When Aurora covered the FMCG sector in the July-August 2019 edition, Pakistan was experiencing an economic downturn and the outlook for the forthcoming fiscal year was not promising. At the time, industry experts attributed the downturn to several factors, including an increase in international commodity and oil prices, import duties and the rupee’s devaluation against the dollar.
Fast forward to over a year later, and according to the Pakistan Economic Survey 2019-20, (released in June 2020), the GDP growth rate in FY 2019-20 stood at 1.91%, decreasing by 3.6% compared to the 5.5% growth rate for FY 2018-19 (considered low at the time). Furthermore, core inflation in urban and rural areas amounted to 7.8% and 8.7% respectively from July 2019 to April 2020, registering an increase of 0.6 and 1.9% (they stood at 7.2% and 6.8% during the same period in the previous year) and overall inflation increased by 2.1% – from 4.7% to 6.8%. The unemployment rate, meanwhile, increased by 2.8% – from 5.8% to 8.6%.
Part of the reason for this decrease is the fact that Pakistan’s economy (as was the case for most countries), experienced a major hit from March to June 2020 due to Covid-19, which led to lockdowns across Pakistan (and the world). The result is that the global economy is heading for a recession and global GDP is expected to contract by 3.8% – a substantially larger amount compared to the 0.4% contraction witnessed after the 2009 global financial crisis. More specifically in Pakistan, Dr Abdul Hafeez Shaikh, the Prime Minister’s advisor on Finance, estimates that the pandemic has resulted in an economic loss of approximately three trillion rupees.
The estimated growth rate for Pakistan’s GDP in FY 2020-2021 is -0.38% (the first time in nearly 70 years to hit negative numbers). This has been calculated keeping in mind that although the agriculture sector registered a growth rate of 2.67% in FY 2019-20, the industrial and services sectors (two other major contributors to the overall economy) registered growths of -2.64% and -0.59%. (Agriculture, industry, and services sectors were expected to register growth of 3.5%, 2.3% and 4.8% respectively and did not meet these expectations.)
The Government Launches a Package for the Construction Industry
To counter the dwindling economy, the government announced a Rs 100 billion relief package for the construction industry in April 2020. In many countries, the construction sector is considered the backbone of their economies and this is also true for Pakistan.
According to Hadi Akberali, COO Strategy, Amreli Steels (see his interview), “the construction industry is a major employer and comes with a lot of allied industries. It is a tried and tested way the world over for construction to kick-start an economy.” He cites Brazil, China and India as countries that improved their economies by means of increased construction activity.
Although formally, on average, the construction sector has contributed between 2.3% and 2.85% in the last five fiscal years to Pakistan’s GDP (it was valued at Rs 316 billion in the Pakistan Economic Survey 2019-20), most economists estimate its value to stand between 10 and 12% of the total GDP. This is because it provides stimulus to over 42 ancillary sectors including aluminium, brick, cables, cement, fixtures, glass, kitchen and bathroom fittings, marble, paint, steel, tiles, transportation, warehousing and wood. Therefore, it has a far-reaching impact on the overall economy as it employs eight percent of the total labour force.
What’s in a Package?
The package’s objectives are two-fold. The first is to bridge the affordable housing gap through the Naya Pakistan Housing Program (NPHP) which was initiated in April 2019 with the goal of building five million houses in five years (see A Question of Affordability) and second to jumpstart the economy by creating employment. To ensure these goals are met, the government set up the National Committee on Housing Construction and Development (NCHCD) in July. The Committee’s objectives include monitoring the construction sector and ensuring that any hurdles that arise are overcome to ensure that construction activities continue to increase rapidly.
Broadly speaking, the construction package includes tax incentives, waivers and subsidies for builders, developers and property owners (see Major Incentives in the Package below). To take advantage of the incentives, builders and developers have to register their projects on the Federal Board of Revenue’s (FBR) dedicated portal, Iris, by December 31, 2020 and complete ‘grey structures’ (basic structures without interior finishings) by September 30, 2022. In addition, a Construction Industry Development Board (CIDB) will be set up to “promote, encourage, facilitate the private construction industry and encourage investment.” (A Real Estate Regularity Authority [RERA] will be formed to regulate the sector with regard to property transactions among other functions.)
According to the industry stakeholders Aurora spoke to, one of the most effective incentives is the one that does not require people to declare their sources of income before investing in construction related projects. “This is a key factor that will attract investment; if a buyer is interested in buying a property, all he has to do is put his money in a bank and make the payment,” explains Shafi Jakvani, CEO, Citi Associates.
This is a view that Mohsin Sheikhani, Chairman, Association of Builders and Developers Pakistan (ABAD) and Hamza Bhatti, General Manager, Pakland Builders, agree on as does Mohammed Adil Sami, Head of Marketing, Meezan Bank.
“The ‘no questions asked’ policy will encourage builders to invest their undocumented wealth in property and construction. This initiative, apart from providing legal cover for such individuals, will encourage people to invest in property. It will also encourage the expat community, who will be spared the cumbersome paperwork required to buy or build a home,” says Sami. He adds that the tax exemptions will lift investments in property and impact the construction sector and its allied industries in a positive manner.
