Is the government really on board with an entrepreneurial Pakistan? and the legal startup guide of your dreams!
Hello friends, colleagues and co-conspirators!
It’s been a big year for digital skills in Pakistan. As I write this piece the DigiSkills program, the federal governments bid to train 1 million Pakistanis “in the future of work” has just launched. Before that there has been PITB’s e-rozgaar program and KPITB’s Youth Employment Program (KYEP) under the Digital KP strategy (#futureofwork #digitalskills #skillsforall). For the public sector, this has marked a significant move forward considering how little attention (and in a lot of cases created extra regulatory & tax hurdles) it has historically given to the IT, freelancing and by extension overall entrepreneurial ecosystem. One could argue that perhaps digital skills training has been one of the lowest hanging fruits that the government could pluck and at the same time give itself a pat on their backs for a job well done. However, while they may now be well on their way to successfully training the next generation of freelancers and entrepreneurs they have done little to actually create the policy environment and clusters like technology parks (more on why the current software & technology towers don’t fully cut it later) required for the participants to grow and scale their businesses (or even declare them for that matter). Part of this equation is now beginning to be addressed by the recent IT incentives announced by the government and spearheaded by Pakistan Software Houses Association (P@sha). Some of the big wins that come with these incentives include an extension of the tax holiday on IT exports till 2025 (which would have expired in 2019 otherwise), 5% cash rewards on exports, a reduction in the federal Sales tax (GST) on IT and ITes, building of special economic zones (SEZs) for the tech sector and commercial loans for tech companies at preferential rates (This TechJuice articles deep-dives into all of these to explain in greater detail what each item constitutes). While the tax holiday extension has already been included within the upcoming finance bill, the government has promised to deliver on the more controversial cash reward and GST incentives. There is a good chance that these will go through, however we will have to wait for the next couple of months to see them formalised in the bill and come to fruition.
But what makes these items so controversial? We sat down with P@sha’s Sectary General, Shehryar Hydri to help us demystify this and also explain why these two items are particularly key for the industry’s growth. According to Hydri GST reductions have been slow to come by due to tight targets within the government. Taking a hit is easier when it comes to the federal government as long as the move is seen as business friendly. However, what this reduction will help in doing is creating pressure especially when it comes to Punjab and KP governments to follow-suit because many businesses would prefer to move operations to Islamabad to avail the lower sales tax. As for cash rewards, this marks the first time that they have been offered to a services industry, primarily because of the high potential of abuse and it being harder to regulate services being exported. However, Hydri remains optimistic citing the fact that extensive reporting and documentation is required by the State Bank when it comes to exports currently which should help minimise the risk. In addition, he believes that if all key stakeholders come together to implement something like the 10% random company audit, whereby all companies exporting services agree to having 10% companies audited randomly, to ensure no foul play is happening (via severe penalties if anyone is caught in violation) the ability for companies to abuse the incentive can be minimised effectively. Did the timing of it being election year play a big part in helping P@sha push forward this historic incentives package? Shehryar Hydri is quite well aware of that fact and remains adamant to using this to the advantage of the IT industry moving forward.
Should the cash reward incentives move forward and become formalised, they stand to be instrumental for the growth of the IT & freelancing sectors. Currently, there are many freelancing business owners that have registered themselves as sole proprietorships where money is shown to be coming in as personal remittances to personal accounts. In contrast, there are still others that while being registered as private limited companies do not declare their income via the IT quotes to the State Bank. P@sha’s underlying goal with pushing for cash rewards is geared towards incentivising these players to officially declare with the SBP. “This has potential of boosting the PKR 850 million figure of the State Bank, which will be crossed in June this year, to PKR 1.5 billion in the next 2 to 3 years. Boosting these numbers will not only show us as a bigger industry and market internationally, but will also bring with it more clout when it comes to negotiating with the government”. While IT is just one specific industry, it presents a good case study when it comes to talking about policy returns. It is one of the fastest growing industries, with IT exports having shown 125% growth over the last 5 years according to IT Minister Anusha Rehman. The slow progress of policy reforms to facilitate this growth, speaks volumes about the governments priorities so far when it comes to the startup ecosystem in my opinion.
