Recommendations for the Pakistan Private Investment Initiative Dustin Cathcart, Meredith Gloger, & Aaron Roesch John F. Kennedy School of Government Harvard University

May 2012

A Policy Analysis Exercise submitted to Office of the Coordinator for Economic & DevelopmentAssistance U.S. Embassy, Islamabad, Pakistan U.S. Department of State Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Acknowledgements Above all, we would like to thank our principal cli- ent, Vinay Chawla, Deputy Coordinator for Eco- nomic and Development Assistance at the U.S. Embassy in Islamabad. As our main point of con- tact for this project, we owe him a huge debt of gratitude—and we have sincerely enjoyed work- ing with him. (He also housed us for two days in Islamabad, so we are extremely grateful for that, as well.) We further thank Ambassador Cameron Munter and the U.S. Embassy in Islamabad for encouraging and supporting this research project.

We also want to thank Nadia Naviwala, who first introduced us to Vinay, and to many other essen- tial contacts for this project. Thank you as well to Mark Karns, Vinay’s counterpart at USAID, who has been exceptionally helpful throughout this process.

Thanks are due to our advisor, Professor Meghan O’Sullivan, as well as our Policy Area Concentra- tion seminar leaders—Profoessors Monica Toft and Stephen Kosack. Their feedback throughout this process has been invaluable.

We wish to thank Ali Siddiqui and Steve Smith, and everyone at JS Private Equity and JS Bank, for their unbelievably generous support during our trip to Pakistan—and, in particular, an immense thank you to Imran Shaikh, whose hospitality truly knows no bounds.

We also sincerely appreciate the assistance of Nadeem Hussain, Ali Jameel, Kalsoom Lakhani, Vally Khamisani, and the Truman National Securi- ty Project Fellows, who were instrumental in help- ing us set up so many excellent interviews.

And, of course, thank you to everyone, in the States and Pakistan, who met with us during our research, and who shared their insights and perspectives on the Pakistan Private Investment Initiative—we learned so much from, and truly enjoyed, discussing this project with so many in- spiring people over the last few months. Cover Photo: Clifton Beach, Karachi, Pakistan Credit: Benny Lin, January 25, 2010

Inset Photo: K2 , Gilgit-Baltistan, Pakistan Credit: Extreme Design Studio (http://www.extremestudio.ro) 2 3 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Contents B ackgrounD Background ...... 5 Promoting Private Sector Development Pakistani border post in November. In October 2009, President Obama signed into law the Enhanced Partnership for Pakistan Act. The legis- The U.S.-Pakistan relationship, however, and Ameri- Executive Summary ...... 6 lation, better known as the Kerry-Lugar-Berman (KLB) can engagement in the country more broadly, remain bill, introduced a comprehensive policy framework for crucial to ensuring Pakistan surmounts the immediate Overview ...... 10 U.S. assistance to Pakistan, tripling development aid challenges it faces—which are substantial. Vital U.S. to $7.5b over five years. As part of this package, the interests and the economic integration of South Asia re- United States prioritized support for private sector de- quire a stable Pakistan—but looming social, economic, Market Analysis ...... 12 velopment through trade and investment. and political upheaval could compromise any hope for – Economic Challenges...... 12 long-term stability. – Development Approaches ...... 16 Launching a U.S.-sponsored investment fund to sup- port Pakistan’s private sector first garnered attention – Targeting Investment ...... 20 when Secretary Clinton, in partnership with the Over- Investing in Stability –– Market Sectors ...... 21 seas Private Investment Corporation (OPIC), pledged The U.S. Government has various tools at its disposal— to provide $50mm for private equity investments in aid, trade, technical assistance. But one that has been –– Market Segments ...... 25 small- and medium-sized enterprises (SMEs) during the given relatively little emphasis in Pakistan has been in- U.S.-Pakistan Strategic Dialogue in March 2010. That vestment. U.S. investment, however, has the potential to Operational Analysis ...... 31 July, Senators Lugar and Kerry introduced bill S. 3665, both stabilize the economy through effective economic – Model & Strategy ...... 31 the Pakistani-American Enterprise Fund Act. The bill, development, and to widen and deepen American ties inspired by the 1989 Support for East European De- to powerbrokers in Pakistan—especially those outside – Structure & Implementation ...... 31 mocracy (SEED) Act and the 1992 Freedom Support the traditional political establishment. – Complements & Alternatives ...... 38 Act, which together established 10 ‘enterprise funds’ throughout Eastern and Central Europe after the Soviet Pakistan’s private sector is essential to any strategy for collapse, authorized an independent fund to provide long-term engagement—bolstering it will increase eco- Risk & Impact Analysis ...... 46 loans and equity to private Pakistani enterprises, in or- nomic stability, hamper terrorist recruitment, and draw der to create jobs and counter militant extremism. in a wider array of political allies. Recommendations ...... 50 – Key Features ...... 52 In December 2011, Congress chose not to authorize The country’s economy is beset by stagflation and a the $60mm allocation for establishing the Pakistani- lack of competitiveness. Energy shortages and rising American Enterprise Fund. Despite this setback, how- fuel and food costs are closing factories and pushing Conclusion ...... 56 ever, the U.S. Department of State, still committed to more Pakistanis below the poverty line. Private invest- strengthening support for Pakistan’s private sector, ment is the engine that drives economic growth; the Appendices ...... 58 began surveying alternative models for promoting job middle class expansion that often accompanies such growth and investment in SMEs. This paper examines growth will play an important role in promoting econom- –Appendix A – Growth Diagnostic .... 58 these alternatives and makes recommendations for ic stability, which undergirds political stability. A robust –Appendix B – Potential Partners ..... 61 which to pursue, and how best to pursue them. middle class provides a constituency for free markets, –Appendix C – Interviews ...... 65 effective governance, democracy, and the rule of law. –Appendix D – Acronyms ...... 67 Looking Beyond 2014 As well, job creation is an important tool for countering The U.S. partnership with Pakistan is one of the most violent extremism. A burgeoning youth population— strategically significant bilateral relationships in the an alarming 68% of all Pakistanis are under the age of world, and it will continue to be so long after the ten- 30—is engulfing Pakistan’s urban areas, where a lack of tative withdrawal of U.S. forces from Afghanistan in jobs, education, clean water, and access to justice cul- 2014. Pakistan, located at a geopolitical crossroads, tivate a breeding ground for radicalization. An invest- is locked in an enduring rivalry with neighboring India ment fund can help grow businesses, which will create and holds close alliances with China, Saudi Arabia, and new jobs. Generating employment is essential for re- the broader Muslim world. Its geographic significance ducing poverty and lessening the tensions that terrorist is compounded by its demographic composition and networks exploit to radicalize marginalized populations. powerful military. Pakistan is a nuclear state, home to the world’s second-largest Muslim population, and is Finally, direct engagement with business leaders will projected to become the fourth-most populous country form new alliances in Pakistani society. The value of in the world by 2050. diplomacy outside the traditional halls of power has become increasingly clear, especially after last year’s Several events in 2011 tested the relationship between ‘Arab Spring’ uprisings. Building broader, stronger re- Pakistan and the United States—in particular, the Ray- lationships throughout Pakistan is in the American inter- mond Davis incident in January, the killing of Osama bin est, helping U.S. policymakers to better prepare for an Laden in May, and the accidental helicopter attack on a unpredictable future.

4 5 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Executive Summary The U.S. Department of State’s Coordinator for Eco- discourage investment in Pakistan, it can still have vari- Major Findings Recommendations nomic and Development Assistance in Pakistan has ous, multiplicative positive effects. 1. There is an urgent need for financing among Pakistani 1. Establish a vehicle to address Pakistan’s immediate proposed the creation of a Pakistan Private Investment businesses and entrepreneurs. financing needs, but acknowledge its limitations—ul- timately, governance failures constrain private invest- Initiative (PII), to be implemented by USAID, as an alter- The Response 2. Microeconomic risks posed by governance-related ment and entrepreneurship. native to a legislated Enterprise Fund. This study sur- In order to best serve the financial needs of Pakistan’s failures represent the most binding constraint on veys a range of potential options for designing the PII private sector, and to contribute to sustainable econom- private investment and entrepreneurship in Pakistan. 2. Invest U.S. Government resources using the private and proposes a model that, we believe, is best suited ic growth more generally, State should establish a fund The underlying challenge is one of demand for, rather equity fund model. Work with private sector part- to increase access to finance for promising SMEs and with a mandate to provide long-term investment capital than supply of, capital. There is, however, more than ners. The private equity model is proven in emerging to foster job creation and long-term economic growth for SMEs. Small and medium enterprises are both the one constraint on investment in Pakistan—and in the economies and private sector partners bring critical in Pakistan. (We hereinafter refer to this collaboration most finance-constrained and the most likely sources of short term, Pakistan’s energy shortage, interest rate experience to the partnership—both are important for between the Department of State and USAID simply as job growth. Accordingly, SME investment provides an spread, depreciating rupee, and image as a high-risk PII success and attracting new investment. ‘State,’ and to the Pakistan Private Investment Initiative exceptional opportunity to ameliorate Pakistan’s financ- country all serve to limit access to finance. 3. Remain sector-agnostic absent any more specific as the PII, ‘the fund,’ or ‘the initiative.’) State has al- ing constraints and to energize private sector growth. 3. A deficit of useful firm- and sector-level information objectives, but seek diversification across sectors with ready expressed a possible interest in partnering with Moreover, given the resources allocated to this initiative high potential for growth and multiplicative impact the Small Enterprise Assistance Funds (SEAF), as one and the capabilities of State and USAID, SME invest- makes market analysis difficult—this presents a spe- cific private sector development challenge in itself. in Pakistan’s economy. Prioritize further information component of the PII—our recommendations account ment is both a feasible and judicious intervention. collection, collation, and dissemination to address for and accommodate this proposal. 4. Over-prescribing the scope of a fund’s investments the deficit of good market data in Pakistan and attract We recommend designing the fund using the private inhibits flexibility and risks closing out opportunities for new private investment. The Problem equity model, to support new and growing SMEs—i.e., financial and development return. 4. Disaggregate the ‘SME’ space and focus on small and Despite Pakistan’s vibrant banking sector, credit ration- form limited partnerships with professional fund man- 5. SMEs are the most capital-constrained businesses ing is a major constraint on SME growth and investment. agers to direct venture and growth capital to promis- medium firms, separately. Define these as firms in and disproportionately overlap with high-growth sec- the $50k–$1mm and $1mm–$10mm revenue ranges, Interest rate spreads on commercial loans compare un- ing businesses. Private equity’s long-term investment tors of the economy. favorably to the high-interest, risk-free securities sold by horizon, emphasis on value creation, and track record respectively. Focus on SMEs with the strongest exit the Government of Pakistan. As a consequence, vora- in spurring growth and innovation in emerging markets 6. There is a need to better define the bounds of the SME prospects—target investments in companies led by cious government borrowing is sustaining an investment has the greatest potential to address the need for fi- segment and, in particular, to distinguish the differ- promising entrepreneurs that have vision, but lack the climate in which banks have little incentive to extend nancing among SMEs and to foster broader develop- ences between ‘small’ and ‘medium.’ financial and institutional support to scale. credit to the private sector. The burden of Pakistan’s mental returns, without the risk of crowding-out. 7. SMEs in both the venture and growth stages are con- 5. Structure the PII to include venture capital and growth underserving banks on SMEs is magnified by a void of strained by a lack of access to long-term, risk-oriented equity components. Plan for ticket sizes of $50k– private equity participation in the market. Alone, the fi- High-quality fund management will be essential to capital and institutional support, and represent com- $400k and $2mm–$7mm, respectively. Employ the nancial constraint on SMEs is problematic, but coupled achieving a strong return on U.S. investments and to pelling investment opportunities. limited partnership structure common in private equity with a rapidly expanding population it becomes urgent. stimulating the multiplicative impacts that will sustain 8. High-quality, professional fund managers, who have and adopted by the CDC and other major DFIs, in line On average, Pakistan’s economy grows 3% annually; the fund and develop Pakistan’s nascent private invest- a local presence and the capacity to add strategic with international industry standards. just to absorb annual workforce additions, Pakistan will ment industry over the long run. State should look for support to investee companies—operating in private 6. Work through multiple implementing partners, as a need to grow 6–7% per year—i.e., Pakistan will have independent and professional investment firms as the equity’s limited partnership model—are key determi- means to create several smaller PII funds with more to create at least 36 million jobs over the next 10 years best partners for success. State should also not limit nants of fund performance in emerging markets. targeted investment strategies. Select and invest with to meet the needs of a huge, young, and fast-growing itself to a single partner but, instead, place capital with 9. The more participation there is in Pakistan’s invest- professional fund management firms with relevant population. Lagging private sector investment under- several firms to target narrower market segments. experience, local knowledge, capacity to add com- mines Pakistan’s ability to achieve the strong, sustained ment industry, the better will be the exit options and prospects for scaling investment after donor funding mercial value to portfolio companies, and ‘skin in the growth required to rise to this challenge. Additionally, State should include a complementary game.’ Consider emerging or first-time fund manag- component to provide support for the development of ends—the benefits of partnering with various other donors and investors to establish investment funds far ers that align with the broader PII mandate, in addition The Opportunity Pakistan’s entrepreneurial ecosystem. Specifically, the to experienced teams with proven track records. There is an opportunity today to respond to the unmet fi- program can work with Pakistani universities to establish exceed those of branding the PII as a wholly American nancing needs of Pakistan’s SME sector without crowd- and support startup incubators, and it can build linkag- initiative. 7. Structure PII fund partnerships using one or more fea- ing out private investment. This urgent need, coupled es among universities and individual entrepreneurs, in 10. There is also a tremendous need—and substantial sible implementing mechanisms that allow for maxi- with an undeveloped private equity market, creates a Pakistan and overseas, to promote knowledge-sharing opportunity—for supporting the development of Paki- mum flexibility, commercial sustainability, and lever- space in which the United States could play a unique and mentorship. A fund with these three components— stan’s burgeoning entrepreneurial ecosystem. age of U.S. Government resources. Prioritize the GDA model but use more traditional contracts and grants role as a catalyst for investment. By establishing a ecosystem development, venture capital, and growth 11. There is a positive relationship between healthy finan- fund—in some form—State could, at a minimum, gener- equity—can target the full stream of the business life- as required. Seek substantial Pakistani private sector cial and economic returns in emerging market private involvement in sourcing and levering investments. ate modest job growth within its portfolio of investment cycle, which is crucial to scalable, sustainable success. equity—but the PII will also face financial and political companies and showcase U.S. commitment to private risks. These can be mitigated by a well-managed, 8. Incorporate an explicit component to develop Paki- sector development in Pakistan. These alone are valu- The Way Forward market-oriented investment approach that institution- stan’s entrepreneurial ecosystem. Allocate between able objectives and worth the use of limited U.S. re- Below, we provide eight core recommendations, fol- alizes adaptability, learning, and transparency—and $10mm and $20mm for startup capital and other incu- sources. Beyond this, there is also an opportunity to lowing from our findings. Collectively, they address the shows the patience to let investments mature. bator initiatives. Work through local entrepreneurship draw in greater participation to Pakistan’s investment financial needs of Pakistan’s private sector, mitigating networks and universities. Implement from the level market by demonstrating the possibility of healthy— risk, enhancing developmental impact, facilitating prof- of the PII as an overarching component or through a even extraordinary—returns. While, ultimately, a single itable investments, and improving U.S. engagement partner as a smaller sub-fund. fund cannot mend the underlying policy failures that with Pakistan’s private sector.