In Jakvani’s opinion, the fact that there will be a 90% tax reduction for builders who invest in NPHP will also give a boost to the economy. “Even in the first stage, if 500,000 units are built, they will require labour, building materials so all related sectors will benefit. That is one area where I see a positive outcome to emerge.”
Sheikhani adds that the fact that taxes will be computed based on the property’s covered area (instead of the value) will be a major incentive for mid- and low-tier builders and developers as it will result in substantial savings. He is of the opinion that the fact that builders and developers will not be required to withhold tax on building materials, other than steel and cement, will prove to be beneficial as well. Bhatti adds that if taxes are waived on cement and steel, the construction sector would benefit even further. Muhammad Irfan Anwar Sheikh, Director Finance & CFO, Bestway Cement, agrees. “An important step that could lead to increased cement sales is to reduce the Federal Excise Duty (FED). Pakistan’s development is dependent on products such as cement and it should not be subject to FED.”
Sheikhani is confident that the incentives will bear fruit shortly, especially as all transactions will be digitised through Iris and approvals from various government entities (such as building authorities and utility companies among others) will now be, as per the government’s directives, ‘one window operations’ and be completed online within 45 days. Furthermore, building bylaws will be updated in a uniform manner across the country through this system. This, he says, will reduce the number of illegal buildings as all projects have to be registered with Iris. He adds that prior to this, builders and developers used to show reduced profits in order to pay lower taxes and “this will bring much needed transparency to a sector that has been unregulated thus far.”
A Bumpy Road Ahead?
Not everyone shares Sheikhani’s optimism. A former ABAD chairman and developer, who spoke on the condition of anonymity feels otherwise. “Obtaining certifications and approvals from local authorities will prove to be a herculean task. Furthermore, the deadlines for registering projects (December 31, 2020) and for completing grey structures (September 30, 2022) are impractical, given the fact that approvals from various authorities take a long time to come through.” He adds that procuring the services of reliable contractors and workers, not to mention securing financing, will make it extremely difficult to meet the mandated deadlines.
Naeemuddin A. Siddiqui, Former Chairman, Constructors Association of Pakistan (CAP) and CEO, Ziauddin Ahmed & Company, has his own reservations. Although he believes they are a step in the right direction, he points out that formalising the industry was tried by the Nawaz Sharif government in the nineties but never materialised. “Even today, despite the talk about formalising the industry, we have yet to receive any notifications regarding this and what it will mean for the industry.” In his opinion, the major issue is that the majority of construction activities are not carried out by certified or professional companies and that regulating the industry to ensure that only licensed professionals should be allowed to work on registered projects should be a priority for the government.
Another issue is securing financing. Although there is talk about lower interest rates, no concrete steps have been taken in this direction. “Because the sector is not regulated, we are unable to receive financing and guarantees from banks. As a result, we are unable to meet our project deadlines, which further cuts into our margins. Furthermore, no specific incentives have been announced for contractors, and they should have been brought on board prior to announcing the package and related incentives,” says Siddiqui. “We requested that the government establish a dedicated financial institution (like in other countries) that mandates the provision of financing to the industry through lending techniques that are different from those that regular commercial banks offer.”
He adds that when builders and contractors go to a bank to secure a loan, they are asked to provide collateral or liquid assets that they do not have as the requirements are too high. “If we had that kind of money, we would not need a loan the first place. The right model would be to issue a guarantee based on the project’s receivables. That is why we have requested that the government establish a Construction Infrastructure Development Bank, a common practice in many other countries.” He says that in other countries, such banks also serve as an intermediary body between developers and the people who buy property. The bank safeguards the interests of both parties and ensures that developers complete their projects in the stipulated time, secure the services of licensed builders and contractors and do not increase property prices randomly. Similarly, to safeguard the developer, such banks ensure that the buyers pay their instalments on time.
Promoting Low-Cost Housing
As far as financing is concerned, the main incentive at the banking end of the spectrum is aimed at people who own five and 10-marla plots (see Building Dreams on Solid Foundations), who can now take advantage of reduced and/or competitive interest rates to build houses on these plots.
According to Muhammad Afaq Khan, Head of Islamic Banking, HBL, “a steering committee has been set up under the chairmanship of the Governor of the State Bank of Pakistan (SBP) and the Chairman of the Naya Pakistan Housing & Development Authority (NAPHDA). The presidents of six banks, including HBL, are members of this committee.” As a result, several banks including Bank of Punjab, HBL, Meezan Bank and UBL, are promoting home financing options such as the ‘Mera Pakistan Mera Ghar’ initiative. Although it is too early to comment on the response to the initiative, Khan says “HBL will offer mortgages, including for low cost housing, through our Islamic Banking. We are gearing up to scale up the business and are committed to ‘Mera Pakistan Mera Ghar’.
Given that the construction package was only announced five months ago, the full response remains to be seen. As of August 14, according to DAWN, 40 projects have been registered and 4,812 are drafted for registration. The Minister for Information and Broadcasting, Senator Shibli Faraz, expects that projects worth Rs 400 billion will be registered by the end of 2020. Furthermore, ABAD has pledged to invest Rs 1,370 billion in various construction projects, including residential ones specifically for the NPHP, in addition to 30 to 40 high-rise buildings in Karachi and at least 1,000 more projects across the country.
