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True Believer

Pakistan is not for the timid. But First Capital and Worldcall's CFO argues that its economy is built to thrive.
Karen Yap and Tom Leander, CFO Asia
February 29, 2008

Sardar Ali Wattoo, CFO of First Capital and Worldcall Group, a Pakistani conglomerate, has no difficulty remembering what he was doing on the afternoon of December 27. When Benazir Bhutto was assassinated in Rawalpindi, Wattoo was in Lahore watching as investors piled into a US$25 million Islamic bond floated by Pace Pakistan Ltd., one of First Capital's fastest growing businesses. The subscription period for the bond was due to close the following day. Within hours of the murder, nervous U.S. investors — funds that targeted South Asian growth companies — were calling him. "Would the flotation collapse?" they wanted to know.

Riots tore through Pakistan's cities, and angry crowds burned stores and smashed bank windows. The Lahore and Karachi stock exchanges dived the following day, and Wattoo began to get the uneasy feeling that support for his businesses was evaporating. Omantel, the Omani state telecom carrier, planned to buy a US$200 million stake in WorldCall, First Capital's fixedline telecom business that specializes in everything from payphones to broadband service. They put the investment on hold, fearful of travel to Pakistan. From Dubai, where Wattoo had been in the final stages of listing Pace Pakistan, the company's real estate unit, on the Dubai stock exchange, an official from the National Bank of Dubai warned that he was withholding the authorization necessary for the listing until stability returned.

Wattoo met with his boss, First Capital's founder Salmaan Taseer, an influential businessman with a political background. Taseer is currently on leave from the business, seconded to Pakistan's interim government as caretaker minister of industries. Surely, they could build a case for the company's stakeholders to hang fire. Taseer agreed to put his business hat back on and work the phones. Pakistan had been here before, they argued; the economic situation will stabilize and the market will rebound.

And that's what happened. The exchanges recovered their lost ground. Investors regained enthusiasm for the bond, which was oversubscribed by US$13 million. Omantel bought its stake and pledged an additional US$25 million in direct investment. The National Bank of Dubai overcame its jitters and authorized the listing. Pace is due to list in Dubai as of CFO Asia's press-time.

It wasn't the first time that Wattoo had taken his case for Pakistan to the world and won willing partners. "Pakistan is resilient," says Wattoo. "I understand [investors'] reservations, but the economic story is still robust." He adds, "It's a relief that many of our foreign partners can see this, too."

A World of Trouble
Pakistan is not for the faint of heart. Yet it has proven to be one of the world's most counterintuitive of success stories in recent years. Even as CNN broadcasts images of burning embassies, lawless tribal enclaves, and broken bank windows, another Pakistan has warily gained confidence and emerged economically robust. Economic stability has graced the country as the controversial Pervez Musharraf, who took power in a military coup in 1999, buffered his longevity by turning the economy over to pro-market reformers. In this, his regime has been successful. Pakistan's economy has grown an average of 7 percent in the past four years and its booming stock exchanges in Lahore and Karachi have enriched local and foreign investors alike.

To understand how Wattoo and CFOs like him operate in Pakistan is to grasp how finance professionals can survive in a world of both peril and opportunity. They must operate in two Pakistans — one in which day-to-day business goes on normally, and another in which political risk upsets the delicate balance of business.

Pakistan's politics have been molded by divisive and incendiary international conflicts (See "A Torn Nation" at the end of this article). During Benazir Bhutto's first term in office in the 1990s, Muslim extremists gained a foothold in Kashmir and along Pakistan's porous, mountainous border with Afghanistan, where anti-Soviet Afghan rebels became jihadists. In an arms race with India, Pakistan successfully tested an atom bomb in 1998 under Prime Minister Nawaz Sharif, triggering punitive trade embargos that crippled its economy.

But sometimes turbulence has its uses. The attacks against the United States on September 11, 2001 brought big changes to Pakistan. One, ironically, was the start of better economic times. The embargoes disappeared as the United States settled on a policy of engagement and collaboration with Musharraf, who proved very friendly to business. Shaukat Aziz, the finance minister for the early part of Musharraf's term who eventually became prime minister, launched a series of pro-market reforms — including allowing 100 percent foreign ownership of banks — and privatization programs.

"In the Musharraf era, there has been more upward cycle of money getting into the hands of the poor people, allowing them to buy more goods than before," says H. Reza-ur-Rahim, JPMorgan Pakistan's senior country officer and head of investment banking. "Deals started to grow too." JPMorgan advised on the biggest privatization to date, the 2006 sale of a 26 percent stake in Pakistan Telecom to Emirates Telecommunications Corp. for US$2.6 billion.