6 7 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Summary Diagram

Market Analysis Operational Analysis withwithh h shouldshoushouldshouulduld we w we w work?w work?w

EconomicEconomic DevelopmentDevelopment StructureStructure & & ComplementsComplements & & TargetingTargeting Strategies Strategies ModelModel & Strategy& Strategy ChallengesChallenges ApproachesApproaches ImplementationImplementation AlternativesAlternatives AssistanceAssistance Types Types FinancingFinancing Vehicles Vehicles SectorsSectors SegmentsSegments InvestmentInvestment Type Type TargetTarget Size Size No.No. of Partnersof Partners SelectionSelection Process Process

TechnicalTechnical CommercialCommercial LowLow human human CapitalizeCapitalize on on AngelAngel 1 partne1 partner, r, GlobalGlobal EntrepreneurialEntrepreneurial assistanceassistance bankbank MicroMicro MicrofinanceMicrofinance capitalcapital corecore strengths strengths investmentinvestment 1 fund1 fund DevelopmentDevelopment ecosystemecosystem (to(to banks) banks) lendinglending AllianceAlliance developmentdevelopment

AidAid DomesticDomestic InvestInvest where where PoorPoor SMESME VentureVenture 1 partne1 partner, r, RequestRequest for for SocialSocial impact impact (to(to State State Bank, Bank, governmentgovernment there’sthere’s pent-up pent-up SmallSmall infrastructureinfrastructure financingfinancing capitalcapital fundfund of offunds funds proposalsproposals bondsbonds NEEDNEED SMEDA)SMEDA) lendinglending demanddemand FEASIBILITYFEASIBILITY

OPPORTUNITYOPPORTUNITY MacroeconomicMacroeconomic ForeignForeign ConsolidateConsolidate IMPACTIMPACT GrantGrant to topublic public LargeLarge capital capital GrowthGrowth MultipleMultiple PartialPartial credit credit governmentgovernment TradeTrade governmentgovernment fragmentedfragmented MediumMedium internationalinternational investmentinvestment equityequity partnerspartners guaranteesguarantees failuresfailures lendinglending marketsmarkets organizationorganization

MicroeconomicMicroeconomic NonprofitNonprofit Feed-inFeed-in tari tariff ff PromotePromote export export governmentgovernment InvestmentInvestment grantsgrants & & LargeLarge BuyoutBuyout forfor renewable renewable competitivenesscompetitiveness failuresfailures lendinglending energyenergy

MarketMarket FinancialFinancial SectorSector informationinformation TradeTrade marketsmarkets agnosticismagnosticism failuresfailures assistanceassistance

MarketMarket PrivatePrivate FocusFocus on on coordinationcoordination equityequity locuseslocuses of of failuresfailures jobjob creation creation Risk &

LowLow savings savings & & TapTap key key I badbad international international demographicdemographic mpact financefinance groupsgroups

LowLow LookLook for for A competitioncompetition multipliermultiplier nalysis effectseffects

HighHigh risk risk AddAdd U.S. U.S. of offinance finance valuevalue Recommmendations HighHigh cost cost & Key Features of offinance finance

8 9 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE O verview Research Goal ment would make a valuable contribution to addressing With this policy analysis exercise, we seek to inform the the existing deficit of useful market data. INSTITUTIONALIZE ongoing dialogue on U.S. economic and development assistance to Pakistan. Our core objective is to pro- Fund Objectives vide specific recommendations to the U.S. Department The U.S. Government has proposed the creation of the of State for the design and implementation of the pro- PII to increase the availability of finance for promising posed Pakistan Private Investment Initiative. small- and medium-sized enterprises in Pakistan. ENSURE! ADAPTABILITY We define the initiative’s objectives as follows: TRANSPARENCY! FEASIBILITY! Methodology & The findings herein are the culmination of field research conducted in Cambridge, Mass., Washington, D.C., 1. Promote job growth – Support the expansion of

and Pakistan, between November 2011 and April 2012. businesses, encourage entrepreneurship, and Research included interviews with entrepreneurs, busi- show positive demonstration effects that attract fur- Private! ness leaders, investors, bankers, policymakers, elected ther private investment. & officials, academics, and other experts, in Pakistan and Investment! LEARNING! INDEPENDENCE

the United States. We held meetings in Karachi, Lahore, 2. Foster goodwill – Establish a visible, long-term Guiding Principles and Islamabad, in order to gather insights into and per- American commitment to supporting the develop- THE ! Pakistan Initiative! spectives on the investment environment in Pakistan, ment of Pakistan’s private sector. and the optimal design for a U.S. fund. EMPHASIZE Guiding Principles ADDRESS! CAPITALIZE ON! We also reviewed the existing literature on foreign as- We identify six overarching principles that underlie the de- NEED! OPPORTUNITY! sistance and private sector development, policy papers sign and implementation of an effective fund. First, the addressing the U.S.-Pakistan bilateral relationship, data fund should optimize across three dimensions—address- and research on the Pakistani investment evironment, ing pressing economic needs, capitalizing on market op- and other relevant sources of information. Direct refer- portunities, and ensuring feasibility. From this foundation, SEEK MULTIPLICATIVE IMPACT! ences to published sources are cited in the endnotes. the fund should enshrine the values of independence and Insights and observations gleaned from interviews are transparency, and of adaptability and learning. Finally, the not cited explicitly in the document, but Appendix C in- fund’s driving motivation should be to have multiplicative cludes a complete list of individuals consulted through- impact.

out our research. NEEDS & OPPORTUNITIES! Analytical Framework MARKET ANALYSIS! Scope Our analytical framework aims to identify the optimal bal- Our research examines the specific proposal for a Pri- ance of the three foundational principles—addressing COUNTRY LEVEL vate Investment Initiatve and its role in strengthening need, capitalizing on opportunity, and ensuring feasibil- ECONOMIC ! DEVELOPMENT! the U.S. approach to economic development in Paki- ity—in two stages. CHALLENGES! APPROACHES! stan, but it does not address other aspects of that en- FIRM LEVEL deavor or this broader policy question itself. First, we evaluate the overlaps between need and oppor- tunity. We assess the economic constraints on growth and TARGET! TARGET! Although we evaluated a range of viable options for the investment at the country level, by examining the broader SECTORS! SEGMENTS! economic environment. Then we identify the areas where design of the fund, we chose not to elaborate on the op- FEASIBILITY & IMPACT! erational details of how these recommendations would financing need and growth opportunity most overlap at the OPERATIONAL ANALYSIS! be implemented. There are thus legal and technical firm level, by examing the market across two key dimen- questions regarding the operation of the fund that are sions: sectors and segments. MODEL &! DESIGN &! beyond the scope of this study. STRATEGY! IMPLEMENTATION! Second, we consider feasibility and impact. We conduct COMPLEMENTS &! Analysis of Pakistan’s economic context and market op- an operational analysis of the range of possible fund mod- ALTERNATIVES! portunities informs our recommendations for an optimal els, implementation structures, and alternative approach- fund model. We intentionally refrained, however, from es to assess their viability and efficacy. We the perform recommending specific investment decisions or strate- a risk and impact analysis to identify the main financial RISK &! gies. Such decisions ought to be the responsibility of and political factors that have the potential to undermine IMPACT! independent and professionally experienced fund man- the effectiveness of fund performance, and how best to Analytical Framework ANALYSIS! agers with local knowledge and technical expertise. overcome them.

Finally, although we consulted a diverse group of stake- We conclude with eight core recommendations, plus sev- holders in Pakistan to produce this study, our interviews en more specific design considerations. We also include were not exhaustive and our time in-country was limited. two (of several potential) models for the fund’s structural Further field research on Pakistan’s investment environ- design. RECOMMENDATIONS!