According to Fahd K. Chinoy, CEO, Pakistan Cables, the incentives have induced a “somewhat positive sentiment in the market.” He says indicators such as rising cement and steel sales have given rise to “cautious optimism that the construction package will bring about a boost in downstream demand for building materials, including wires and cables.” He points out that “housing societies such as DHA are showing signs of activity as they roll out development plans for new phases in Bahawalpur, Lahore, Multan and Peshawar. However, several projects are at very early stages and it will be some months before they reach the level of maturity where orders for cables are placed.”
A representative of a private cement company confirms that demand for cement has started growing, especially in northern and southern Pakistan and the All Pakistan Cement Manufacturers Association recently announced that the consumption of cement has increased by five percent and amounted to 3.5 million tons in August.
Sami too is cautiously optimistic. “SBP has played an immense role in aggressively cutting interest rates and stimulating the economy and signalling intent to make low-income housing finance easier. Furthermore, the government has encouraged banks to allocate five percent of their portfolio to the construction segment.”
In Jakvani’s view “these incentives will be of most benefit for mid-tier and small developers and builders. That said, the incentives will also affect the real estate sector in a positive way and given that property prices have started to rise, I foresee almost 100% growth in property transactions within six months.”
Given all the above, it is too soon to judge whether or not the construction sector will be able to revive Pakistan’s economy. Nevertheless, if the December 31, 2020 deadline for registering projects is extended and if the formation of RERA, CIDB and ‘one window’ operations for approvals are expedited, the chances are fairly good that the impact on the economy will be positive.
Major Incentives in the Package
Investors, developers and builders will not be questioned about their sources of income.
Taxes will be computed according to the size of the property (per square foot or per square yard) instead of the price of the property (the case previously) and as a result will be substantially lower.
Builders and developers will not be required to withhold tax when purchasing building materials (except steel and cement) and on certain services (such as plumbing).
If builders and developers take on a project related to low-cost housing under the Naya Pakistan Housing Program, taxes will be reduced by 90%.
Sales tax and excise duties levied on construction materials will be reduced.
Owners of five- and 10-marla residential plots will receive subsidised house building loans.
People constructing, buying or selling their first houses are exempted from several taxes and fees, including Advance Tax, Capital Gains Tax, Stamp Duty Tax and Registration Fees.
Additional reporting by Uzma Khateeb-Nawaz.
Will the Naya Pakistan Housing Program deliver on the promise of providing affordable housing to low-income segments in Pakistan? Ayesha Shaikh reports.
A cornerstone of Pakistan Tehreek-e-Insaf’s election pitch in 2018 was the commitment to construct five million affordable houses for low-income groups in Pakistan under the Naya Pakistan Housing Program (NPHP). The underlying objectives were two-fold. First, since the construction industry generates a high level of direct employment, whilst stimulating demand in over 40 ancillary sectors, including cement, steel, paint, brick, building and consumer durables, the rationale was that the programme would drive both economic growth and job creation across multiple industries. Second, a government-led affordable housing scheme would finally allow the underprivileged segments to ‘own’ a house, a pipe dream for low-income groups in Pakistan.
Current statistics are a stark reminder of how skewed the housing market is towards the affluent class. Only one percent of the housing units developed annually cater to 68% of Pakistan’s population (people earning a maximum monthly income of Rs 30,000). Conversely, almost 56% of housing units target 12% of the population – individuals with a monthly income of Rs 100,000 and above (source: Research Report by Ansaar Management Company, 2016).
Hardly surprising therefore that Pakistan has a housing backlog of almost 10 to 12 million units and an expected incremental demand of 300,000 to 350,000 units added on annually (source: World Bank and Government of Pakistan estimates). Given this supply shortage, 40 to 50% of the urban population is living in slums and squatter settlements (katchi abadis) that lack the most basic utilities such as clean drinking water, sanitation and electricity.
As the first step towards delivering on the promise of affordable housing, NPHP was officially launched in April 2019, with the goal of constructing 135,000 houses in the first phase (110,000 in Balochistan for the fishermen of Gwadar and 25,000 in Islamabad for public sector employees).
In theory, the successful completion of NPHP (completion and transfer of ownership of five million houses in five years) should go a long way in reducing the supply-demand gap in housing for the lower income segments. However, similar to the fate of most major public housing programmes in the past, NPHP is struggling to take off. In addition to structural bottlenecks in the construction industry, delays in obtaining NOCs and approvals from government authorities to start construction and the absence of formal mortgage financing facilities were the two issues most often cited by builders and developers contacted for this story, all of whom spoke on the condition of anonymity given the sensitive nature of their involvement with NPHP.
These challenges were exacerbated when Covid-19 brought all economic and construction activities to a halt across Pakistan in March this year. This proved to be a major blow to the project’s timeline and promised deliverables, not to mention the financial losses sustained by builders and developers. However, as the curve of new Covid-19 cases began to decline, construction was one of the first sectors allowed to resume operations, for the simple reason that construction activity would trigger demand in related industries while creating new employment opportunities for unskilled and semi-skilled labour. From economic and public policy experts to the business community, there was consensus that the construction sector would trigger a much-needed economic revival.