However, not all is gloom and doom. There has been a recent upswing in the various government departments and institutions’ interest in wanting to more fully understand the entrepreneurial ecosystem and facilitate it’s growth and development. Just last week, I met with the research team from the State Bank of Pakistan, along with other stakeholders, to help them understand the complexities of the ecosystem, the current gaps and challenges and potential ways SBP can play a role moving forward. The Planning Commission approved a PKR 2.3 billion National Startup Initiative. The Startup Initiative has also created a PKR 1.1 billion Venture Capital fund created with public money but to be managed independently through the Ministry of Planning, Development and Reform. Since 2014 the Prime Minister’s Youth Business Loan Scheme has aimed to facilitate entrepreneurial growth and the National Incubation Centres (in Islamabad, Lahore, Peshawar, Karachi and Quetta now) have also been set-up recently.
While in previous issues of this newsletter and also in our research projects, such as our Pakistan Entrepreneurship Ecosystem Report 2016, we have often addressed many issues pertaining to the startup ecosystem particularly when it comes to the themes of policy, finance, support and human capital. However, another huge gap existing within the ecosystem is that of the lack of access to information and understanding specifically when it comes to legal matters. In the recent report released by Social Innovation Lab called Beyond the Buzz, the startups surveyed identified “Legal Problems” as the second most significant external challenge they faced. Globally, a research carried out by CB Insights (we talked more about it in our previous issue on Why Startups Fail) again cites “Legal Challenges” among the top 20 reasons startups fail. While this may sometimes be due to the lack of enabling policy and laws all together, its more commonly due to the regulatory environment being so opaque that it’s hard to understand and navigate without help from lawyers. This newsletter was born out of our desire to fill this void and make information and data more easily available and understandable. In 2016, we also released an Investor Toolkit meant to be an 101 guide to educate potential investors on how to navigate and invest in the Pakistani market. Since then if there has been one thing we’ve learnt it was that there was a huge need for a similar resource for startups. This has been the primary motivation behind us launching the Startup Toolkit, in collaboration with Mubariz Siddiqui, Co-Founder Wukla.
The 101 guide includes answers to questions on company registrations, investment vehicles, vesting schedules, how much equity to give out, IP laws and much more. While this information isn’t new (or exhaustive) for startups who have gone through a formal incubation or acceleration program via which they’ve had access to lawyers to advise on these matters, many startups either don’t make it to these programs or choose not to participate in one. However, time and time again we see startups with great potential falling into legal traps such as, having given away too much equity to their first investors in return for very little investment or accepting and entering into legally binding agreements based off extremely exploitative term sheets (fun fact: a term sheet isn’t actually legally binding, even if you’ve signed it. More on this in the guide). What thats made us realise is that information like this needs to be publicly available, so that startup founders have a starting cheat sheet against which to compare. The document in itself is not meant to answer all your questions (even though it is an living document and we will keep adding more Q&A’s, so send them our way) and is by no means a substitute for legal advice (#disclaimer!) but what we hope that it does is equip founders with the basic knowledge required as they navigate relationships with lawyers and investors. The full guide is available for free download here. We hope that as we move forward this effort helps demystify some of the questions we get asked most frequently and also creates and environment of information sharing that enables and pushes the whole ecosystem forward.
Read on for more interesting research on the entrepreneurship, internet & investment trends. Also I would like to acknowledge the support, time and information shared with us by Shehryar Hydri, Secretary General P@sha and Mubariz Siddiqui, Co-Founder Wukla. This issue couldn’t have been possible without their valuable insights. Have more to say on the topic? Or just share some interesting research/articles with us? Give us a shout!
Anusheh Naveed Ashraf
Head of Insights, Invest2Innovate
P.S. On Tech Parks (or the lack of them) in Pakistan: Currently there are no clusters or full campuses in Pakistan where all the top Technology companies can sit in one location and really display the strength of the ecosystem. What we have are some software and technology towers spread across the major cities. According to experts, none of them have the required technology infrastructure and 24/7 services and support that would be required for the tech companies to thrive. Furthermore, most remain very expensive and some towers have extensive waitlists to get space.
Mary Meeker’s 2018 internet trends report (the most highly anticipated slide deck in the Silicon Valley) is out. Some of the key findings, summarised in an article by recode linked below, include that smartphone unit shipments and internet user growth have both slowed down. This makes sense since as more and more people come online, there are fewer people to connect and now that more and more people own smartphones it becomes harder to see growth in shipments as well. China is seen to be catching up as a hub for internet companies and leads the world in mobile payment adoption. Immigration remains integral to U.S. tech companies. Read a summary of the key findings and watch the video of the presentation here. You can also find the full slide deck here.