10 11 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

crease—represents both an opportunity and a tremen- in the supply of labor. In recent years, this imbalance Market Analysis dous challenge. has been stoking inflation.4 Currently, Pakistan is ex- periencing ‘stagflation’—i.e., high inflation coupled with Any development program in Pakistan must take into Fig. 1 Pakistan's 'Youth Bulge'! Volatile Growth low growth. Percentage of Population <14yrs! account the larger economic context in which it will op- 45%! Pakistan’s ability to rise to this challenge depends on its

erate. Be it for an enterprise fund or any alternative 44%! capacity for strong, sustained growth. While the coun- Although unemployment itself is not an immediate con-

model, the needs of Pakistani businesses, the challeng- 43%! try has this potential, its economy has been extremely cern, it will become one, if economic growth does no es they face, and their prospects for growth are distinct volatile in recent years. keep pace as the workforce balloons. To achieve such 42%! from those in Eastern Europe in the early 1990s and, growth, Pakistan needs more investment in its private 41%! indeed, from many other emerging markets today. Un- After experiencing anemic growth in the 1990s, the sector. derstanding these nuances is essential for crafting the 40%! economy bounced back with rapid economic growth in best possible policy intervention. 39%! the early- to mid-2000s.* But Pakistan’s external defi- 38%! cit in 2007 made it particularly vulnerable to the 2008 37%! financial crisis. High inflation and low levels of domes- * Economic Challenges 36%! tic liquidity became unsustainable with the collapse of Pakistan faces a unique set of economic challenges— 35%! global demand. As a result, the IMF bailed out Pakistan some caused by natural and demographic circum- 1960! 1965! 1970! 1975! 1980! 1985! 1990! 1995! 2000! 2005! 2010! to avert a balance of payments crisis. In addition to stances, others by poor policy choices. While substan- soon be the fourth-largest country in the world—its inflation, political instability and rising global commodity tial, these challenges are manageable given the right population has tripled in less than 50 years and is pro- prices have further deterred investment and weakened approach, from within the Pakistani government, and jected to increase by an additional 85 million by 2030.1 Pakistan’s current account balance. from outside partners like the United States. Ultimately, Pakistan is also experiencing an unprecedented youth the prospects for resolving Pakistan’s broader political bulge. About 68% of Pakistanis are under the age of Pakistan’s economy is currently at risk of ‘overheating.’ and security difficulties will hinge on how effectively the 30, and the size of the workforce is increasing at an That is, its non-accelerating inflation rate of unemploy- country navigates this turbulent economic period. average of 3% per year.2 ment (NAIRU), or its ‘natural’ unemployment rate, has exceeded its real unemployment rate. This suggests Immediate Constraints on Capital Youth Bulge To meet the needs of this surging population, Pakistan’s that growth in aggregate demand is outpacing growth In the short term, Pakistan faces a unique set of inter- With more than 190 million people today, Pakistan will economy has to grow at an estimated 6–7% annually, * The World Bank credits this growth to economic reforms, including woven constraints on financing for investment—particu- fiscal adjustment, energy sector privatization, deregulation of the fi- * Portions of this section were written originally by Dustin Cathcart, for the foreseeable future, and it must add some 36 mil- larly for smaller, growing businesses. 3 nancial sector, and liberalization of international trade policy. Andrew Fitzpatrick, and Meredith Gloger for PED-130, “Why Are So lion new jobs in the next 10 years. This ‘demographic Many Countries Poor, Volatile, and Unequal?” with Prof. Ricardo Haus- dividend’—as the youth bulge ages and moves into the mann, Harvard Kennedy School. (“PED-130 Final Assignment: Growth workforce, the proportion of productive workers will in- Diagnostic—Pakistan,” December 2011).

12 13 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

Circular Debt5 it more difficult to raise energy tariffs—illuminating the In 2011, for instance, while lending to the government sponding decrease in FDI; investment dropped each Pakistan’s most pressing economic challenge is the ac- debilitating circularity of this crisis. increased by 74.5%, credit to the private sector grew year from 1995 to 2001. Then, in the early-2000s, Paki- cumulation of circular debt in the energy sector, which only by 4%.9 stan experienced an economic surge—GDP growth in- has reverberating effects throughout the economy. In Interest Rate Spread creased each year from 2001 to 2005, rising from 1.98% 2008, the Pakistan Electric Power Company (PEPCO)— In 2011, Pakistan’s overall public debt grew by 1.76b Depreciating Rupee at the start of the decade to 7.67% annually.11 An influx the public umbrella organization for power-generation rupees to Rs 11 trillion (about $121.6b)—representing During the financial shock of 2008, the Pakistani rupee of foreign investment paralleled this boom; FDI rose companies (GENCOs) and power-distribution compa- 60.9% of GDP. Today, interest payments themselves experienced a swift devaluation—from March 2007 to each of those years, from $322.5 million in 2001, up to nies (DISCOs), accounting for 90% of energy produc- eat up 32.8% of government revenue.7 There are many October 2008, the rupee lost 27.31% of its value against a peak of $5.41 billion in 2007. But the reemergence tion in Pakistan—began facing rising energy production pernicious effects of such a large debt burden—most the U.S. dollar. Because Pakistan’s external debt was of instability in the second half of the decade, coupled costs, as worldwide oil prices rose, exaggerated by a immediately, though, it is not the size of the debt that so heavily invested in foreign exchange reserves, it was with the financial crisis in 2008, saw a sharp downturn in depreciating rupee. At the same time, due to the gov- poses the biggest problem, but rather how the govern- particularly vulnerable. In the years since, following a FDI, which has dropped each year since 2007—falling ernment’s high external debt amidst the global finan- ment finances it. The government has come to rely on brief recovery, the exchange value against other major to less than $1.5 billion in 2011–2012. cial crisis and the resultant credit crunch, public power Pakistani commercial banks to supply the majority of currencies has been in steady, gradual decline. purchasers fell short on its debt—by borrowing Pakistan’s ‘Binding Constraint’ payments. Aggravat- Fig. 3 Pakistan's Growing Interest Rate Spread heavily from domestic Currency depreciation can have ambiguous effects Pakistan undoubtedly faces a host of economic chal- ing the shortfall, high 16% lenders, the govern- on an economy—for instance, a weaker rupee might lenges—from the immediate debt, financing, exchange,

rates of energy theft re- 14% ment thus crowds out strengthen Pakistan’s export sector. But volatility adds and perception problems, described above, to longer- mained unaddressed. private-sector borrow- risk for investors outside Pakistan and businesses with- term infrastructure deficiencies in the energy and edu- 12% ers. in. And, compared to neighbors like India, Pakistan has cation sectors, current account imbalances, and mar- In lieu of cracking down 10% seen markedly higher volatility. ket failures related to corruption, monopolization, rent-

on theft or raising tariffs 8% Following the suspen- seeking, and lack of information. It is important to ask, (tariffs remained stag- sion of the IMF’s Stand- In particular, a continuous fall in the rupee against other however, which of these are underlying ailments and nant from 2003 to 2007, 6% by Agreement (SBA), major currencies will depreciate the value of foreign which are merely symptoms, and, from a policy per- despite rising energy 4% there are fewer viable debt for Pakistani firms—a loan in U.S. dollars, for in- spective, which constraint, if loosened, would unleash costs), PEPCO passed sources of external stance, will require constantly accelerating growth to the most investment and growth—i.e., what are their 2% on the growing receiv- debt. As a result, in repay, as local earnings have to stretch ever further to ‘shadow prices’ and which has the highest one? able to suppliers—ex- 0% 2011 the government reimburse foreign debts. tending the debt up the 2004 2005 2006 2007 2008 2009 2010 borrowed Rs 1.1 trillion Ricardo Hausmann, Dani Rodrik, and Andrés Velasco12 energy supply chain Bond Yield Lending vs. Deposit Rate from domestic lenders Outside Perceptions of Risk introduced a model—called a growth diagnostic—for (GENCOs, refineries, (about $12.2b)—local During the last two decades, foreign investment has determining a country’s ‘binding constraint’ on invest- oil and gas exploration sources now finance been sensitive to instability in Pakistan. An increase in ment. This methodology uses a standardized, staged companies, etc.). Fig. 4 Pakistani & Indian Rupee FX Rates vs. USD, 2007 – 2012! 91% of the deficit.8 violence in the mid-1990s (much of it linked to MQM- process for isolating the most constraining factor in an 95! backed political attacks in Karachi),10 saw a corre- economy. In Appendix A, we employ this approach to This mounting debt Heavy government reduces energy pro- 85! borrowing disincentiv- duction, as upstream izes—and thus crowds Fig. 5 Monthly Terrorism Deaths vs. Annual FDI (USD), 1994–2010! producers—the only 75! out—lending to the 450! $6b! ones with liquid cash private sector in three reserves—are forced to ways: 65! 400! pay off their receivables $5b! rather than invest in ex- 55! 1) the government pansion. Additionally, offers high interest 350! since 2006, PEPCO has rates, raising the effec- 45! borrowed from com- tive discount rate for 300! $4b! mercial banks against banks, and raising the 35! government guaran- 2007! 2008! 2009! 2010! 2011! 2012! hurdle rate for investing 250! tees, as have indepen- USD/PKR! USD/INR! Linear(USD/PKR)! Linear(USD/INR)! in the private sector in- dent power producers stead; $3b! (IPPs) who supply PEP- 200! CO, since 2007. 2) Government debt is risk-free, and so banks seek a risk premium from private borrowers, further raising At the end of 2011, the government formally absorbed their lending rate; 150! $2b! the accumulated debt from PEPCO—Rs 391b (about

$4.3b), equivalent to 1.8% of GDP—into the public 3) transaction costs are lower for government borrow- 100! debt.6 In this way, the energy sector feeds the larger ing. debt problem in Pakistan, which in turn is a key factor $1b! in suppressing private-sector financing. Further, circu- Taken together, these three factors serve to push inter- 50! lar debt dampens energy investment; this exacerbates est rates seen by private borrowers too high to often be

the electricity shortages that so constrain businesses; viable, and to reduce banks’ inclination to seek oppor- 0! $0b! these then limit their capacity for growth; and this makes tunities for lending to the private sector in the first place. 1994! 1995! 1996! 1997! 1998! 1999! 2000! 2001! 2002! 2003! 2004! 2005! 2006! 2007! 2008! 2009! 2010!

14 15 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

identify Pakistan’s binding constraint­. State has a core set of tools at its disposal for any pro- Congress’s decision not to authorize funding for the the United Kingdom’s CDC—as potential models for the gram of this sort: aid, trade, technical assistance, and Pakistani-American Enterprise Fund at the end of PII. We find that microeconomic risks posed by government investment. And there are several broad approaches 2011 eliminated the possibility, in the immediate term, failures most constrain investment. In other words, the whereby State could attempt to increase access to fi- of establishing an independent institution, capitalized Enterprise Funds government’s over-involvement in the economy—e.g., nance for SMEs. One would be to provide technical by the U.S. Government, to invest directly in Pakistani Under the 1989 SEED Act, followed by the Freedom by creating and enabling monopolies, paying untar- assistance to Pakistani banks, government institutions, businesses. There are nevertheless other options for Support Act in 1992, Congress established 10 ‘enter- geted subsidies, enforcing cumbersome and ineffi- or other potential lenders, to encourage them and to partnering with private-sector, nonprofit, or multilateral prise funds’ covering 18 countries in Eastern and Cen- cient regulations, and engaging in direct corruption— strengthen their capacity to lend to smaller businesses. organizations to provide a conduit for such financing. tral Europe. The funds combined lending programs discourages investment at the firm level, by distorting A second would entail offering loan guarantees or first- (debt), equity investments, and technical assistance for companies’ incentives. These practices, more than loss capital to domestic lenders, thereby absorbing their Given the nature of Pakistan’s investment climate, how- establishing local financial institutions. Over their lifes- anything, dampen Pakistan’s growth. risk and incentivizing private-sector lending. A third is ever, private sector institutions—namely, professional pans, the funds were obligated $1.175b by Congress to establish a fund to make such investments—equity private equity and venture capital fund managers—of- and earned an overall return of $1.704b. They directly This observation should serve to frame the PII. Ultimate- and debt, paired with strategic guidance—directly. fer a particularly attractive partnership opportunity. As invested a total of $2.973b, leveraged an additional ly, a U.S. fund cannot directly rectify these policy failures such, investment, rather than traditional aid, could pose $3.326b in equity through fund managers, plus $3.581b that fundamentally discourage investment in Pakistan. A fund—providing a new source of substantial benefits. of debt and co-investment. They also provided signifi- The initiative may demonstrate that investors can earn cant technical assistance, including for the creation of high returns, but until Pakistan’s growth-constricting capital—can fill the financing gap John Donahue and Richard Zeckhauser13 lay out four 30 financial institutions (banks, venture capital firms, policies are reformed, many investors will remain wary, without fighting the interests or incen- rationales for collaborating with private sector actors leasing companies, microfinance institutions, etc.).14 and the economy will be unlikely to see high, sustained like these to achieve a goal usually relegated to the economic growth across the board. tives of other actors. public sector.