As one developer involved in NPHP in Balochistan says, “Of the multiple commercial and residential projects underway, if NPHP comes even close to achieving the targeted milestones, the potential of the positive ripple effect on other projects and the construction industry itself will be massive.” In his view, given the amount of public attention NPHP has received as PTI’s flagship project, the government is highly motivated to come close to delivering on this commitment.
It is interesting to note that even the stakeholders who stand to benefit directly from the success of NPHP do not expect the construction of five million units to be achieved within the remaining tenure of the government, given the delays the project has encountered and the challenges that are yet to be resolved. The expectation is that even if 50% of the houses are completed with successful transfer of ownership, the much-needed economic recovery and uplift of the underprivileged communities will be on its way. According to initial estimates, the delivery of 2.5 million houses will result in 10 million new jobs per year in the unskilled, semi-skilled and skilled categories, as well as an additional 1-1.5 million jobs in banking, security, maintenance, insurance and other related service industries. Furthermore, the overall contribution to the economy from housing, allied and service industries due to NPHP alone would be approximately eight to nine trillion rupees.
Given the economic potential of NPHP, it is not surprising that in July this year, after announcing incentives and subsidies for the construction industry, the government announced an incentives package specifically for NPHP.
As the target buyers of NPHP are cash-starved, the original financial model stipulated that in order to obtain ownership, people would have to make a down payment of 20% of the value of the unit (unit values were estimated at three million rupees at the time of the launch of the project, but delays and increases in the cost of materials and labour mean that the actual price at the time of delivery will be significantly higher). The remaining 80% of the cost would be financed via house mortgages provided by banks at an estimated mark-up of 10%.
The project not only incentivises buyers, but builders and developers as well. These include providing land to builders on instalments (purchase of land for construction requires a massive capital outlay which adds to the upfront cost for builders), thereby allowing construction to start without such a massive initial investment. Moreover, builders were promised they would receive loans from banks to overcome any cash flow shortages they may experience during the project to ensure that construction does not stop and deliveries are made to owners on the announced dates.
To recover from the setback affecting NPHP in the aftermath of Covid-19, in addition to the incentives package for the construction industry, in July the government announced policies specifically aimed at reigniting investor interest. This included a subsidy of Rs 30 billion for houses to be constructed as part of NPHP. More importantly, subsidised mortgage financing has been announced for a period of up to five years at five percent for five marla and seven percent for 10 marla houses. In addition, the State Bank of Pakistan (SBP) has set a mandatory lending target for all commercial banks equivalent to five percent of their outstanding private sector credit, which would translate into mortgages for housing and construction to the tune of Rs 300 billion by the end of the next year. The subsidy and the increased targeted lending will go a long way in bringing Pakistan’s house financing facility (it stands at a meagre 0.2%) more at par with the neighbouring economies of India (10%) and Malaysia (30%), thereby increasing the overall affordability of housing in the country.
According to Mohsin Sheikhani, Chairman, Association of Builders and Developers of Pakistan (ABAD), “Home mortgages are the principle on which the global real estate industry operates and this is a non-existent concept in Pakistan. Home financing offered by commercial banks is limited to high-net income earners because of the extensive collateral requirements as well as exorbitant mortgage rates, making it impossible for middle income and lower income segments to use the facility.”
Although the government’s plans and SBP policies are commendable, most builders and developers are sceptical about whether the houses built under NPHP will be affordable to the target demographic (households earning Rs 60,000 or less) even if banks step up and provide the required volume and value of mortgages.
Tables 1 and 2 reflect the affordability gap between the monthly instalment amount that would be affordable to different income segments and the debt burden on families looking to own a housing unit under NPHP. A comparison of the average household incomes of Pakistani households and the advertised prices of NPHP housing projects make it clear that almost 80% of the population will not be able to make the down payment or afford the monthly instalments, even at the subsidised interest rates. The lowest monthly mortgage instalment in NPHP is Rs 15,618, which is higher than the sustainable monthly instalment amount for the lowest four quintiles of Pakistan’s population.
Furthermore, regardless of the lending targets specified by SBP, commercial banks will not be incentivised to increase their mortgage portfolio until clear and strict foreclosure laws are enacted. At present, banks are unable to recover their losses in case of defaults by resuming control over mortgaged properties and selling them, especially with the added risk that the property may be tied up in the courts for years.
Lastly, the fact that most of the units planned under NPHP are standalone, independent units further complicates the issue of affordability. The large swathes of unused land needed for such projects are scarce in large cities and where available, the cost is exorbitant. This is why the builders and developers contacted for this story are of the view that the focus of low-cost housing projects should be on constructing pre-fabricated, two to three bedroom apartments in high-rise buildings on state-owned land. This will allow the construction of more units per acre while ensuring that the final price of the completed units remains within the budget of the financially vulnerable.
Ayesha Shaikh is a freelance writer. firstname.lastname@example.org
The government’s Naya Pakistan Housing Program is the first real ray of light in the quest for providing housing for Pakistan’s lower income segments, but to succeed it has to push further to achieve meaningful affordability, writes Nasir Jamal.
In 1959, newly self-governing Singapore found itself faced with a major housing crisis. Both government and private housing construction had failed to keep up with the number of immigrants the city-state had been drawing from China, India, Malaysia and other parts of Asia. Overcrowding was ubiquitous. Most immigrants lived in dense squatter towns that lacked proper sanitation.
