A move in the right direction

IT exports are becoming an important source of foreign exchange for Pakistan. According to the Pakistan Software Export Board, Pakistan’s IT services earned $3.5 billion in the last fiscal year and according to industry sources, the country is earning annual foreign exchange worth $5.5 billion through the export of IT services – a figure that is expected to grow to six billion dollars in the next fiscal year. This will add up to about 25% of Pakistan’s total exports, if the anticipated $24 billion worth of exports is achieved.

Recently, former Prime Minister Shahid Khaqan Abbasi released the long-awaited Digital Pakistan Policy. The draft of the policy had already been prepared in 2017 and some of the directives are already in the execution phase under the Ministry of Planning & Development. The policy is a much-needed step in the right direction as it tries to address the key bottlenecks faced by the IT sector in general and Pakistan’s entrepreneurial ecosystem in particular.

One of the main bottlenecks faced by Pakistan’s venture capital industry is the lack of capital. So far, Pakistan has been unable to produce a single $100 million start-up (India has billion dollar start-ups). According to the Jazz Foundation’s 2017 report, Digital Entrepreneurship Ecosystem in Pakistan, “one of the biggest bottlenecks in the entrepreneurial ecosystem is the lack of venture capital.”

In consonance with the policy, the Planning & Development Ministry announced a national start-up initiative in May 2018 worth Rs 2.3 billion, of which Rs 1.1 billion will be allocated to an independently managed, government-backed venture capital company, which would either invest directly or co-invest with a private investor in start-ups.

According to the report, out of nearly 300 start-ups launched every year, only about five (a mere five percent) receive seed or Round A funding. Now, in order to bolster venture capital funding, the policy has announced a tax holiday for venture capital funds until 2024. This is a major breakthrough and one hopes that the acquisition of Daraz.pk, coupled with tax breaks for investors, will incentivise both international and local players to invest in Pakistan. The government also announced a facility of commercial loans at preferential rates for IT companies. However, it remains to be seen how the State Bank of Pakistan will structure this facility for software companies which have no collateral.

In consonance with the policy, the Planning & Development Ministry announced a national start-up initiative in May 2018 worth Rs 2.3 billion, of which Rs 1.1 billion will be allocated to an independently managed, government-backed venture capital company, which would either invest directly or co-invest with a private investor in start-ups. Other incentives include a scaling and globalisation platform for Pakistani start-ups through a global network of relations and soft-landing opportunities to enable them to enter and scale up in leading global start-up hubs. This fund will also go towards supporting the Pakistan Stock Exchange in developing a small stock market to help support capitalisation and exit options.

The announcement of the government-backed venture capital fund is a key decision that will have a long-term impact on the start-up sector. In 1993, Israel confronted the same problem. They had research and development capabilities but did not know how to market their products. With the help of Yozma (an Israeli government-backed fund), their tech ecosystem was able to achieve a complete turnaround. In fact, it has been one of the most successful government-backed venture capital funds in the world. It initially invested $100 million in start-ups and by 2002, it had achieved a worth of about $1.4 billion. The start-ups in which it invested, raised $10 billion from venture capitalists and received $17 billion in merger and acquisition deals.

Another bottleneck for start-ups and the IT industry were the massive corporate taxes they had to pay at every step of the value chain. The government has announced an income tax holiday on IT exports from 2019 to 2025. Similarly, to incentivise the IT companies for aggressive marketing and expansion, the government has announced a five percent cash reward on IT exports, which have also been exempted from sales tax. All these incentives are aimed to bolster investment by IT companies in their services and R&D, and thereby lead to rapid expansion. A micro-econometric study on Canadian firms between 1997 and 1999 showed that R&D tax credits increase engagement at the company level and consequently lead to additional innovation output. Another study by the Tuck School of Business in the US showed that one additional dollar of expected cash flow leads to an extra $0.68 in fixed investment compared to just $0.12 for a dollar of unexpected cash flow.

However, one area that remains neglected is in the realm of intellectual property (IP) laws. In Pakistan, there is little incentive to innovate because of the slow and inefficient system of justice which means that innovators have to wait for years for an IP rights case to be resolved before they can market their product.

IT-based service providers have tremendous potential in the global landscape. Tata Consultancy Services, the IT wing of the Tata Group, has a yearly revenue of $19 billion, which is 19 times higher than the annual revenue of DESCON, Pakistan’s largest engineering concern.

AI and Big Data too are opening up new avenues of growth for consultancy services based on the outsourcing model, whereby data scientists in Pakistan can provide consultancy services to big companies in the EU and North America. To gear up Pakistan’s transition to high-tech, value-added IT exports (rather than basic IT outsourcing, such as call centres), the Planning Commission has established four national centres of excellence aimed at conducting research in robotics and automation, AI, cyber security, cloud computing and Big Data. The policy also announced the establishment of state-of-the-art IT software parks with specialised incentives for the IT sector.

Furthermore, the Digital Pakistan Policy targets marginalised communities and women on a broader scale. It aims to impart coding and computing training to women in unserved and underserved areas, as well as encourage local software development for PWDs (Persons with Disabilities).

However, one area that remains neglected is in the realm of intellectual property (IP) laws. In Pakistan, there is little incentive to innovate because of the slow and inefficient system of justice which means that innovators have to wait for years for an IP rights case to be resolved before they can market their product. The government should make special provisions to ensure speedy and efficient resolution with respect to cases of intellectual property rights’ plagiarism. There is also no mention of increasing investment in education, which is fundamental to improving digital inclusion in the long-run.

Overall, Pakistan’s government, as a key stakeholder of the country’s digital entrepreneurial ecosystem, is moving in the right direction. However, a lot needs to be done if we want to produce even 10 $100 million companies or produce even one IT services company comparable to Tata Consultancy Services.

Tayyab Tariq is CEO, Advertelligent.