Nevertheless, Pakistan faces a diverse set of imminent Rationale for an Investment Approach • Resources – Private partners offer the opportunity economic challenges, so we do not intend to imply Working through preexisting institutions in Pakistan— to leverage American capital for greater impact. By that addressing the financing gap is not worthwhile—it whether public or private—has proved difficult: The partnering with investors who can raise their own certainly is. But it is important that such an initiative is Pakistani government is ill-placed to finance business equity—from other institutional or international in- not viewed as a panacea. As well, it is important that growth (especially when so many of Pakistan’s eco- vestors, local investors, or the Diaspora—the fund the initiative itself recognize the deeper problems the nomic woes are tied to government over-involvement can multiply its size and thus increase its effect. Pakistani market faces, and that it incorporate these in- and rent-seeking in the first place). At the same time, sights into its design. A fund, for instance, could help capacity-building of or technical assistance to com- • Productivity – The human capital, incentive coalesce a stronger private-sector lobby for policy re- mercial banks is misplaced, as it is simply not in their schemes, and institutional structures of the private form, by connecting investees and wider networks of interest to provide capital to SMEs at present, given the sector are better-equipped for making productive entrepreneurs. It could also find ways to support more government’s reliance on banks to finance the pub- investments into Pakistani firms than are those of forward-thinking policymaking, as initiated by the Plan- lic debt, risk-free and at high interest rates. Likewise, USAID or the Department of State. ning Commission’s Framework for Economic Growth. loan guarantees for these banks might require working through the State Bank—a government body—and it is • Information – Likewise, at both the institutional and also unclear, given their exorbitantly high investment in individual levels, potential private-sector partners The enterprise funds were private, nonprofit corpora- Recommendation 1 government securities, whether this would do enough to possess substantially more know-how and on-the- tions, capitalized by USAID grants. They had indepen- Establish a vehicle to address Pakistan’s incentivize more lending without further prodding (e.g., ground knowledge about investment opportunities dent, White House-appointed boards, which then hired immediate financing needs, but acknowl- substantial changes to the tax code to reward private- in the Pakistani market than does the Department of in-house professional fund managers. Each fund re- edge its limitations—ultimately, governance sector lending and penalize debt financing). State, USAID, or either’s staff. ceived ‘notwithstanding authority,’ and thus was exempt failures constrain private investment and from many standard rules and regulations, such as for entrepreneurship. Design the PII to invest A fund—providing a new source of capital—can fill the • Legitimacy – Private investors have more credibility procurement procedures or ‘Buy American’ require- in relatively unconstrained market areas financing gap without fighting the interests or incentives than the U.S. Government for two reasons: 1) their ments. The individual boards had significant leeway to and to act as a catalyst for reforms to im- of other actors. If successful, it can catalyze further in- track records and professional expertise render determine investment strategy, and the funds often took prove the business environment. vestment (local and international) to address this need them more suitable strategic partners for Pakistani divergent approaches country by country. more sustainably. Trade preferences for Pakistani ex- firms; 2) in Pakistan’s complicated political climate, porters could also play a crucial role in spurring private- private investors will be a step removed, and thus Today, all but one fund has fully liquidated (the West- Development Approaches sector growth, but such accommodations would have a more insulated, from any negative connotations of ern NIS fund is scheduled to liquidate by 2013)—but all Some of Pakistan’s economic problems—like those re- less immediate effect, are not as politically feasible in U.S. involvement. have been rolled over into legacy institutions, like the lated to the government’s macroeconomic policies or the current U.S. climate, and, anyway, are beyond the Polish-American Freedom Foundation and the Hungari- micro-level market interventions—are beyond the scope scope of this intervention by State—though they could Precedents an-American Enterprise Scholarship Fund.15 of any direct U.S. initiative. Among those that are within serve as an important complement to an investment ve- The U.S. Government has engaged previously in a reach, Pakistan’s financing gap for small- and medium- hicle.* number of collaborations with the private sector to pro- More recently, Congress authorized enterprise funds for sized businesses is perhaps both the most pressing mote investment as a means to development. As well, a Egypt, Jordan, and Tunisia. Sen. Richard Lugar has * The Center for Global Development, for one, has written extensively and the one on which State can have the most impact. on the need for trade concessions as a means to development in number of other development finance institutions (DFIs) also sponsored legislation for a Haitian-American En- Finding a way to channel capital to young, growing Pakistan. The European Union’s recent decision to reduce tariffs on exist, financed by sovereign governments and multilat- terprise Fund. businesses will most directly generate new jobs, and, if 75 Pakistani products, for instance, could produce $100–300mm in eral institutions. We highlight below two in particular— achieved through wider market mechanisms, the dem- new annual revenue. For more on this, see: http://blogs.cgdev.org/ the World Bank’s International Finance Corporation and Overseas Private Investment Corporation (OPIC) globaldevelopment/2012/02/trading-up-pakistan-the-eu-and-trade- onstration effects of successful investments can multi- as-development.php; http://www.cgdev.org/content/publications/ Congress founded OPIC in 1971 as the U.S. DFI, in or- ply well beyond the ambit of any single U.S. program. detail/1425847/; and http://www.cgdev.org/content/publications/de- tail/1425136/. der to “mobilize and facilitate the participation of United

16 17 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

States private capital and skills in the economic and TFBSO places particular emphasis on operating with of less than $905.30 In the last five years, 44% of its new equivalent to 2% of the fund’s total assets. Beyond this, social development of less developed countries.” Un- a business mindset. It hires employees out of the pri- investments have been in Africa, 28% in South Asia, any profits are split 20/80 between the GP and LPs— der its original mandate, OPIC provided risk insurance vate sector (with an eye toward both country-specific 20% in Asia Pacific, and 8% in the Americas.31 i.e., managers are entitled to 20% of all profits (so- to foreign investors to promote FDI. In the late 1980s, and professional expertise), it encourages extended called ‘carried interest’).35 OPIC added support to private equity investment funds in-country stays (rather than limited, 12- to 18-month CDC made £420mm of new investment in 2010—over to its mission. OPIC provides loan guarantees to fund tours), and it stresses the importance of establishing the last five years, annual new investments have ranged In the United States and other developed markets, we managers—typically for 30–65% of the fund’s total trust and strong local connections, such as by wearing from £257mm to £436mm. As of 2011, its active portfo- typically think of PE firms as turnaround agents—inves- value.16 OPIC also provides loan financing directly to civilian clothes, using civilian vehicles, and living and lio totaled to £1.933b. This is managed by 74 fund man- tors who buy out firms, restructure them (often with se- SMEs (revenues less than $250mm), and structured fi- working ‘outside the wire.’25 agers, and is invested in more than 1,000 businesses.32 vere cost-cutting), and then sell them for a profit. But in nancing for large-scale capital projects to businesses emerging markets like Pakistan’s, the model often looks with revenues greater than $250mm.17 In January 2010, TFBSO expanded operations to Af- CDC has been wholly self-sufficient for more than 15 quite different. Private equity in this context usually en- ghanistan, where it focuses on mining sector develop- years—it has not received taxpayer money since 1995, tails minority stakes (rather than buyouts); focuses on To date, OPIC has committed $3.6b to more than 50 pri- ment, encouraging private investment in energy and as profits from exited investments cover all operating smaller, younger companies (rather than larger, dis- vate equity funds, which have then invested more than IT, industrial development in traditional activities (e.g., costs. In 2010, the CDC earned an after-tax return of tressed ones); and its goal is to provide firms capital $4.6b in 470 businesses in 53 developing countries.18 carpet-weaving, dried fruit production, and cashmere £269mm.33 and strategic guidance to help them grow, rather than In 2010, OPIC provided $2.4b in total financing and production), and increasing women’s economic partici- to restructure them into profitable businesses. CDC provides an excellent model for the PII: It is a sov- ereign DFI with an explicit development focus. It has From 1969 to 2003, OPIC supported $145b of private investment, generating operated primarily as a ‘fund of funds’—i.e., investing in more than $11b in revenues for local governments and 680,000 jobs in develop- preexisting private equity funds—but also makes direct ing countries. investments through fund managers. CDC earns com- petitive market returns by working through the private sector, while maintaining clear government oversight insurance, and earned a net income of $259.9mm— pation through skills training, literacy courses, the es- under the direct auspices of DFID. returning money to the Treasury for the 33rd straight tablishment of a center for women’s economic develop- year.19 ment, and other initiatives.26 The Role of Private Equity The term ‘private equity’ (PE) covers investments of a There is substantial evidence that OPIC’s activities have International Finance Corporation (IFC) wide array of sizes, and for a variety of purposes—but Private equity can carry negative connotations—lay- a positive impact. From 1969 to 2003, OPIC supported The IFC, part of the World Bank Group, is the world’s they share some common features. First, private equity offs, downsizing, etc. But in emerging markets, private $145b of private investment, generating more than $11b largest DFI. Founded in 1956, it is jointly owned by 182 involves private placements—distinguished from pur- equity’s role is rarely about squeezing efficiency out of in revenues for local governments and 680,000 jobs in member countries and works in more than 100 devel- chases of shares in publicly traded companies (e.g., underperforming firms, and is much more often aimed developing countries.20 Anecdotally, fund managers re- oping countries. It accounts for roughly one-third of all through stock exchanges). Second, the typical private at bringing scarce capital to promising businesses with port that OPIC’s presence has encouraged their entry financing provided by DFIs to the private sector in the equity model, particularly in emerging markets, takes a the potential for growth. into emerging markets, and has made it easier to then developing world.27 standard structure: a general partner (fund manager), raise follow-on funds to sustain and grow private invest- along with limited partners (additional investors), invest Evidence on the performance of private equity in Paki- ment.21 In 2011, the IFC invested $12.2b in 518 projects in equity (perhaps paired with debt) into portfolio compa- stan, in particular, is extremely thin because there has 102 countries from its own account, and mobilized an nies. The relationship among the general partner (GP) been very little activity to date—which is why there is OPIC, by statute, cannot take equity positions, and in- additional $6.2b in co-financing. IFC also provided and its limited partners (LPs) is formalized in a fixed- such a need. Even in emerging markets generally, stead focuses on the provision of debt and insurance. $206.7mm in technical assistance. About half of invest- term limited partnership, in which the GP has authority though, the evidence is little better—there is especially OPIC is authorized, however, to pilot a program for mak- ments and two-thirds of advisory services went to poor over investment decisions, while the LPs have limited a lack of exit data for assessing success or failure. ing equity investments.22 countries (i.e., aid recipients, as designated by the In- liability for losses.34 ternational Development Association).28 A 2010 report by the World Economic Forum, however, Task Force for Business and Stability Operations (TFBSO) PE funds also have a standard incentive and profit- which combined datasets from private equity invest- The Department of Defense (DOD) established TFBSO The IFC has three core divisions: Investment Services, sharing structure, known as two-and-twenty (2&20). ments in both developed and developing countries, in 2006 to channel counterinsurgency funds directly to Advisory Services, and Asset Management. Through Fund managers are paid a set, annual management fee found that industries in which PE funds are active grow Iraqi businesses. TFBSO leveraged $484mm of public these, the IFC provides direct investment (loans, equity, funding into $500mm in private commercial real-estate trade finance, structured finance, and syndications); Fig. 8 Count of PE Deals in MENASA by Ticket Size! Fig. 9 Density of EV/EBITDA Multiples in MENASA! development proposals and more than $8b in private technical assistance to individual companies, indus- 10,000! (Excludes Top & Bottom Quartiles)! investment commitments to state-owned enterprises. try groups, and governments to improve the business 0.2!

It also channeled $6b of DOD contracts to more than environment; and acts as a fund manager for other in- 0.18! 23 4,400 local businesses. vestors, including sovereign funds, pension funds, and 1,000! 0.16! 29 other DFIs. 0.14! TFBSO focuses on building institutions, providing tech- 0.12! nical assistance, and facilitating relationships between CDC Group 100! 0.1! foreign investors and local businesses, to foster a more The CDC was founded in 1948 and is wholly owned by Log Scale ! vibrant business environment and stronger global link- the U.K.’s Department for International Development 0.08!

ages. It works to form partnerships among Iraqi and (DFID). It is the world’s oldest DFI. CDC’s core mission 10! 0.06! multinational firms, such as GE, Boeing, Microsoft, and is to strengthen the private sector in and attract new 0.04! 24 Google. investment to developing countries—75% of its invest- 0.02!

1! ments are made in countries with annual per capita GNI 0! <$10k! $100k! $200k! $300k! $400k! $500k! $600k! $700k! $800k! $900k! >$1mm! 0! 1! 2! 3! 4! 5! 6! 7! 8! 9! 10! 11! 12! 13! 14! 15! 16!