The Singapore government responded to the challenge by creating the Housing Development Board (HDB). The objective was to rapidly increase the supply of homes for rent for the poor. By the middle of the sixties, HDB had housed 400,000 people – and this, according to a recent Bloomberg article, is why Singapore has one of the highest home ownership rates. Singapore now has one million HDB apartments and the vast majority of families live in these modestly sized high-rise housing estates built by the government.
Although this initiative by the Singapore government did help solve the housing crisis, it was the Home Ownership for the People Scheme, launched in 1964 with the objective of building subsidised flats, that actually laid the foundation for Singapore’s real estate success. Under the Scheme, the government built two- and three-bedroom apartments and sold them to lower-middle income citizens on a 99-year lease. Buyers were not allowed to resell the property for at least five years.
These apartments were built in neighbourhood clusters – miniature new towns with playgrounds, food centres and shops. The larger townships had a health clinic, a community centre and a library. The management of these estates was integrated into government policies and included everything from the design for Singapore’s mass transit system to racial integration. The early flats were Spartan – massive slab blocks up to 10 storeys high, with 12 flats per floor, accessed by open corridors running along the front of the building. Water and electricity were provided but no fittings other than a squat toilet and a shower in a tiny bathroom and a sink in the kitchen. However, they were clean, safe and most importantly, well maintained. Over the years HDB grew and the projects became more modern and sophisticated. HDB not only maintained the buildings and grounds, it periodically upgraded the estates with new elevators, walkways and facelifts. When buyers resold their properties, they could make substantial profits. Few would have thought that this public-sector affordable housing initiative would give Singaporeans a direct stake in their city-state’s prosperity and lead to a country with one of the highest rates of home ownership in the world – despite the fact that over 80% of the population live in government-built flats.
Affordable housing has always been a big public policy issue in Pakistan. It was recognised as a human right by the Universal Declaration of Human Rights and reaffirmed at the UN Habitat Conference in 1996 with the ‘Adequate Shelter for All’ slogan. Yet, the housing shortage in Pakistan is assessed by the World Bank to have reached approximately 10 million units.
Similar to other developing countries, rapid urbanisation in Pakistan has resulted in the growth of unorganised settlements (katchi abadis) in urban areas, adding pressure on low-income housing demand (Source: State Bank of Pakistan Report on Housing). Rapid urbanisation compounded by a fast growing population is pushing the demand for housing upwards at a staggering pace. The annual housing shortfall is estimated to be increasing by 350,000 to 400,000 units (equivalent to half of the number of houses constructed in Pakistan) every year. Many consider these estimates to be conservative, holding that the housing supply gap is much bigger than these assessments.
Sadly, the response of successive governments to the growing housing crisis has lacked substance. This is especially true when it comes to housing deficiency for low and middle-income families. Between the formation of the Pakistan Housing Authority (PHA) in 1999 (the first public sector initiative after the establishment of the House Building Finance Corporation in 1952 to provide loans for house construction) and the formation of the Naya Pakistan Housing and Development Authority (NAPHDA) by the incumbent government, none of the housing policy frameworks have ever focused on low-cost homes despite the fact that nearly 80% of the housing stock shortfall is attributed to lower and middle-income groups.
The new housing and construction policy is a significant improvement over the National Housing Policy of 2001, which declared housing to be a major pillar of the macro economy, and emphasised resource mobilisation, increasing land availability, providing incentives for developers and constructors and promoting research to make construction more cost-effective. It was a non-starter. The Prime Minister’s Housing Programme launched in 2008 aimed at building one million units for government employees, media workers and the public at affordable prices also fell through. In 2013, the government revised the 2001 National Housing Policy to shift the burden to the private sector.
The ambitious construction and house building package rolled out by the present government is generally touted as perhaps the best policy framework developed so far that is aimed at bridging the widening housing supply gap. The incentives offer generous fiscal, regulatory and monetary concessions to builders and developers. To kick-start demand, the package offers attractive mortgage rates to people who can afford to buy or build up to 10-marla standalone, independent units. However, a cursory look at the package shows that the entire incentive package is targeted towards the affluent segments and ignores the objective of cost-effective housing for low-middle income families.
Nevertheless, the construction package has kick-started activity in Pakistan’s real estate market with land prices pushing up to new levels as the affluent use the incentives to legalise what in common parlance is known as black money. Going forward, we may see house construction increasing as builders seek to take advantage of the increasing liquidity in the housing market. However, if the purpose of this initiative is to provide housing for all, we will have to wait until the government decides to give the low- and middle-income population a stake in its policy framework. For this to happen, it will have to follow the example of Singapore and tweak the policy in order to provide small two- and three-bedroom units in high-rise housing estates built on state land in urban and semi-urban areas on long-term leases and at affordable rents. Such estates could be developed through public investment and should be equipped with well-maintained education and health facilities along with playgrounds, community centres and local commercial areas.
In this regard, the government could seek to collaborate with the private sector in the form of Public Private Partnerships (PPP). In this model, the government could provide land as equity while the investors bear the construction costs in exchange for predefined returns on their investment. Such a model could provide a mix of low-cost housing cross-subsidised by returns from the sale of commercial property and high-end apartments for more affluent families. According to some developers, investors are willing to partner with the government if a proper policy framework is developed and banks agree to provide long-term financing at affordable rates. Some are even enthusiastic about undertaking such projects without government involvement as the housing gap offers them a big opportunity.
