Interview with Shahzad Saleem – Chairman, Nishat Chunian Group
Shahzad Saleem is the Chairman of Nishat Chunian Group. He founded Nishat Chunian Limited (NCL) in 1990 after graduating from the Lahore University of Management Sciences (LUMS). From a single spinning unit, NCL has grown to a vertically integrated company with annual sales of Rs60 billion in FY22. NCL is now amongst the top five textile companies in Pakistan in terms of sales. The company has since diversified into weaving, home textiles, retail, and power generation businesses under the name Nishat Chunian Group (NCG). At present, NCG comprises two listed companies which are Nishat Chunian Limited (NCL) - a textile company and Nishat Chunian Power Limited (NCPL) – a power generation company.
Shahzad Saleem has also served as Director on the board of MCB Bank Limited for twenty-three years and Adamjee Insurance Company Limited for five years. He founded and chaired LUMS Alumni Association for multiple tenures and initiated the ‘Pride of LUMS Award’. He stayed as a member of the Board of Trustees of LUMS for eight years.
Shahzad Saleem is also a philanthropist chairing Saleem Memorial Hospital; which is one of the largest, 350-bed, tertiary-care hospitals in Lahore, designed on a not-for-profit mechanism where affluent patients are charged and the underprivileged patients are subsidized. The hospital became operational in May 2022 and is the only hospital in Punjab providing services from radiation therapy to cardiac surgery under one roof.
Following are the edited excerpts of a recent conversation BR Research had with him regarding the current state of the economy and the future prospects:
BR Research: How do you see the current economic situation and the state of governance in the country?
Shahzad Saleem: The economy is in terrible shape – the reasons have been built up over decades for not making the right decisions. There are examples of countries that have turned around over the last 20-30 years. A low-income society transitions to a middle-income society when it realizes that thriving businesses will generate employment, raise incomes, fuel optimism which reduce frustration and agitation in the society and puts it on the path of development. Higher per capita GDP raises consumption which in turn raises demand and production and has a trigger effect on other sectors also.
Unfortunately, we continue to have a stopgap approach to economic issues. Our governments continue to disregard local investors and run after foreign investors without realizing that the risk profile of a foreign investor for our country is much higher than a local investor, which is why he demands a return on equity as high as 30 percent in dollar terms. Why do companies have back-offices in Pakistan but front-offices in Dubai and Singapore? This economic apartheid will not work.
Why can't we have a country where people genuinely want to invest, and we create an opportunity and legal system which is good so that our risk profile is much less? At today’s risk profile, why do we insist on attracting foreign investment and pay such high dollar returns? Anyway, this investment is usually not efficiency-enhancing investment; it is market share seeking investment with little or no increase in exports. Expecting a different outcome from the same strategy in place for decades is living in a fool's paradise. We need to change something to have a different outcome.
BRR: So, where do you suggest we start?
SS: We need to simplify things. Today, the biggest issue faced by the country is that of foreign exchange. Therefore, the first thing that the government should do is fuel rationing. The government should engineer to reduce fuel imports for the next few months and maybe set a rationing system to control the foreign currency deficit.
Secondly, the government should stop power generation on expensive resources and offset the power deficit through load shedding.
Thirdly, the government should put the development expenditure budget on hold.
Also, the interest rates have to come down for the economy to survive. The government cannot control inflation when interest rates are this high. We do not have high leverage in our economy as compared to personal and mortgage credit debts in advanced economies. Here, higher interest rates increase fiscal deficit and increase the costs for organized sector as they are big users of bank credit. Rather than offering solutions for everything, we must stick with the guiding principle and that is we need to conserve. We do not have the resources to consume so much imports. For starters, we need to bring down / curtail government expenditure. For example, we can stop or limit foreign travel by government officials; reduce the police force as security for VIP’s; bring in a public pay limitation act; etc. These are little things, but symbolism does matter. These issues must be discussed.
Our system penalizes big companies for being big and being in the official economy. Yet there are not many big companies. The policies need to be revised and convey the right message. For example, the government is collecting wealth tax on foreign assets but not local assets, which is giving the wrong message that people should not declare their foreign assets.
BRR: What about the capacity issue in the government machinery and the bureaucracy? Do we lack talent?