18 19 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

more quickly than other sectors—in terms of produc- 3) On the other hand, not constraining by segment agricultural sectors, which accounted for 39.9% of GDP tivity, value addition, and employment. Private equity could encourage investments in larger businesses in 1970, have declined steadily in their share of the also either reduced or had no effect on sectors’ volatil- (as has been the trend in the limited private equity economy, falling to 20.9% by 2011. In this period, Paki- ity. These results can be shown with lagged effects, activity in Pakistan to date). While large firms may stan shifted toward a more service-based economy, indicating the direction of causality is from investment present more attractive options to highly risk-averse with service sectors now accounting for 52% of GDP. to growth (rather than PE funds having identified sec- investors, they are less in need of financing, and Industrial sectors’ share of the economy remained stag- tors already primed to grow).36 such investments could feed the entrenched inter- nant (~16%) for nearly three decades, but increased ests and rent-seeking behaviors underlying Paki- somewhat in the last 10 years to 18.7%.42 The report also finds that, when governments actively stan’s economic problems, rather than fostering promote venture capital (VC), whether through direct in- new growth. Increasingly, services have been the drivers of growth vestment, via professional funds, or through tax breaks in the Pakistani economy—they hold an outsized share or subsidies to incentivize venture capitalists, enterpris- 4) It is dangerous to over-prescribe the fund’s strate- of GDP growth, relative to their share of overall GDP, es benefit—businesses with moderate government VC gy—targeting by both segments and sectors (e.g., and they have been, on average, by far the largest con- support outperform others.37 SMEs only in the energy, ICT, and textile sectors) tributors to real GDP growth in the last decade. is likely to constrict fund managers and possibly In particular, funds with only partial or indirect govern- doom the fund’s prospects. In 2011, services accounted for 89.6% of real GDP ment involvement (i.e., those working through private- growth; agriculture and industry contributed only 10.8% sector partners) were more successful than fully owned Recommendation 2 It is important to note that there is a dearth of good firm- and -0.8%, respectively. Manufacturing (as a subset of government ventures.38 Invest U.S. Government resources using or sector-level data on emerging markets—especially industry) contributed 23.0%, but this gain was offset by the private equity fund model and work with for Pakistan. This makes effective market analysis dif- declines in other industrial sectors—especially electric- In emerging markets, deal sizes tend to be smaller than private sector partners. The private equity ficult. The lack of information adds another reason not ity and gas distribution.43 in developed countries—the entire investment spec- model is proven in emerging economies to over-constrain the strategy ex ante—market oppor- trum is pushed downward. A survey of deals on the and private sector partners bring critical tunities may be overlooked or overhyped, because the High-performing Sectors Capital IQ database from the Middle East, North Africa, experience to the partnership—both are information is imperfect. This also points to the sub- Over the last half-century, export growth has been driv- and South Asia shows that the large density of private important for PII success and for attracting stantial need for collecting better information—which, en by the textile, garment, leather-product, and agricul- placements were under $10mm. new investment. itself, should be a prime objective of the fund. tural sectors. These are Pakistan’s traditional areas of dominance—and for which products it is known glob- Capital IQ also provides a rough sense of firm valua- ally. tions. EV/EBITDA is a proxy for an investment’s poten- Targeting Investment Market Sectors tial—higher ratios (i.e., more value relative to earnings) What is the best way to address Pakistan’s economic Performance and revenue growth in emerging markets But these have not been the sectors seeing the high- make better targets, though these are not comparable needs while capitalizing on its market opportunities? tend to vary widely from sector to sector, even within est growth, or that have been driving the recent growth across sectors. (Fast-growth sectors will have higher And what investments will best fuel the engines of countries. A survey of the performance of IFC-invested in the services sector. The AllWorld Network has average multiples than slower-growth ones, though this growth—particularly job growth? In order to achieve funds from 1978 to 2009, for instance, shows that re- published lists the last two years of Pakistan’s fastest- does not imply the investment opportunities are nec- optimal impact, the fund must be targeted, to best ex- turns fluctuated across sectors, and that sector selec- growing companies (the Pakistan 25 in 2011 and the essarily better in the former.) Nevertheless, looking at ploit this overlap between need and opportunity. tion can make a significant difference for fund perfor- Pakistan 100 in 2012). These lists give an indication for the mid-range of available target multiples can give mance.41 That said, there are myriad and often contra- where Pakistan’s economy is accelerating most rapidly a sense of the broader investment environment fund Disaggregating the Economy dictory reasons for choosing one sector or another ex today. managers see. It does underline, however, the lack of To assess targeting strategies, we try to disaggregate ante. Lack of good market data and competing objec- good data in these markets—and the need for more on- Pakistan’s market. There are two basic ways to distin- tives can make selecting sectors of focus difficult. AllWorld ranks firms according to their revenue growth the-ground, qualitative due diligence when assessing guish businesses: by sectors (i.e., industry), or by seg- over three-year periods (2007–2009 for the Pakistan investment opportunities, as well as for concerted ef- ments (i.e., firm size). Below, we offer detailed analysis Pakistan’s Structural Transformation 25, and 2008–2010 for the Pakistan 100). These high- forts to improve the breadth and rigor of quantitative along both dimensions. The structure of Pakistan’s economy has evolved sig- performing companies grew at an average 200% over- data collection. nificantly over the past four decades. In broad strokes, all (281% in the Pakistan 25 and 178% in the Pakistan Ultimately, we recommend focusing the fund on certain Fig. 11 Sector Contributions to Real GDP Growth! Fig. 12 AllWorld Avg. Growth Rates by Sector & Firm Size! Private equity in emerging markets also requires a lon- segments (namely, small- and medium-sized business- 100%! (Small, Medium, Large)!

ger investment horizon—typically, at least five years. es—defined and discussed further, below), while being Transportation and Aviation! 903%! Health and HealthCare! 463%! The CDC, for instance, holds equity positions in a com- sector-agnostic. There are four main reasons for this Construction and Engineering! 444%! 80%! Import/Export Trade! 290%! 39 High-Tech and Telecommunications! 284%! pany for 10 years, on average. Some models—like approach: Consumer Goods! 237%! Professional, Scientific and Tech Services! 212%! Acumen Fund’s ‘patient capital’—anticipate even lon- Recruitment and Training! 174%! 60%! Professional and Consulting! 170%! 40 Building Materials! 165%! ger time horizons. 1) The characteristics of the SME segments of the Entertainment and Recreation! 161%! Agriculture and Mining! 122%! market align most closely with the objectives of the Software Services and Products! 121%! 40%! Automotive! 113%! Finance and Insurance! 104%! PE portfolios also usually exhibit ‘J-curve’ returns—i.e., fund—these are both the most finance-constrained Travel and Tourism! 103%! E-commerce and Web services! 101%! negative returns in early years, followed by growing re- businesses, and the ones most likely to be sources Education! 97%! Manufacturing and Packaging! 82%! 20%! turns as the fund begins to exit investments. In general, of job growth. Textiles and Fashion! 76%! Medical Services and Supplies! 68%! Education and Training! 64%! emerging-market portfolios will tend to see longer up- Public Relations, Media and Publishing, Advertising! 56%! Professional and Consulting Services! 49%! front dips, but with the prospect for steeper subsequent 2) While there are many valid reasons to focus on any 0%! Energy and Power, Water! 47%! 2002–03! 2003–04! 2004–05! 2005–06! 2006–07! 2007–08! 2008–09! 2009–10! 2010–11! Advertising and Marketing! 44%! Computer Networking and Software! 42%! returns. For example, the Polish-American Enterprise one sector or set of sectors, these often conflict and Conventional Energy! 36%! Food Industries! 19%! Fund, which began operations in 1989, only saw a posi- suggest different areas of focus—instead of betting -20%! Media, Publishing and Printing! Security Services! Agriculture! Industry! Services! tive net return in 1997—but this was followed by con- on one, it is better to take a more open approach. 10%! 100%! 1,000%! sistently high returns until the fund phased out in 2008. Log. Scale Growth Rate!

20 21 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

100).44 been relatively insulated from the challenges faced by Targeted sectors might include agribusiness and foods, Focus on Loci of Job Creation the rest of the economy. logistics and transportation, retail and consumer prod- Ishrat Husain, former State Bank chairman and current About 27% of the companies in the two lists were tech- ucts, and technology and communications. dean of the Institute of Business Administration in Ka- nology-related, and a large majority were in service Government Constraints rachi, conducted a comparative sector analysis, iden- sectors.45 Most of the top-100 firms listed on the Karachi Stock Ex- Invest in Sectors with Pent-up Domestic Demand tifying which sectors were creating the most jobs, and 49 Scroll to zoom in/out change are in sectors Inadequate investment in a number of key, domestically which were stagnating or losing jobs. He found: Prospects for Growth Click and dragFig. to 13 pan Pakistan's 'Atlas of Economic Complexity,' 2009 characterized by sub- focused sectors has resulted in severe service deliv- Particularly relevant stantial government ery shortfalls and capacity constraints. These struc- Sectors creating jobs: for investors, though, protection or involve- tural supply problems, combined with a rapidly grow- • Mobile phone, wireless loop, & LDI is trying to pick the ment—such as tex- ing population, have resulted in pent-up demand and • Public call offices next high-growth area. tiles, fertilizer, cement, opportunities for substantial private investment. This • Internet & broadband services The Atlas of Economic sugar, and oil and gas. presents an opportunity to transform traditional sectors • Cable services Complexity offers one No firm in the index is of high importance through innovative business mod- • Electronic media useful tool for trying to from an entrepreneurial els and increased private sector involvement. Investors • Private & nonprofit education project future growth. sector, like software, IT, would seek out sectors facing historic underinvestment • Scientific R&D The products a coun- or retail. There is also and strong domestic consumption growth. • Private & philanthropic hospitals & clinics try makes today deter- a significant mismatch • Agriculture farm machinery sales & workshops mine which products between sector con- Targeted sectors might include social infrastructure • Automobile service stations & show rooms it will be most likely to tributions to economic (e.g., education, healthcare) and energy (e.g., alterna- • Automotive vendor industries make tomorrow—tech- growth and public trad- tive energy). • Fertilizer, pesticide, seed, & agrochemical distribu- nology and physical ability—i.e., firms in tion and human capital the highest-performing Consolidate Fragmented Markets • Dairy & milk processing, packaging, & marketing expand first and most sectors tend not to be Many industries in Pakistan lack competitiveness be- • Livestock, fisheries, fruits, & vegetables easily to products of publicly traded. Pro- cause, at home, they see high competition and structur- • Feed mills like kind. So, the prod- Fig. 14 Avg. vs. 10yr Risk-adjusted Growth per Sector tected sectors, despite al impediment, while their competitors overseas benefit • New private banks (e.g., Islamic banking, MFIs) ucts in which a country 2001–2011! the rents their firms from maturing markets and new technologies. Pakistan • Advertising, marketing, & creative services

is competitive today— 9.94! receive, have not per- loses out in economies of scale in sectors where con- • Inter-city & intra-city coach, bus, & transport Finance & Insurance! 0.6! 7.75! that is, where it is com- Social & Community Services! 5.3! formed exceptionally solidation is an advantage, but legal and other impedi- • CNG filling stations 7.31! petitive in the export Small Scale Manufacturing! 9.0! well. For instance, only ments prevent it. Particular opportunities exist in sec- • Hotels & restaurants 6.75! market—can signal Large Scale Manufacturing! 0.8! three out of more than tors in need of consolidation and strategic reposition- • IT & Internet-related companies 6.05! where it is most likely Construction! 0.4! 200 textile companies ing, where SMEs occupy significant or dominant market • Accountancy & management consultancy 5.59! to become competitive Public Admin. & Defense! 1.4! have made it to the positions. • Construction services (e.g., plumbers, electricians, 5.22! 47 in the future, by map- Mining & Quarrying! 1.1! KSE 100. This mis- masons) 4.54! ping products based Livestock! 1.1! match, combined with Targeted sectors might include light manufacturing • Private airlines 4.49! on their relative simi- Wholesale & Retail Trade! 1.1! Pakistan’s low market (e.g., surgical instruments and sports goods). • Oil & gas exploration & drilling 4.47! larities. Products clos- Fishing! 0.5! capitalization to GDP, 4.25! est to similar, export- Electricity & Gas Distribution! 0.1! indicates substantial Promote Export-competitive Industries Sectors losing jobs: 3.32! Ownership of Dwellings! 6.2! competitive products 3.26! untapped investment Pakistan’s lack of export competitiveness makes it vul- • Federal ministries & attached departments Transport, Storage & Comm.! 2.8! are good bets; clusters 2.27! opportunity in Paki- nerable. Pakistan’s export base has failed to diversify, • Provincial departments & agencies Major Crops! 0.3! of export-competitive 0.98! stan’s private sector. remaining concentrated in the textile manufacturing in- • Public sector corporations Minor Crops! 0.2! products indicate en- -4.92! dustry. The share of Pakistan’s services exports has • Nationalized commercial banks Forestry-0.4! ! tire industries that have Sector Targeting been minimal but it has the potential to grow. This pres- • Public sector universities & colleges good prospects. Avg. Growth! Risk-adjusted Growth! There are a number of ents an opportunity to facilitate the identification of new • Print media companies viable, persuasive sector-targeting strategies. Each is export activities and diversify into high value-added • Pakistan International Airlines, Pakistan Steel, Risk-adjusted Performance46 attractive for different reasons—and, given very partic- products, as well as increase the productivity of exist- Pakistan Railways Returns only paint half the picture—the canvas inves- ular objectives, some might prove advisable. But from ing export industries through knowledge and regional • Water & Power Development Authority tors look at is also colored by risk. It is the risk-return a wider perspective, seeking only to maximize financial relationships. Look for export-oriented sectors with • Provincial government-owned enterprises tradeoffs that are most salient from an investment per- return and development impact, it is harder to predict if tradable products and services that have the potential spective. Taking volatility into account, then, we see any one sectoral strategy is preferable. to compete in regional markets. Tap the Talent of Key Demographic Groups notable changes in the growth performance of certain Capitalize on opportunities that draw on parts of the sectors. Small-scale manufacturing and social and Capitalize on Pakistan’s core strengths Targeted sectors might include business process out- population that suffer disproportionately from unem- community services, among other sectors, have sus- Pakistan’s core strengths—particularly its rich demo- sourcing, IT, consultancy services (e.g., accounting, le- ployment, including youth and women. The IT sector, tained relatively stable, positive growth rates over the graphic profile—will drive growth over the long run. gal, financial), medical tourism, architecture, and con- for instance, has low barriers to entry (the cost of a last 10 years. Other sectors that recorded strong av- Identifying sectors that stand to gain the most from struction.48 computer and Internet connection), is less constrained erage annual growth from 2002 to 2011—including fi- both a young and growing workforce and a burgeoning by traditional gender roles and favors people who may nance and insurance, large-scale manufacturing, and consumer base—namely, those with labor- and knowl- Targeting for Development Impact otherwise struggle with transport or mobility (women construction—showed significant volatility over the edge-intensive industries that provide opportunity for DFIs and other ‘impact investors’ might as well consider can operate an IT business from home), and it favors a same period and, consequently, a less favorable risk- Pakistan’s youth and tap the talent of a growing middle targeting strategies, geared less toward profit maximi- younger generation more adept at using new technol- adjusted performance. These findings suggest that class, and those generating products sought by this zation, than toward have the greatest development ef- ogy. small-scale manufacturing and some services have same demographic. fect.