Without NAPHDA developing a policy framework for construction of commercially viable but affordable small apartments in new well-maintained ‘miniature’ towns with all the basic amenities, the vision of affordable housing for all will remain a pipedream at best.
Nasir Jamal is Chief Reporter, DAWN Lahore. email@example.com
AURORA: Would you agree that even before Covid-19 struck, steel as an industry was already experiencing difficulties? HADI AKBERALI: The period between 2014 and 2017/2018 was a good one for steel and we experienced increases in both margins and revenues. A lot of construction was going on and many CPEC projects really got going then. During this period, there was a lot of interest in steel, be it from current players who were expanding or new players entering the market. This was also a period when a lot of the macroeconomic indicators were being fuelled, such as pegging the dollar to Rs 100 and keeping interest rates low, all of which ultimately resulted in a very high deficit. When the new government assumed power, Pakistan had to go back to the IMF, which insisted that all the remedial measures be taken upfront before releasing any money, and as a consequence, the economy crash landed. The rupee was devalued by 50%, interest rates doubled, imports were curtailed. All this put a tremendous amount of pressure on steel (as well as other industries) and reduced our margins. Steel is a highly leveraged, high fixed cost industry. Most steel manufacturers have a lot of loans which they use as working capital, and the doubling of interest rates really affected us. All our raw material is imported and the devaluation of the rupee brought on huge cost increases and because the economy had ground to a halt, we could not pass them on to the consumer. So we went from doing really well for three to four years to nose diving, as our margins pretty much disappeared. In fact, last year we made a loss.
A: When you say ‘we’, do you mean the industry or just Amreli?
HA: The industry as a whole including Amreli. It takes three to four years to set up a steel manufacturing plant from the time you decide to do it to the time when you actually start production. What happened was that many players decided to expand their capacity at a time when the margins were good. When the crash came, some of them pulled out but others were too invested to do so. The result was that a lot of new capacity came online at a time when demand was in decline. Amreli’s expansion came online in 2018 and shortly afterwards we saw the economy unravel and the result is that we are at a much lower capacity utilisation than we would like to be; we are at about 50%, which is very low.
A: Did you have to lay off people?
HA: No; in steel the payroll cost is not a very high percentage of the total cost. We were grateful that we did not have to lay off people either due to the economic downturn or Covid-19.
A: What happened to the industry after Covid-19 hit?
HA: It was like the last nail in the coffin. We only restarted production at the beginning of June when the lockdown eased.
A: Do you think the current government’s emphasis on the construction industry as a way to boost the economy is a step in the right direction?
HA: Yes, because construction employs a lot of people and has a lot of allied industries. Boosting construction is a tried and tested way to revive an economy. China did it and so have Brazil and India. However, those economies had big government spending programmes to back them. Unfortunately, our government does not have that kind of money, so they decided to put together an incentive package for the private sector to incentivise construction.
A: Is it working?
HA: So far we have not seen an up-tick in demand. Despite the positive talk and the fact that many developers have registered their projects in order to take advantage of the incentives, on-ground demand has not taken off.
A: Why is that?
HA: Firstly, there is no real demand on the horizon. The economy is not going to suddenly take a turn upwards; it will be a gradual recovery. People have lost their jobs and margins for many industries are down. The economy has contracted and even if developers see an opportunity because of the incentives, if they do build, who will buy? Disposable incomes have shrunk and people are worried; they would much rather save in a bank in a fixed deposit than invest in property. Furthermore, the property market is not accessible to 95% of the people. Secondly, there are concerns about the time frame; developers have to complete the grey structure before September 2022 to be eligible for the incentives. In Pakistan, two years is a very tight timeline and developers do not want to be stuck in a place where they have invested but have not met the September 2022 deadline and therefore, cannot benefit from any incentives. Thirdly, one of the big concessions was the amnesty, whereby no questions are asked about the source of money, be it a buyer or a developer. However, there have been two amnesty schemes in the last few years, so the chances are that most of the people who wanted to take advantage of them have done so and the pool of people who missed the amnesty boat twice is now small. In my opinion, a more effective way to boost construction is for the government to take money from its own pocket. The Prime Minister has done this by announcing the 1.1 trillion rupee package for Karachi. I think this is the sort of thing that will really get things going.
A: Government projects account for up to 30 to 35% of the total share, which is quite substantial.
HA: It is a pretty big share. During these difficult times ensuring that funding is forthcoming is important. The government is trying to do this and despite their constraints, they are releasing the funds for projects and continuing on this path is important because the government component is a major share of the construction sector’s business.
A: Has the government announced any incentives for the steel industry?
HA: No. The thinking here is to incentivise builders and this will generate demand for all allied industries. The incentives are targeted towards people who are building or buying.
A: From the steel industry’s perspective, and Amreli’s in particular, has the situation improved since June?
HA: Since June, we have been catering to the pent up demand that existed pre-Covid-19. Construction takes a few years to complete and what we are now seeing is an upsurge in demand as activity resumes for existing projects. Demand now is as good as it was pre-Covid-19; the question is, how many new projects are actually going to materialise?
A: What is your feeling on this?