The ascent of Aziz and a long period of relative stability under Musharraf sparked an economic renaissance. Pakistan became one of the fastest growing economies in Asia. Its stock markets were among the biggest gainers. Since 1999, sales of cars have climbed 20 percent annually, televisions 29 percent, and air conditioners 206 percent. The number of mobile phone subscribers has nearly doubled since 1999.

The economic boom created a middle class — one that trusted business and mistrusted the extremism that is so often the foreign image of Pakistan and its politicians. Young people began to meet in coffee shops, chat on mobile phones, and use the Internet. Many felt that Musharraf was a stabilizer and perhaps only just as corrupt as everyone else that has run the country. Among those who could have pursued opportunities outside the country — like Wattoo — many chose to stay in Pakistan to make their living, spurred by hope and opportunity.

Embracing the Risks
Sardar Ali Wattoo hails from a town not far from Lahore, and qualified as a chartered accountant in 1991, when he went to work for accounting firm PricewaterhouseCoopers. Prior to joining Worldcall, he worked with Nishat Group, an industrial conglomerate, for four years focusing on the finance side of its textile business. He also worked as the financial controller of Kohinoor Energy and Southern Electric Power Company. When Pakistan became part of the nuclear club and nations including the United States and Japan imposed punitive trade restrictions and froze foreign banking accounts, Wattoo contemplated leaving Pakistan. He was working to raise funds for power projects, and thought of parlaying his international experience into a job overseas.

"This was the only time I thought of leaving Pakistan," says Wattoo. "Given the international climate and the sanctions, it was difficult to see how I could grow my career here."

Instead, he decided to join Taseer at Worldcall and First Capital. Taseer had an earlier career as the information minister of Benazir Bhutto's opposition Pakistan People's Party. (His secondment as minister of industries was a concession to Bhutto's party.) The Worldcall and First Capital Group began life in 1994, when Taseer established First Capital Securities, a full services brokerage house, with equity participation from Smith Barney. In 1996, the success of the brokerage allowed Taseer to obtain capital funding to start a payphone business called Worldcall Payphones Limited. That business began to grow rapidly, as the popularity of payphones grew.

Worldcall was on its way to being the multibusiness telecommunications sector operator that it is today when the Pakistan nuclear tests threw the business environment into doubt. Smith Barney pulled out of First Capital, and the brokerage, which had concentrated on servicing a limited number of wealthy clients, began to lose customers.

Into this situation stepped Wattoo. Why did he join Worldcall and First Capital, a troubled entrepreneurial venture, after an already substantial and distinguished career in accounting and finance? "I was encouraged by economic reforms, and convinced that the chairman had the right instincts and that Pakistan was ready for a new phase of growth," he says. The market's turnaround in 2000 may have had something to do with it. The Karachi Stock Exchange index, which hovers at around 14,000 points today, bottomed out at 1,300 in 2000, and then began gaining steadily, fueled, analysts agree, by the gradual success of the Aziz reforms.

Wattoo's job initially began in a very un-CFO fashion. Acting like experts in institutional sales, Taseer and Wattoo began wooing local and foreign funds for the brokerage business. "We had been focused on high-net-worth individual clients. We changed, and decided to mix our business with 50 percent institutional traders," he explains. In this, he says, he was aided by the market's climb, and the desire among both local and overseas investors to grasp the opportunity. "I could see that the pie was getting bigger and bigger," he says, "and that a new type of client was gaining ground."

A partnership with Auerbach Grayson, a New York–based brokerage firm specializing in emerging markets securities, helped secure foreign business. First Capital began expanding around Pakistan, opening 20 shops around the country. The brokerage went from having 20 — albeit extremely rich — customers to a customer base of 900. The new clients were not so rich, but represented a growing middle class market of investors. It diversified First Capital's business.

The budding conglomerate had also made a foray into real estate. Property values were tracking the rise in the stock market as new residential and commercial developments came into demand. Taseer bought an indebted company called Pace Pakistan in early 1998. In doing so, he inherited US$5 million in debt. Cost-cutting measures and lower-cost financing helped clear debts to US$600,000 — just in time for a brush with disaster.

On September 13, 2001, a fire completely destroyed Pace's flagship shopping mall in Lahore. Wattoo recalls his sense of disbelief. "Our work of more than three years came to nil," he says. It later emerged that most merchants who had bought space in the mall lacked adequate insurance coverage. Pace's insurance allowed it to rebuild the mall, but the destitute merchants lacked the means to open their shops again.


Taseer and Wattoo weighed whether to exit the business or make another start. They opted to make an offer to the merchants. Pace would rebuild and stock the shops if the owners returned to business as soon as the mall was open. The revamping took one year. The economic upswing had continued through 2002, and when the merchants opened up shop, the stores met eager consumers. Many of the same merchants followed Pace into two subsequent shopping malls in Lahore and a fourth in Gujranwala. By 2007, multiple projects were underway across Pakistan, including five-star hotels and residential and managed properties.