22 23 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

Invest where there are multiplier effects star performers were companies in the business and Market Segments Fig. 17 Firm Density, by Revenue (PKR)! Look for sectors with strong backward and forward link- professional service sub-sectors that are dominated by In Pakistan, the broad category of ‘SME’—including mi- 0.6! ages, and high potential to have multiplicative impact SMEs. In fact, the overall highest-performing individual croenterprises—accounts for roughly 99% of all busi- 0.5! in Pakistan’s broader economy. Education or IT, for in- company was Exceed, an engineering and construc- ness in the country. According to Pakistan’s Small and

stance, can add human capital or develop new tech- tion firm that started as a medium-sized firm (revenue Medium Enterprises Development Authority (SMEDA), 0.4! nologies that will have reverberating effects throughout range of $5–10mm). Also, among the fastest growers SMEs employ 80% of the non-agricultural labor force, the economy. were small firms, like Innovative Technologies (ranked and their share of annual GDP is approximately 40%. 0.3! #9), Arbisoft (#11), and Umer Trading Company (#13), SMEs also account for the vast—and unmeasured— Invest where there is U.S. added value which had revenues less than $1mm. amount of informal business activity. 0.2!

A U.S. fund, in particular, can leverage American com- 0.1! plementary resources than another fund could not. The Overall, 70% of ranked companies would be classified SMEs play a vital role in the industrial development of

United States is especially strong in the IT and higher- as SMEs—19% with revenues less than $1mm, 38% most countries. They have historically been crucial in 0.0! education sectors, for example—it has the most innova- with revenues of $1–5mm, and 13% with revenues of the transformation of economies from low- to middle- Rs 1b! tive technology companies and the best universities in $5–10mm. income.52 Unlike large firms, who have business rela- business owners from where they received their financ- tionships with commercial and investment banks and ing. A large majority of all firms’ financing came from access to international sources of capital, small and internal sources—but the proportion from banks drops Overall, 70% of AllWorld’s top-ranked companies would be classified as SMEs. medium enterprises often face significant financing off sharply between large and medium-sized firms. constraints—which is an impediment to growth. About 20.5% of all financing for large firms came from the world. Creating strong linkages between such in- SME Focus, Sector Agnosticism banks, whereas only about 8.0% and 8.1% of medium stitutions and promising Pakistani businesses or entre- Research has shown that over-prescribing a fund’s sec- If Pakistan is to achieve sustained growth—and, espe- Manufacturing & Export SMEs and small firms’ preneurs could be invaluable—as valuable as financ- tor focus produces lower returns in emerging markets.51 cially, if it is to find productive employment for its bur- with Access to Formal Credit financing did, ing itself. Funds need to be adaptable and able to find high- geoning labor force—it will be on the back of SMEs. Age of Firm (yrs) respectively.53 growth, high-impact opportunities across the economy. Pakistan needs to both provide resources to promising Headcount 0–5 6–10 11–20 21+ Total 0–10 0% 0% 0% 0% 0% SMEs by Sector There is a clear need to focus on SMEs (explored fur- businesses so they can achieve scale, and create the 11–49 0% 35% 0% 0% 29% Likewise, in re- Small-scale manufacturing and social, community, and ther, below), to best address financing needs, capital- conditions for entrepreneurs to found new businesses. 50–99 100% 67% 75% 15% 50% sponse to a personal services—all of which have a dominant or sig- ize on market opportunities, and contribute to private According to some interviewees, Pakistan will need to 100+ 100% 75% 75% 83% 80% question about Total 50% 67% 64% 50% 59% nificant SME presence—have sustained high growth sector development, rather than reinforce entrenched double the roughly 45,000 firms in this middle segment. Source: “SME Development in Pakistan: Analyzing the Constraints the severity of rates with little volatility. On average, over the last 10 interests and rent-seeking behaviors. There is little rea- to Growth,” Asian Development Bank, 2005 constraints they years, these sectors have outperformed both total GDP son to constrain the fund beyond this though—it should Constraints on SMEs faced, large portions of both small and medium enter- growth and other sectors dominated by larger corpora- remain sector-agnostic. Specifying certain sectors for The severely underserved SME banking market in Paki- prises listed access to finance as an obstacle to some tions or those that benefit from substantial government investment might close out important opportunities for stan is characterized by firms whose financial require- degree—36% of medium-sized firms, and 56% of small protection. both financial return and development impact. ments are too large for microfinance but too small to be firms.

SME Presence Correlates with Growth Fig. 18 2007–2010 Revenue Growth, by Firm Size (# of employees)! SMEs contribute approximately 40% to Pakistan’s over- Recommendation 3 1000%! all GDP and are spread across the economy with vary- Remain sector-agnostic absent any more 50 ing density. According to Pakistan’s 2005 Economic specific objectives, but seek diversifica- 800%! Census, SMEs operate disproportionately in the larger tion across sectors with high potential for services sector—particularly wholesale and retail trade; growth and multiplicative impact in Paki- 600%! restaurants and hotels; social, community, and personal stan’s economy. Prioritize further informa- services; followed by manufacturing. SMEDA estimates tion collection, collation, and dissemination that about 80% of SMEs in Pakistan are service-based to address the deficit of good market data 400%! enterprises, reflecting concentration in the high-growth in Pakistan and attract new private invest- portion of the economy. ment. 200%! 2007–2010 Revenue Growth Rate ! In AllWorld’s lists, a few large transport and healthcare 0%! firms saw exceptionally high growth—but among the $100! $1,000! $10,000! $100,000! $1,000,000! $10,000,000! $100,000,000!

Fig. 15 Sector Distribution of SMEs! Fig. 16 AllWorld Avg. Growth by Avg. Revenue, per Sector! -200%! 1,000%! 2007 Revenue (Log. Scale) in 1,000s!

Micro! Small! Medium! Large! 1.6%! 1.6%! 1.7%! Wholesale & Retail Trade, effectively served by commercial banks. There is, of In terms of the single-largest constraint firms face, 19.7%! Restaurants, & Hotels! Social & Community Services! 100%! course, a financing gap across firms of all sizes in Paki- across all segments, lack of energy and inconsistency

Manufacturing! Log. Scale ! stan—but it is especially deep for this middle segment in its supply poses the greatest concern. Following this, 53.1%! Transport, Storage, & of the economy. firms also saw political instability as a major hindrance. Communication! Agriculture, Forestry, & Fishing! Access to finance, however, is the single-largest con- * 22.3%! Financing, Insurance, & Business In its 2010 Enterprise Survey, the World Bank asked straint for about 2.9% of small firms and 3.3% of medi- Services! 10%! * um-sized firms. $0mm! $10mm! $20mm! $30mm! $40mm! $50mm! $60mm! It is important to note that the World Bank’s Enterprise Surveys do Bubble Size Indicate # of Firms per Sector! not use random selection and are not representative. While firms comparable numbers, the sample is thus heavily biased toward the of all sizes (micro, small, medium, and large) are represented in larger end of the spectrum in terms of proportional representation.

24 25 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

Fig. 19 Financing Sources, by Firm Size! Defining SMEs absolute and market share terms) over time. Revenue es that earn, on average, less than $50k in annual rev- While a continual refrain in our research has been this is also a metric commonly used by investment profes- enue, and draws in a vast swath of informal businesses Large (100+)! need to target SMEs, the notion of what, exactly, consti- sionals to assess a firm’s value or performance. (Of- that are typically in the realm of microfinance. Given tutes an SME is nebulous—by some definitions, as much ten, in valuations, potential investors use it as part of that the stated purpose of the PII is to invest in SMEs—

Medium (20–99)! as 99.5% of Pakistan’s businesses count as SMEs. To a multiple, such as EV/EBITDA—‘enterprise value’ over but with an eye specifically toward scalability and at- better define ‘SME’ in the Pakistani context, and to de- ‘earnings before interest, tax, depreciation, and amor- traction of new investment—a narrower, functional dis-

Small (1–19)! compose the term—in particular, to distinguish between tization.’) ambiguation is useful. ‘S’ and ‘M’—we survey working definitions in Pakistan and then create functional classifications for ‘small’ and This metric can prove difficult in a global context, as Large Enterprises Micro (0–5)! ‘medium-sized’ businesses (distinct from ‘micro’ and firms’ revenues may vary widely from one country to Large enterprises, on the other hand, from which SMEs

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%! ‘large’ firms), in the context relevant to the PII. the next, even within one industry—but within a single- are more often distinguished, also operate in a starkly

Internal! Banks! Owner/New Equity! Supplier/Customer Credit! Non-bank FIs! Other! country context, like Pakistan’s, this is less problematic. different environment. The Government of Pakistan has no official definition By any metric, it is clear that Pakistan’s economy is for what constitutes an SME. In fact, definitions vary weighted heavily toward smaller enterprises. Less than In particular, they are much more likely to have signifi- widely among government organizations and other in- 1% of firms has revenues greater than $100k or more cant personal contacts at high levels of government stitutions operating in Pakistan, and, as a result, statis- than 20 employees. and in the financial sector—they are thus better-placed Fig. 20 Severity of Financing Constraint, by Firm Size! tics and information on SMEs are incongruent. Almost to gain government rents or negotiate favorable financ- 54 Micro (0-5)! all organizations, however, classify SMEs using one or Delineating the Bounds of ‘SME’ ing packages. Consequently, they are more likely to more of three metrics: 1) headcount (i.e., number of While SMEs are often distinguished from larger com- be complicit in—and benefit from—government corrup- employees), 2) maximum asset value, and 3) maximum panies, many group microenterprises with small- and tion. Small (6–19)! revenue. medium-sized businesses. But, in practice—especially Official Definitions of SMEs in Pakistan in Pakistan—firms in the middle of this spectrum face Large firms also tend to have professionalized manage- Medium (20–99)! Organization Headcount Assets (PKR) Revenue (PKR) ≤ 250 ≤ 100mm a unique set of opportunities and challenges, distinct ment (rather than being managed by owners), to be less (manufacturing) (manufacturing) State Bank ≤ 300mm from those seen by firms at both the large and small centralized, and to have stronger delegation authority Large (100+)! ≤ 50 ≤ 50mm (trade/services) (trade/services) extremes of the market. and departmentalization. They rely less on unskilled or SMEDA ≤ 25 ≤ 25mm ≤ 250mm 0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%! Small: ≤ 20mm SME Bank N/A N/A Severe! Major! Moderate! Minor! None! Doesn't Know! N/A! Medium: ≤ 100mm Fed. Bureau of Statistics < 10 N/A N/A Not only are large firms less finance-constrained, but supporting them potentially Source: SMEDA website, http://www.smeda.org.pk/main.php?id=2 Each measure returns different results, and each has enables and encourages the government’s intrusion into the market that crowds benefits and drawbacks in practice and for use in poli- out more widespread participation and stymies business growth in the first place. Fig. 21 Proportion of Pakistani Businesses by Employment ! cymaking.