HA: I think people with projects in the pipeline will think twice before going ahead because there is not enough demand in the market. Government spending in terms of infrastructure may still continue and hopefully it will. The government is reaching out to the Asian Development Bank, the World Bank, as well as to bilateral donors to get funds, but I think recovery from the private sector is going to be tentative.
A: Do you think that the steel industry will continue to register a negative growth?
HA: No, hopefully there will be some improvement. The major reason for the negative growth was the increase in costs and as we were unable to pass them on to consumers, we had to absorb them and that killed our margins. Hopefully, if we are not hit by further significant cost increases and the rupee remains stable, we should be able to recover some of our margins and see the year through in a positive light.
A: What is Amreli’s market share?
HA: About 13%. Steel is a very fragmented market. Our main competitor would be Mughal Steel which have a similar market share. The rest are smaller players; from a revenue perspective, Amreli and Mughal are at the top and everything that follows is 50% or lower. One of the problems with having so many small players is meeting quality standards.
A: Are these standards enforced?
HA: They are not enforced at all and this is the one of the big issues we have. When standards are not enforced, substandard steel finds its way into the market and will obviously be a lot cheaper. We are talking about a technical product and most customers don’t know much about steel; it all looks the same, so it is very easy for them to opt for a product that is Rs 10,000 cheaper.
A: Would price be the main determinant in terms of what consumers buy?
HA: Most consumers go by whatever is recommended by their contractor. Our aim is to make steel a high-end involvement product. Steel is buried inside a house and nobody sees it, but it is the strength that matters. We believe people should get involved in the purchase decision and not leave it to someone else to decide for them.
A: How would you categorise your target consumers?
HA: Buyers generally fall into two categories. One consists of bulk consumers who deal directly with companies and with them our marketing is more BTL oriented and based on personal relationships. Bulk buyers are more informed because they have structural engineers and architects who supervise the quality of the steel that comes on site. The other consists of individual buyers; people building a house and who may require 10 to 20 tonnes of steel. However, in aggregate terms, they are a large market.
A: Is Amreli involved with CPEC?
HA: Yes, we are the largest suppliers to Chinese contractors as CPEC is mostly carried out by Chinese firms.
A: Do you face any competition from Chinese steel?
HA: Steel is not imported from China.
A: That is a very good thing.
HA: When CPEC was coming on-stream, we advocated the need to be inclusive, otherwise CPEC would never be viewed as beneficial to Pakistan. We have always maintained that material should be bought locally. There are exceptions where the government has given tax and duty exemptions to certain projects and they have been able to import steel at a cheaper price. But it is a small share; largely, they are buying steel locally.
A: Is there a Steel Association to look out for the interests of the industry?
HA: There are several. We are a very fragmented industry and a lot of the smaller players do not share the same vision we do in terms of how the industry should develop and how we can become globally competitive. We broke away from these associations and created the Pakistan Association of Large Steel Producers which represents about 60% of Pakistan’s primary steel capacity and is made up of like-minded companies that want to go beyond just talking about their own benefits and discuss where the industry is heading and the policies and frameworks the government should devise to implement a 10-year vision for the industry.
A: Has the government been responsive to that?
HA: This government has been more responsive. It is easy to pick holes with the government. Everybody makes mistakes and they made their own share, but I think they have a lot of the right people in the right jobs. They have constraints in terms of what is available to them, but they are listening and taking small steps, although obviously not as many as we would like.
A: Why doesn’t the government enforce standardisation? Surely that has to be a first step? HA: They should. Standards come under the Pakistan Standards and Quality Control Authority (PSQCA) and they are a weak institution.
A: Can the government not intervene?
HA: We have stopped going to PSQCA because we have been banging on their doors for the past many years. We are now approaching other ministries and asking them to intervene, because PSQCA cannot solve problems. Frankly, until your documented and quality-oriented sector makes money, there cannot be progress. We don’t have the kind of wealth creation that would enable us to set up plants with huge capacities. And because of this we are undercut by informal players who do not comply with quality standards. Yet, we have invested a great deal of money to make sure that our product is compliant in terms of health, the environment and safety – all this costs money. All compliance costs money.
A: Do you have a nationwide presence?
HA: We do, although our margins are the highest in Sindh, because we started out from here and until 15 years ago, 90% of our sales were in Sindh. However, as our capacity started to increase we started to diversify by expanding regionally as well as by building up a retail presence rather than rely only on the corporate sector.
A: Are there Amreli branded shops?
HA: They have the Amreli branding, but they carry other brands as well; in other words, we don’t own the shop. The retailer is our stockist and we brand his shop so that he knows we monitor his weighing machine to ensure the consumers are getting the right weight and quality. Retailers are running a business and at the end of the day, they see where the margins are coming from and they push that product. It is very hard to get the loyalty of a retailer without giving him a big margin and sometimes economics do not permit us to give the highest margin. This is why a lot of our marketing is now aimed at the end consumer and today 60% of our sales are retail based, inclusive of what we sell to our distributors and stockists. This is why we prefer to talk directly to the end consumers and make them aware of the quality of our product and develop a connection between them and our brand, so that they eventually ask for Amreli.
A: Is this strategy working?