SS: I wouldn't call it a shortage of talent. The same people were behind the privatization of industries, foreign currency deregulation, etc. The amount of money PIA has lost in the last 20 years divided over the population of Pakistan is the most significant tax on every individual, whether they know it or not. Ironically, if you take the non-taxpayers out of the system, this tax is being paid by only the taxpayers. So why am I paying for the national airline's inefficiencies and their sinecures? The same holds for the steel mill and other such SOEs.
There are separate circular debts in power and gas sectors. It isdue to line losses, theft, and the debt component, especially in the power sector, where the power plants have 80 percent debt. The projects have a life of around 30 years, while debt repayment is in 10 years; the aggregate debt repayment on all the power projects has crippled the system. The amortization of debt can be stretched; technical line losses should be reduced and passed on; theft should be addressed. The responsibility level must be shifted to city, town, and "muhallah" levels. DISCOs should be broken down into smaller units, and the most efficient should be sold first. The hangover of KE privatization has been so intense that the authorities have been unable to undertake the privatization of the distribution companies. They should learn from the mistakes made in the KE privatization.
And always, one side of the picture is highlighted more. In the case of IPPS, the governments and media have been vocal about the returns and capacity charges ofIPPs, but never highlighted the other side of the picture. Who is paying for the cost escalation of the Nandipur Power Project? It is the people of Pakistan. Had it been an IPP, the private investor would be paying for the increased cost. The same is the case with the Neelum-Jhelum tunnel collapse. The people of Pakistan paid for it, which is still not fixed. None of the governments since 2013 or even those who set up the IPPs defended the fact that capacity charges are internationally accepted practice in the private sector. Today no investor wants to invest in the private power sector.
In banking, the National Bank of Pakistan has the highest amount in banking sector frauds. So why is the state of Pakistan involved in commercial lending? The state should instead have a small bank for strategic reasons, which is easier to manage.
We also need to cut expenditures on ceremonial positions like the governor or the president of Pakistan.
We must return to the drawing board and make a vision and policy bigger than any political party's agenda. We need to fix our system, laws, and judiciary, land records and have a business-friendly image of the country. The relevant people in the system should decide with the judiciary on board to reduce expenditure and conserve and privatize all assets with no strategic interest. And we need to prioritize investment in affordable education. Instead of subsidizing PIA or steel mills, the government should subsidize world-class education.
BRR: Is the government willing to take these steps?
SS: I think there is a severe conflict in the strategy. They want to do many things, and I see willingness in the government. But since it's a coalition government, the politicians have varied views on privatization. We all, including the politicians and the judiciary, should learn from our mistakes.
BRR: What is your view on the current taxes in the corporate sector?
SS: Countries with high tax incidence, like Norway, Sweden, Denmark, etc., have free healthcare, world-class education, and security. These countries have low-interest rates, so building a house is also not arduous. In countries like Pakistan the black economy is enormous; yet, people have to pay for all these expenses with high-interest rates. High taxes need to be fixed. And to be honest, forcing them to pay high taxes will push the entire economy underground. Two things will significantly raise tax collection: first, people at the highest level must be accessible and give justice. And second, tax rates have to come down and be applied across the board – removing all exceptions and exemptions.
BRR: With the concessions to the textile sector being taken away, how do you see the textile sector performing going forward? Any expansion plans? Where do you see the economy heading?
SS: It is a misnomer that the textile sector has been receiving concessions. The industry does not get subsidies in power. The LTTF facility, which incentivized new investment, has been withdrawn. No one will invest at current rates. Export refinance facility in value-added exports is also taken away, which has increased the interest cost significantly. The industry is in survival mode, where some players will survive and some won't, as the costs have gone through the roof. On average, the interest cost has increased by 150 percent for all the textile players. There will be players that will close down or default for sure. There can be no investment by any player at 22 percent interest. It has to go down to single digits to attract investment and expansion.
Right now, the economic picture is bleak. Is it all gloom and doom? I believe that until we put our house in order, the situation will not improve. Even with the IMF deal coming through, we might now see significant improvement in the economic climate. The government should engage a foreign advisor, renegotiate foreign debts, and extend the tenors to get some breathing space. Restructuring external debt is not a default.