>1000! 0.001%! Headcount Microenterprises untrained workers, and are generally less dependent 500–999! 0.002%! Headcount is often the easiest metric to measure but Most SME definitions have no lower bound. Microen- on personal relationships between managers and em- 200–499! 0.005%! can prove problematic, as it does not account for vary- terprises, however—typically consisting of five or few- ployees, or between management and customers. 100–199! 0.012%! ing labor requirements across sectors. For example, a er employees—are vastly different from small firms in 50–99! 0.037%! small IT services firm with 30 employees may have an terms of sector participation, management sophistica- Larger companies’ stronger institutional structures and 20–49! 0.240%! annual turnover equal to or greater than a textile mill tion, formalization, and revenue size. more professionalized staff then allow them to focus

10–19! 0.840%! with 100 employees. One thus fails to account for dif- more on long-term profitability and increasing market

5–9! 4.410%! ferences between more labor-intensive and more capi- Microenterprises tend to be informal—i.e., unregistered share, rather than being preoccupied with immediate tal-intensive sectors. There are further problems when and tax-evasive. They less frequently provide employ- needs or short-term survival. They are likewise more 1–4! 94.453%! accounting for workers who are not formally employed ee benefits, such as paid sick leave or skills training. likely to have and follow formal business plans, and to 0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%! (e.g., in firms relying heavily on subcontractors or out- They can also rarely finance accounts receivable or employ new or sophisticated technologies. sourcing, or who use informal hiring practices, which make long-term investments (e.g., capital projects with are common in Pakistan). payback periods longer than a few months). And they Evidence suggests, however, that such companies are are unlikely to join or form networks, engage formally also less flexible and unable to adapt quickly to chang- Fig. 22 Proportion of Pakistani Businesses by Revenue ! Assets with local communities, or make charitable donations.55 es in the economy or regulatory environment. And they

>$5.03mm! 0.007%! Using total assets is problematic for many of the same are less likely to be deeply rooted and active in their 56 $4.19mm–$5.03mm! 0.001%! reasons that using headcount is. Whereas headcount The informality of microenterprises makes them unin- communities. $3.36mm–$4.19mm! 0.003%! ignores differing labor requirements across sectors, as- vestible. JS Private Equity, for instance, estimates that $2.52mm–$3.36mm! 0.004%! set value cannot account for different capital require- close to 99% of such ‘small’ firms do not maintain ad- In Pakistan, an especially important aspect of the di- $1.68mm–$2.52mm! 0.011%! ments. Moreover, the values of assets held in buildings equate business practices (e.g., they keep two sets of vision between small and medium, on the one hand, $838.9k–$1.68mm! 0.040%!

$167.8k–$838.9k! 0.325%! or land, for instance, which can differ considerably even books) for being viable investments from its perspec- and large, on the other, is the tendency of large firms

$83.9k–$167.8k! 0.572%! within a sector, may distort determinations of firm size. tive. to benefit from close government connections, rent-

$33.6k–$83.9k! 1.908%! seeking behavior, or outright corruption. From an in- $16.8k–$33.6k! 3.876%! Revenue Classifying enterprises with either the State Bank or vestment perspective, there may be attractive oppor- $8.4k–$16.8k! 9.179%! Annual turnover or revenue better approximates busi- SMEDA’s SME revenue metric results in an SME market tunities on the larger end of the spectrum, and often at <$8.4k! 84.074%! ness size—it is easily quantifiable, assesses a firm’s segment that incorporates roughly 97% of the economy. less risk—but a primary reason one can earn relatively 0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! contribution to the economy, and captures growth (in But this includes a vast number of such microenterpris- high returns at relatively low risk with such investments

26 27 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Defense (January 2012). http://tfbso.defense.gov/ Development Authority (May 2006), 1. http:// 57 Sources is precisely because of this government cooptation. In- best heuristic available. www/attachments/TFBSO%20Afghanistan%20 siteresources.worldbank.org/PAKISTANEXTN/Re- 1 Philip Auerswald, Elmira Bayrasli, and Sara Fact%20Sheet-January%202012.pdf sources/293051-1147261112833/Session-3-2.pdf vesting in large firms of this sort may reap short-term Shroff, “Creating a Place for the Future: Toward returns, but diverges from any development objectives. a New Development Approach for the Islamic 27 “About IFC,” International Finance Corporation, 51 Meerkatt et al. (2010), 10. A Functional Definition of SEs & MEs World Bank Group (accessed March 2012). http:// Republic of Pakistan,” Competitiveness Support 52 Faisal Bari, Ali Cheema, and Ehsan-ul-Haque, Not only are these firms less finance-constrained, but We thus suggest a workable revenue-based classifica- Fund (December 2010), 23–24. www1.ifc.org/wps/wcm/connect/corp_ext_con- “SME Development in Pakistan: Analyzing the tent/ifc_external_corporate_site/about+ifc Constraints to Growth,” Asian Development Bank, supporting them potentially enables and encourages tion for SMEs in Pakistan: 2 Pakistan: Framework for Economic Growth, Plan- the government’s intrusion into the market that crowds ning Commission, Government of Pakistan (May 28 “I Am Opportunity: IFC Annual Report 2011,” Pakistan Resident Mission Working Paper Series, 2011), 11. http://www.pc.gov.pk/hot%20links/ International Finance Corporation, World Bank Working Paper No. 3 (2005), 34. http://www2.adb. out more widespread participation and stymies busi- Small enterprise: A business earning between $50k growth_document_english_version.pdf Group (2011), 10. http://www1.ifc.org/wps/wcm/ org/Documents/PRM/Working_Papers/wp-03.pdf connect/e800ef80484524eeb9d0fb9a28555046/ ness growth in the first place. and $1mm in annual pre-tax revenue. Auerswald et al. (2010), 23–24. 53 Anjum Asim Shahid, “Final Framework Plan 3 AR2011_English.pdf?MOD=AJPERES for Market Survey, for SME Market Segmenta- 4 Khalid Zaman, Muhammad Khan, Mehboob 29 “What We Do,” International Finance Corpora- tion,” Grant Thornton PowerPoint presentation to Medium-sized enterprise: A business earning be- Ahmad,and Waseem Ikram, “Inflation, Unemploy- tion, World Bank Group (accessed March 2012). IFC (2010). http://www.sbp.org.pk/departments/ Distinguishing ‘Small’ from ‘Medium’ ment, and the NAIRU in Pakistan (1975-2009),” In- http://www1.ifc.org/wps/wcm/connect/CORP_EXT_ ihfd/Final%20framework%20and%20work%20 While small and medium firms are more similar than dif- tween $1mm and $10mm in annual pre-tax revenue. ternational Journal of Economics and Finance 3:1 Content/IFC_External_Corporate_Site/What+We+Do/ plan%20for%20market%20survey.pdf (February 2011). ferent when compared to their micro and large coun- 30 “Annual Report and Accounts 2010,” CDC 54 Tom Gibson and H. J. van der Vaart, “Defining terparts, there are also some important distinctions be- These classifications account for the composition of 5 Syed Sajid Ali and Sadia Badar, “Dynamics of Group plc (2010), i. http://www.cdcgroup.com/up- SMEs: A Less Imperfect Way of Defining Small Circular Debt in Pakistan and Its Resolution,” The loads/cdc_annualreport_2010.pdf and Medium Enterprises in Developing Countries,” tween these two groups. Although most organizations Pakistan’s businesses by revenue using 2005 census Lahore Journal of Economics 15:SE (September Brookings Global Economy and Development 2010), 61–74. 31 “About Us – Who We Are – Key Facts,” CDC in Pakistan refer to ‘small’ and ‘medium’ separately, data, as well as qualitative feedback received during Group plc (2011). http://www.cdcgroup.com/key-facts.aspx (September 2008), 10–12. http://www.brookings. 6 Khaleeq Kiani, “Govt Takes over Circular Debt,” edu/~/media/Files/rc/papers/2008/09_develop- this distinction is rarely clear, and seldom manifests in our field research. Dawn.com (November 5, 2011). http://www.dawn. 32 Ibid. ment_gibson/09_development_gibson.pdf policies targeting com/2011/11/05/govt-takes-over-circular-debt.html 33 Ibid. 55 Ibid. SMEs. Fig. 23 SME Market Segments, Disaggregated! More importantly, 7 “State Bank of Pakistan Annual Report 2010– 34 Lancaster et al. (2006), 61. 56 Ibid. 2011: Economic Outlook,” State Bank of Pakistan Ibid., 62. we believe these (December 19, 2011), 2. http://www.sbp.org.pk/ 35 57 Ibid. Annual Revenue Range reports/annual/arFY11/Economic_Outlook.pdf 36 Anuradha Gurung and Josh Lerner (eds.), SMEDA and the classifications strike “Globalization of Alternative Investments Working State Bank’s SME- an optimal balance 8 Ibid., 3. Papers Volume 3: The Global Economic Impact of Fig. 1 World Bank, World Development Indicators (March 2012). http://data.worldbank.org/indicator 9 Ibid. Private Equity Report 2010,” World Economic Fo- support programs between specificity rum (December 2009), viii. http://www3.weforum. Ibid. Microenterprises Less than $10k 10 “Pakistan: Information on Mohajir/Muttahida Fig. 2 suggest that any and sensitivity. That Qaumi Movement-Altaf (MQM-A),” United States org/docs/WEF_IV_PrivateEquity_Report_2010.pdf & Trading Economics, Pakistan Govern- constitute nearly Fig. 3 Ibid. distinction be- 84.07%! Between $10–20k is, a lower bound Bureau of Citizenship and Immigration Services, 37 Ibid. ment Bond 10Y (March 2012). http://www.trading- 85% of the entire PAK04002.OGC (February 9, 2004). http://www. economics.com/pakistan/government-bond-yield tween small and of $50k excludes 38 Ibid. market.! Investment! unhcr.org/refworld/docid/414fe5aa4.html OANDA Corporation, Historical Exchange Between $20–50k 39 “About Us,” CDC (2011). Fig. 4 medium is rarely Strategy! the vast majority of 11 World Bank, World Development Indicators Rates (March 2012). http://www.oanda.com/ (March 2012). http://data.worldbank.org/indicator 40 “What is Patient Capital? A New Approach to used as a disposi- Lower Bound: $50k! informal microen- Tackling Poverty,” Acumen Fund (accessed March Fig. 5 WB/WDI & National Consortium for the tive criterion for Between $50–100k small ! terprises without 12 Ricardo Hausmann, Dani Rodrik, and Andres 2012). http://www.acumenfund.org/about-us/what- Study of Terrorism and Responses to Terrorism Velasco, “Growth Diagnostics,” John F. Kennedy is-patient-capital.html (START), Global Terrorism Database (2011). http:// eligibility. In fact, rejecting high-po- School of Government, Harvard University (March www.start.umd.edu/gtd Between $100k–1mm Heino Meerkatt and Heinrich Liechtenstein, almost all SME 9.12%! Target ! tential businesses 2005). http://www.hks.harvard.edu/fs/drodrik/Re- 41 Private Placement Transactions from MENA- search%20papers/barcelonafinalmarch2005.pdf “New Markets, New Rules: Will Emerging Markets Fig. 8 Market ! Reshape Private Equity,” The Boston Consulting SA, Capital IQ, Inc., a division of Standard & Poor’s programs in Paki- Between $1–2mm Segment! with low revenue John D. Donahue and Richard Zeckhauser, (2012). http://www.capitaliq.com 3.88%! 13 Group and IESE Business School (November stan effectively streams; a middle “Public-Private Collaboration,” Oxford Handbook 2010), 10. http://www1.ifc.org/wps/wcm/connect/9c197b80 Ibid. of Public Policy, eds. Robert Goodin, Michael Mo- Fig. 9 lump small- and 1.91%! Between $2–3mm division of $1mm 49bdb99b960cd6a8c6a8312a/BCG%2BNew%2BMarkets