During this period, Pakistan was undergoing a liquidity boom. The robust economy encouraged many overseas Pakistanis to repatriate their funds. The reform in the banking sector, allowing full foreign ownership of banks, spurred a string of cross-border acquisitions. Standard Chartered, the UK banking group, bought Pakistan's Union Bank for US$413 million in 2006, and has since expanded Union's branches throughout the country. Both ABN-AMRO and Temasek, the Singapore government investment arm, now own banks in Pakistan.

As their wealth grew, Pakistanis — said to be wary of ostentatious shows of wealth that might make them a target of both jihadists and tax collectors — tended to invest excess funds in property, the stock market, and businesses across the country. Some Pakistanis felt it was safer to own property and investments in Pakistan rather than the United States following 9/11. "They started snapping up properties," says Wattoo. "My Pakistani friends who were living in the U.S. came back to shop for houses." Others simply wanted to take advantage of the boom in their own country.

Worldcall and First Capital held an enviable position in the key areas where these investors were driving growth — financial services, communications, and real estate. Wattoo denies that the conglomerate diversified with this in mind. "It was the chairman's vision," he says, "to see an opportunity and seize it." Whether by strategy or instinct, the company has been rewarded with substantial investments from international investors, including Omani businessman Sheikh Sulaiman Ahmad Said Al-Hoqani, Sheikh Khaled Juffali from Saudi Arabia, UK-based Millennium Global High Yield Fund, and American Hedge Fund.

Another Lucky Call
Taseer and Wattoo can point to Worldcall's investment in fiber optic cable, starting in 2000, as their luckiest call. When the group started laying fiber optic cables in Lahore and Karachi, it met criticism. "Initially people were laughing at us. They said we were laying gold," Wattoo recalls. Over time, cheap phones flooded the market and call rates became more affordable. Telecom companies scrambled to add more bandwidth to their networks to handle the surge in traffic. Suddenly, all mobile phone service providers needed fiber optic networks. Rather than opt for the investment and long gestation period to build their own, the service providers opted to lease from WorldCall. The group is now raising US$50 million for its network expansion of broadband Internet.

First Capital also has a lively and growing media unit. The group owns Pakistan's largest daily English-language newspaper, the Daily Times, business and kids television channels, and a printing company. The group is adding an Urdu-language newspaper titled AajKal (translated as "Today, Yesterday"). Nationwide growth in advertising dollars is driving profits in the media group. "Advertisements have expanded like no other businesses in Pakistan," Wattoo says. In 2006, ad revenues more than doubled to Rs23 billion (US$378 million), compared with Rs10 billion in 2004. Part of the surge was due to TV advertising, as TV ownership has leapt in the past four years.

In fact, the only one of First Capital and Worldcall's businesses to suffer a major setback since 2001 was in Sri Lanka — another deeply troubled South Asian nation where the group has bought a bank and started a payphone business along the lines of the one in Pakistan. The bank has been doing well, but the payphone business reeled when the December 26, 2004 tsunami destroyed beach property on the eastern coast of Sri Lanka, where many of Worldcall Sri Lanka's payphones were installed.

Just Wait
In the tense days following Bhutto's assassination in early January, when the success of Pace's bond issuance was in question, Wattoo wheeled out the classic arguments to overseas investors, which included the Shakti Masters Fund, Sandstone Capital, and the Apollo Asia Opportunities Fund. The argument was not that Pakistan would be safe for business anytime soon, but that it would be able to weather any coming squalls. "I told them that in two or three months, the political mess would be sorted out," he says. "And whatever party wins, all, at least, have no manifesto against business." None, he says, are likely to nationalize, slap new labor restrictions on businesses, or introduce protectionist measures.

He also has a persuasive argument about Pakistan's future in the presence of a booming India. "We're about ten years behind India in the development of our economy," he says. "But remember that Pakistan has nowhere near the level of poverty as India." The implication is that as the economy develops, a class of ready, middle class consumers will emerge more quickly than it has in India.


As for Pakistan's reputation for danger — to some, the nation's name is synonymous with terrorism — he's dismissive. Islamic extremists have a political presence in two provinces out of four, and those provinces, such as the rugged northwest territories where Osama bin Laden is said to be hiding, are not major commercial centers. "In the main Pakistani areas, no one is seeing the fundamentalists winning any seats," he says. He reminds investors of the disparity between the imagined Pakistan and the one that he knows. "Remember, the radicals are 5 percent of the population, but 5 percent can make an outsized impression," he says. "It only takes one person to throw a bomb."

