Size matters. This column has previously grappled with the conundrum of building “scale” in the local ICT industry that is dominated by free-lancers. (Read: “IT: build scale,” published November 26, 2018). It’s good to see that the issue is now being discussed in the non-IT mainstream circles as well. The latest State Bank of Pakistan (SBP) quarterly report had a special feature on the now officially-billion-dollar ICT exports, giving plenty of food for thought to policymakers.
There is a statistic in the SBP feature on ICT exports that really stands out and backs up the issue of limited “scale” in the industry. Out of 3,228 registered ICT-exporting firms as of last year, only 56 firms – less than two percent of that base – had annual exports of over $2 million. Contrast this with 2,480 firms – more than three-quarters of the ICT exporting firms – that were earning revenues below $0.1 million. Most of the small fish operate at the bottom of the value chain, selling low-end services like call centers.
The feature also mentioned that only 30 percent of all ICT-exporting firms scored their exports through software development, which is a high-end, value-added IT export. No wonder this lucrative segment has flat-lined: software exports in FY18 were about the same as software exports in FY15 – $320 million.
This is not to undermine call-center exports – which, after all, still earn handsomely for the providers, are growing in number every year, and are a good source of employment for the youth. Yet, Pakistan’s dream of matching India’s scale (adjusted for size) will not be realised by simply scraping at the bottom the barrel. Pakistan needs to develop IT champions that can play in the big league.
The report’s authors identify a number of limiting factors. Citing several global indices, they drive home the point that development of the sector is contingent on improving quality of human resource and providing a better business environment. Besides, they acknowledge the problems due to absence of PayPal in Pakistan owing to concerns of data privacy and forex management.
While the issues have been identified, remedies are amiss – though it is not the job of the central bank to suggest sectoral policies unsolicited. In any case, pinning the problem merely on limited skills and absence of cross-border payment solutions might make for a simplistic assessment of the “scale” problem. What requires more analysis is firms’ behavior as a result of prevailing business environment.
The government’s long-running complaint with the IT industry has been the latter’s alleged under-declaration or misrepresentation or mis-recording of export proceeds. (As per industry estimates, roughly one billion dollars is recorded as ICT exports; another billion dollars is coming in through official remittances sources but not recorded as ICT exports; and about half a billion dollars is coming in for freelancers every year).
Software houses deny this impression that they are not fully remitting their export proceeds back home. But the candid bosses at a few houses justify holding back some proceeds abroad out of necessity and not out of greed: they maintain that the government makes it hard to remit dollars abroad when they need to pay for costs/expenses overseas. The problem is generic, as firms in other sectors also have to wait for SBP approval for months to make even $100,000 payments to their consultants or workers abroad.
Salim Ghauri, who is the CEO at NetSol Technologies, which had a top line of over $30 million last year, told BR Research that the “scale” problem is not linked to human skills or payment issues alone. Rather the issue is “fiscal” in nature, as he also alluded to difficulties in making payments abroad. He suggested that if the government allowed a 5 percent rebate on incremental remittance from IT exports, it will do more than realise true scale of exports – it will also incentivise firms to grow big within Pakistan without fearing capital controls.
Asif Peer, CEO at Systems Technology, a leading IT exporter, has attributed the scale problem to various challenges, while speaking to BR Research in a recent interview.
He cited issues like unfavourable travel advisories, visa-issuance process for foreigners, local software companies having limited onsite presence abroad, and an overwhelming focus on project-based work, which makes firms dependent on strategic outsourcing and managed services to build scale and get recurring business from abroad.
The upcoming visa-on-arrival policy should help. The restrictions on dollar payments abroad is understandable due to perennial forex shortfall – but the government needs to find a middle ground way, for this policy – along with the taxman’s alleged intimidation and the lack of a strong local demand for IT services by businesses and government – is working against the “scale mindset” of entrepreneurs, who eventually find it difficult to expand and prosper in Pakistan and set up shops elsewhere.
Comments
Comments are closed.