentivize the introduction of electric or hybrid vehicles for private and public transport in 2020 with a special emphasis on fueling buses with CNG, and finally, technology to burn crop stubble in steel furnaces will be imported to minimize open fires. Alarmingly, the oil industry has been persistently resisting government orders to reduce manganese content in its fuel – an extremely harmful additive for human health – even after a complete ban on adulterating fuel with this substance was levied in May 2019.

Cognizant of the fact that Lahore has lost 70 percent of its green belts in the past decade, the government is set to make an overarching move by building an urban forest in Lahore spanning 60 thousand canals.

All these steps are crucial for developing climate change resilience in Punjab and countering the ill-effects (including the worsening air quality) of fast paced urbanization.

It is now a waiting game to see whether these interventions are carried out successfully or not and how fast improvement will begin to take root in terms of balancing the country’s health, environmental and economic interests.

Sharmin Arif is the Communications Associate at the Consortium for Development Policy Research.

This policy brief is based on a study conducted by the researchers through Oxford University and Lahore School of Economics, and funded by the British Academy and Lahore School of Economics. The study is entitled “The Downside of Discretion” and is available at sites.google.com/site/kvyborny.

Pakistan’s Benazir Income Support Programme is one of the world’s largest public assistance programs, issuing a regular Unconditional Cash Transfer to 7 million recipient households across the country. When BISP was first initiated, parliamentarians were asked to identify and nominate poor households for the program. Then, the Government of Pakistan worked with advisors in aid donor agencies to develop and implement a Poverty Scorecard (Proxy Means Test) to select the poorest recipients, using a simple formula based on their assets.

This policy brief summarizes the findings of a research study on the effects of this reform to use the Poverty Scorecard. The study looks at survey data from thousands of households, and compares how BISP was distributed as the Poverty Scorecard reform was rolled out. It finds that the reform that implemented the Poverty Scorecard:

• Improved targeting by reducing favoritism for politically connected households. Before the reform, households from the home villages of winning politicians were two to four times (200-400%) more likely to receive the transfer than those in rival politicians’ villages. After the reform, there is a large and significant reduction in favoritism for the best-connected group – the politician’s own caste/clan in his home village. These households no longer receive any advantage in getting the BISP after the reform. Favoritism was reduced across parties and for powerful senior politicians as well as junior politicians.
• Improved targeting by reducing BISP transfers to wealthier households, such as those who have finished (pakka)houses or who are highly educated.
• Increased welfare by 15% by targeting poorer households who benefited more from the funds, even after accounting for the administrative costs of the Poverty Scorecard survey (National Socio-Economic Registry)
• Improved public approval of social protection programs by 40%.

Before BISP, many governments in Pakistan each introduced a new transfer program, in part in response to favoritism in previous programs. This led to inconsistent coverage, making social protection ineffective as a safety net. BISP was the first social protection program in Pakistan to adopt a completely objective, rule-based system for selecting recipients.

The study shows that the investment in the Poverty Scorecard / National Socio-Economic Registry and the commitment to an objective targeting system has paid off by making BISP pro-poor and resistant to political favoritism. The findings suggest that the government should build on BISP’s success by expanding the use of the NSER for identifying beneficiaries across programs through the Ehsaas initiative, and make this system accessible to provincial governments and other development partners to expand the benefits of this investment.

 

Kate Vyborny is Associate Director, DevLab and Research Associate, Department of Economics, Duke University; Visiting Fellow, Lahore School of Economics.

Muhammad Haseeb is a Ph.D. candidate at the University of Warwick and former Research Fellow, Lahore School of Economics.