HA: I think so; we have made our way up to 60% and part of this success was ensuring our product is available at more places and marketing it to customers. The journey has been very interesting. We were the first steel company to undertake ATL marketing. Initially we made mistakes. For example, our ‘Resilience’ campaign was a very good one, but the problem was that because the involvement of an average customer with construction materials is pretty low, they did not make the connection with steel and the brand name Amreli was lost on them. We were too early in our advertising cycle to go for that kind of advertising. We then went for functional ads, but customers glazed over them; when people watch TV commercials, they don’t really want to learn about steel and the technology we use and our post campaign analysis showed that the recall was not there. Now, in our most recent campaign ‘Aap Ki Tarha Solid’ (‘Solid Like You’) we focused on strength of character and it was our most successful campaign.
A: Do you have an advertising agency?
HA: We have changed our model. We used to be very agency based but we have kind of deconstructed it. Our recent TVC was done by Arey Wah. We use The Agency for our design work and we have a couple of in-house people to do the digital part.
A: How important is digital in this business, or is TV your main medium?
HA: If you look at the stats, our target market is composed of SEC A men aged 40+. So although the need for an online presence is increasing, our mainstay is still TV.
Hadi Akberali was in conversation with Mariam Ali Baig. For feedback: firstname.lastname@example.org
In 1940, Robert Graves and Alan Hodge published The Long Weekend (A Social History of Great Britain, 1919-1939) – the time period that corresponds with the housing boom in the country, when over four million homes were built – one third of the housing stock then available in Britain.
In 1919, Britons were emerging from the horrors of the First World War. At the time, 80% of Britons were renting their homes and it was Prime Minister David Lloyd George’s vision to create a “land fit for heroes” for the returning British troops. As a result, the 1919 Housing Act (Addison Act) was voted in to provide subsidies for local authorities to build affordable public housing (later known as council houses).
The availability of subsidies (subsequent Housing Acts were passed between 1919 and 1939) prompted a boom, which peaked by the mid-1930s at 350,000 houses a year. In terms of layout and design, most of this new housing was based on the recommendations of the Tudor Walters Report of 1918, which set the standards for council house design. The Report’s main recommendations were that density should not exceed 12 houses per acre, all houses should ideally be semi-detached, dispose of interior bathrooms, front and back gardens and be served with good transport access. With his recommendations, Sir John Tudor Walters influenced the course of British affordable housing planning for the better part of the century, although not all the recommendations were adhered to as urban sprawls began to grow in scale.
None of this is to say that Britain in 2020 has overcome its housing shortage. In fact, in 2019, the National Housing Federation stated that “an estimated 8.4 million people in England are living in an unaffordable, insecure and or unsuitable home.” In his article Building Dreams on Solid Foundations, Nasir Jamal writes about how Singapore solved its housing crisis. In the long-term, Singapore has proved more successful than Britain, but that is probably more a function of Singapore’s size and governance systems.
Now to Pakistan, a country of 207.8 million people (2017 Census) and which according to Jamal has (by conservative estimates) “an annual housing shortfall that is increasing by 350,000 to 400,000 units (equivalent to half of the number of houses constructed in Pakistan) every year.” Ayesha Shaikh in her article A Question of Affordability, writes about the way Pakistan’s housing market is skewed in favour of the affluent. “Only one percent of the housing units developed annually cater to 68% of Pakistan’s population (people earning a maximum monthly income of Rs 30,000). Conversely, almost 56% of housing units target 12% of the population – individuals with a monthly income of Rs 100,000 and above.” In Shaikh’s estimation, Pakistan has a housing backlog of almost 10 to 12 million units.
In light of the above, something has to be done to address this crisis – something should have been done decades ago – and the fact that nothing was done is a failure of all past governments. Therefore, all credit to the PTI for making the imperative of affordable housing one of the main tenets of its manifesto and that this vision (that is what it still is at the moment) is embedded in the Naya Pakistan Housing Program (NPHP). This intent was reinforced by the government’s announcement in April of an incentive package aimed at boosting construction in order to sustain the economy post Covid-19.
So much for the intent, what of the implementation? As our cover story reveals, a gamut of questions need critical answers. Are the incentives enough to not just spur construction activity in the private sector but NPHP as well? For the latter, the concern is whether the project will indeed be affordable for the majority of the 68% of the population for whom owning a house is a dream rather than an aspiration. In this respect, much more work is required from the government, not least a policy framework that will facilitate the financing requirements of both developers and buyers and which is backed by a blueprint that allies community housing design (with adequate provision of sewerage, water, gas and electricity) with sound urban planning (including easy access to workplaces, education and medical facilities) and political decision making with professional expertise.
At this point, commendable (and necessary) as the intent is, the government has done what Pakistani governments usually do with their good intentions. Announced a policy vision, thrown in some incentives and then left the rest to whomever the ‘stakeholders’ happen to be, to sort out as best (or badly) as they can. Unfortunately, this approach has become increasingly untenable. Until now, the affluent have coped with the fallout arising from the lack of government follow through by creating parallel private sector alternatives and that too with less than desirable results.
As Jamal reminds us, affordable housing was recognised as a human right by the Universal Declaration of Human Rights and reaffirmed at the UN Habitat Conference in 1996 under the banner of ‘Adequate Shelter for All’. The government has to work much, much harder to make its vision a reality.