So is Pakistan's economy insulated from the nation's troubles? JPMorgan's H. Reza-ur-Rahim argues that its stock market, at least, is. "On the market cap of US$70 billion," he says, "there's about US$4.5 billion of institutional money from overseas. That's about 7 percent. There would be a downturn, of course, if that money fled." But, he argues, there would be an automatic floor, because local investors would be likely to remain in the market. "The bad news would be tempered." Reza-ur-Rahim predicts the first half of 2008 will be volatile, but that deals will begin to flow later this year. The deals will follow the path that's already been cleared. Foreign buyers have made their mark in banking. Another opened sector, telecoms, has benefited from investments from companies like Norwegian Telecom, China Mobile, and Omantel. Reza-ur-Rahim sees investment into the power sector as the next big thing.

For his part, Wattoo is looking forward to expanding Worldcall's fiber optic network with funding from Omantel and to the upcoming listing of Pace in Dubai (Pace listed in Karachi in early 2007 and was oversubscribed). In the meantime, there were no signs of despair at the launch party for AajKal, the Urdu newspaper. "There's a feeling that opportunity's in the air," says Wattoo, "for those brave enough to seize it."

Karen Yap is a contributor to CFO Asia. Tom Leander is editor-in-chief of CFO Asia and CFO China.


A Torn Nation

Pakistan's history has see-sawed between democracy and military dictatorship. Neither mode of government — or its leaders — has given the nation cause to rejoice. Pakistan gained independence on August 14, 1947, as the combination of two states — East and West Pakistan — with Muslim majorities. Following two wars with India, East Pakistan declared independence in 1971 and became Bangladesh. West Pakistan simply became Pakistan and Zulfikar Ali Bhutto emerged as the first elected president in many years. He was deposed and eventually hanged by General Zia-ul-Haq, the country's third military president. General Zia died mysteriously in a plane crash in 1988.

A return to democracy followed, and throughout the late 1980s and 1990s, Bhutto's daughter Benazir and rival politician Nawaz Sharif took turns as prime minister. Corruption hobbled the administrations of both. The economy fell into steep decline and a military coup brought General Pervez Musharraf to power in 1999. The current crisis coincided with Bhutto's and Sharif's return from exile and the decision by Musharraf — under pressure from the United States — to retire from the military and throw himself into newly declared elections as a civilian candidate. Pakistan has been under an interim, caretaker government since November. Following Bhutto's assassination, Musharraf — amid protests — postponed the elections until February 18. — T.L.


Confident in the Future

Since 2001, many Pakistanis, fearful of their futures in the West or simply fed up with Europe or the United States, have returned to Pakistan, considering it a better place to invest their savings.

So it was that seven years ago, Parvez Abbasi decided to leave the UK to return to Pakistan and went on to found Mobile Zone, a company that sells mobile handsets. Today he's the company's CFO. The company started with US$500,000 in seed money from seven investors, including Abbasi. Today, Mobile Zone is a company that has, he says, netted US$200 million in profits over those seven years (Mobile Zone is privately owned and doesn't release its financials).

The company grew rapidly, driven by increased consumer spending power and mobile phone ownership, better connectivity and voice quality. There are over 60 Mobile Zone outlets and approximately 300 franchises across Pakistan's urban and suburban centers, including its 15,000 independent retailers.

"We were lucky, as we came into the business at the right time," he says. "The demand for value-addition on phones is on the rise and people are changing their phones frequently. We have people who change their phones every three months."

Abbasi is optimistic about Pakistan's economic future. "We expect Pakistan will continue to grow around 10 to 12 million handsets each year for the next three to four years," he says. The company has expanded into Afghanistan, the United Arab Emirates, and Bangladesh.


As for his attitude toward Musharraf and his legacy, "Musharraf is Pakistan's best bet," he says. Adding, "Both Benazir (Bhutto) and Nawaz (Sharif) had two terms as prime minister, but we didn't see much social and economic development. What's happening today [referring to the political stalemate) is nothing new — we have experienced this many times." — K.Y. and T.L.


Pakistan's Turbulent Success Story
Key economic indicators since 1999.
'99-'00
'00-'01
'01-'02
'02-'03
'03-'04
'04-'05
'05-'06
'06-'07
Total Liquid
Forex Reserves*
1,968
3,220
6,432
10,719
12,328
12,623
13,137
15,611
CPI (General)
3.6%
4.4%
3.5%
3.1%
4.6%
9.3%
7.9%
7.9%
GDP Growth Rate
3.9%
2.0%
3.1%
4.7%
7.5%
8.6%
6.6%
7.0%
GDP per Capita*
526
501
503
582
669
742
847
925
FDI*
470
322
485
798
949
1,524
3,521
5,125
KSE-100 Index
1,521
1,366
1,770
3,402
5,279
7,450
9,989
13,772
Average Market Capitalization*
6.5
5.6
6.7
12.3
23.2
33.7
45.7
65.8
*in US$ mil; Source: State Bank of Pakistan & Ministry of Finance


First Capital and Worldcall Group profits, 2003 to 2007


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