medium ! PAEF Annual Reports (1990–2008), The ran, and Martin Rein, (UK: Oxford University Press, %2BNew%2BRules%2BNov%2B10.pdf?MOD=AJPERES Fig. 10 medium-sized en- 0.90%! separates the bulk 2006), 496–525. http://www.hks.harvard.edu/fs/ Enterprise Funds Association (accessed May Between $3–4mm rzeckhau/oxford_paper.pdf 42 “Pakistan Economic Survey 2010-2011: Growth 2012). http://www.seedact.com/paef-1990-po- terprises together 0.04%! of young firms and Investment,” Ministry of Finance, Government land/annual-reports-1990-2008 0.01%! 14 Richard Johnson and Steve C. Eastham, “US- of Pakistan (June 2011), 13. http://www.finance.gov.pk/ as a monolithic 0.009%! in need of seed, AID Enterprise Funds Europe & Eurasia: Funding, Fig. 11 “Pakistan Economic Survey 2010–2011: Greater than $4mm survey/chapter_11/01-Growth%20and%20Investment.pdf Growth and Investment,” Ministry of Finance, Gov- business class. 0.007%! startup, or venture Liquidation, & Legacy,” USAID (July 2011). 43 Ibid., 10. ernment of Pakistan (June 2011), 10. http://www. capital, from some- 15 Ibid. finance.gov.pk/survey/chapter_11/01-Growth%20 44 “Pakistan 25 Leading Indicators Report” and Yet, while small- what larger firms in 16 Carol Lancaster, Kwaku Nuamah, Matthew Li- “Pakistan Fast Growth 100 Research Report,” All- and%20Investment.pdf eber, and Todd Johnson, “Foreign Aid and Private World Network (March 2012). http://www.allworldlive. Fig. 12 Pakistan Fast Growth 100, AllWorld Net- and medium-sized need of growth eq- Sector Development,” Watson Institute for Interna- com/research/pakistan-25-leading-indicators-report; work (2012). http://www.allworldlive.com/asia-500/ businesses tend uity; and an upper tional Studies (2006), 64. http://www.allworldlive.com/sites/default/files/research/ winners/2012-pakistan-100 17 “Financing,” Overseas Private Investment Cor- PAK100%20Research%20Report%20Final.pdf Alexander Simoes, The Observatory of to be functionally bound of $10mm porations (accessed March 2012). http://www. Fig. 13 45 Ibid. Economic Complexity (2012). http://atlas.media.mit. similar, almost al- includes the high opic.gov/financing edu/explore/product_space/export/pak/all/show/2010/ Upper Bound: $10mm! 46 “Pakistan Economic Survey” (2011), 13; “State ways eligible for end of the range 18 “Investment Funds – Overview,” Overseas Pri- Bank of Pakistan Annual Report 2010-2011: Ag- AllWorld vate Investment Corporation (accessed March Fig. 14 the same benefits, of ‘medium-sized’ gregate Supply,” State Bank of Pakistan (Decem- “Trade in Services” (2007), 144. 2012). http://www.opic.gov/investment-funds ber 19, 2011), 14-25. http://www.sbp.org.pk/reports/ Fig. 15 and academic studies seldom distinguish between the businesses, but effectively excludes large corporations. 19 “2010 Annual Report,” Overseas Private Invest- annual/arFY11/Aggregate_Supply.pdf; “State Bank Fig. 16 AllWorld two, they do have different financing needs—both in ment Corporation (2010), 3. http://www.opic.gov/ of Pakistan Handbook of Statistics on Pakistan Fig. 17 World Bank, Enterprise Surveys (2012). sites/default/files/docs/annualreport_2010.pdf Economy 2010: National Income, Saving and In- http://www.enterprisesurveys.org (WB/ES) terms of investment size and purpose. Smaller busi- vestment,” State Bank of Pakistan (2010), 34-35. 20 Lancaster et al. (2006), 65. Ibid. nesses tend to be younger and less experienced—they Recommendation 4 http://www.sbp.org.pk/departments/stats/PakEcono- Fig. 18 21 Ibid., 66. my_HandBook/Chap-1.3.pdf Ibid. often seek startup capital and know-how for breaking Disaggregate the ‘SME’ space and focus Fig. 19 22 Foreign Assistance Act of 1961 (P.L. 87–195), 47 Framework for Economic Growth (2011). Fig. 20 Ibid. into markets. Medium-sized businesses, on the other on small and medium firms, separately. Sec. 234 (2008), in “Legislation on Foreign Rela- tions through 2008,” U.S. Senate Committee on 48 “Trade in Services: An Answer Book for Small Fig. 21 “Number of Establishments by Employ- hand, tend to be more established and mature. They Define these as firms in the $50k–$1mm Foreign Relations & U.S. House of Representa- and Medium-Sized Exporters,” International Trade ment Size, Status of Enterprise, Area, and Prov- often seek larger investments for achieving scale. and $1mm–$10mm revenue ranges, re- tives Committee on Foreign Affairs Vol. 1-A (March Centre UNCTAD/WTO, Small & Medium Enterprise ince,” 2005 Pakistan Economic Census, Appendix 2010). http://www.opic.gov/sites/default/files/statute1.pdf Development Authority (2007), iii. http://www.sm- 17 (2005). http://www.pbs.gov.pk/content/eco- spectively. Focus on SMEs with the stron- eda.org/downloads/TradeinServices-Pakistan.pdf nomic-census-2005 23 “History & Impact in Iraq,” Task Force For Busi- Revenue is an imperfect metric for segregating busi- gest exit prospects—target investments in ness & Stability Operations, U.S. Department of 49 Ishrat Husain, “Education, Employment, and Fig. 22 “Number of Establishments by Major In- dustry Division and Sale Revenue Groups, Area, nesses of these two types. Except through case-by- companies led by promising entrepreneurs Defense (May 2011), 2. http://tfbso.defense.gov/www/ Economic Development in Pakistan,” Inaugural attachments/TFBSO_Iraq_History_and_Impact_Brief.pdf Address, Conference on Education, Woodrow Wil- and Province,” 2005 Pakistan Economic Census, case evaluation, however, it is difficult to draw any that have vision, but lack the financial and son Center (April 15, 2005), 15. http://ishrathusain.iba.edu. Appendix 15 (2005). http://www.pbs.gov.pk/con- 24 Ibid., 13. tent/economic-census-2005 clearer line—but revenue boundaries between ‘micro, institutional support to scale. pk/speeches/humanDevelopment/Edu_Emp_Dev_Apr_15.pdf 25 Ibid., 8. 50 Shahab Khawaja, “Unleashing the poten- Fig 23. Ibid. ‘small,’ ‘medium,’ and ‘large’ will inevitably be arbitrary. 26 “Fact Sheet: Afghanistan,” Task Force for Busi- tial of the SME sector with a focus on productiv- Yet absent more thorough market information, this is the ness & Stability Operations, U.S. Department of ity improvements,” Small and Medium Enterprise

28 29 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Operational Analysis Model & Strategy separating these components of the larger strategy, Taxonomies of private equity tend to focus on the stage therefore, will help ensure each prong is pursued pro- of investment—early, middle, or late. Early-stage in- ductively. vestments include angel investing, seed funding, and other support for startups, and then traditional venture Based on discussions with investors active in the Paki- capital at a slightly later stage. Middle-stage invest- stani market, in revenue terms, the target size for the ments can include growth and expansion capital, and venture capital fund should be roughly $50k to $1mm, bridge financing for companies headed toward public while the target size for the growth capital fund should offerings (IPOs). Late-stage investments include ac- be roughly $1mm to $10mm. Likewise, we expect tick- quisitions and leveraged buyouts, sometimes of dis- et sizes of investments to range from $50k–$400k for tressed companies or those otherwise in ‘turnaround’ the venture fund and $2mm–$7mm for the growth fund. situations.1 Recommendation 5 One can likewise classify investments by their size (i.e., Structure the PII to include venture capital ticket size)—and thus the scale of the target compa- and growth equity components. Plan for ny—ranging from microfinance, to SME financing, to ticket sizes of $50k–$400k and $2mm– funding for large enterprises or capital projects. $7mm, respectively. Employ the limited partnership structure common in private Comparing across both dimensions, then, we can equity and adopted by the CDC and other specify an investment strategy that encompasses both major DFIs, in line with international indus- target size and funding stage. try standards.

Fig. 24 Proposed PII Investment Approach!

Angel STRATEGY! Venture Capital! Growth Equity! Buyout! Investment! Large Capital TARGET SIZE! Microfinance! SME Financing! Investment!

Our analysis, above, finds that sector-specific invest- Design & Implementation ment strategies would be ill-advised at this stage: there As we note, above, the private equity market commonly is too little good information about the market, and too operates through limited partnerships. OPIC-support- many compelling reasons to focus on one sector or an- ed funds, for instance, are established by investment other. Instead, though, we find that there is both par- professionals and are typically structured as limited ticular need and substantial opportunity to focus the partnerships or limited liability companies.2 Fund man- fund on SMEs—i.e., small and medium-sized firms, dis- agers raise equity capital from outside investors and tinguished from both microenterprises and larger, more make, manage, and exit investments in portfolio com- established corporations. panies with attractive return prospects. LPs commit equity capital and may provide counsel to the Board of It then follows that the stage of investments will be ven- Directors, but are not directly involved in the manage- ture capital—for smaller, younger companies—and ment or governance of the fund. growth equity—for the more established, scaling firms. Management & Governance It is important, though, that these two strategies be The standard private equity limited partnership model pursued in parallel, but separately—e.g., through the includes essential features for making the PII a viable creation of distinct funds under the PII. The nature of and productive investor: investment, the needs of businesses, and the expertise required of fund managers is unique and quite differ- • A skilled and credentialed professional manage- ent between the venture and growth stages. Cleanly ment team that uses local knowledge and technical

30 31 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

expertise to make and manage investments. number of representatives and be split equally between tion (SCI), co-founder of four technology startups, consortium structures can help pool resources from Americans and Pakistanis. Important considerations and the first Pakistani to be recognized by the MIT partner investors (e.g., other DFIs, like the IFC or CDC) • A market-competitive incentive structure for fund for membership include: 1) relevant investment or pri- Technology Review as one of the 35 “World’s Top for joint investment in a fund. managers negotiated upfront, using the standard vate sector experience; 2) extensive knowledge of the Young Innovators for the year 2011”; and Kalsoom 2&20 fee and carried interest system, to ensure a broader industry, in addition to specialized expertise on Lakhani, the Washington, D.C.-based Founder and Leverage top-quality staff, with adequate ‘skin in the game,’ the Pakistani or emerging market investment context; CEO of Invest2Innovate. Flexibility to leverage U.S. capital investment through who are driven to optimize performance. 3) commitment to and competence in the application of engagement and strategic partnership with other do- responsible investment approaches; 4) independence; From the United States, State should draw on individu- nors and investors is essential. The fund manager’s role • An ability to leverage State’s resources through and 5) credibility among both American and Pakistani als who offer a combination of American business acu- in contributing its own equity and raising additional in- complementary investment from other donors, mul- audiences. men and emerging market investment experience to vestment from other LPs provides the most established tilaterals, sovereign funds, private investors, and the PII. Strong candidates would include: experienced and easiest way to multiply the fund’s capitalization— the fund managers themselves. While the identification of Pakistani candidates who private equity and venture capital investors, renowned State can effectively outsource fundraising to the GP. are both highly qualified and removed from any con- philanthropists and impact investors, and reputable But, alongside the fund manager, State can also play a • An independent Board of Directors overseeing the flict of interest may pose challenges, we believe that scholars and thought leaders in the areas of private eq- critical role in mobilizing third-party capital: fund manager and ensuring proper governance local participation on the Advisory Board is both es- uity, venture capital, and entrepreneurship.* and accountability. sential and, based on our consultations in the country, • U.S. Government backing can help leverage U.S. State should also consider investment experts from investor networks to raise and, if feasible, pool ad- multilaterals and other global institutions with relevant ditional capital. The combined credibility of State For the Advisory Board, State should seek out a diverse group of Pakistani private experience in emerging market private equity or impact oversight and a strong fund management team can sector leaders with strong networks and expertise, but also a commitment to sup- investing. DFIs, for instance, play an increasingly im- help attract private investors who might not other- porting aspiring entrepreneurs and fostering longer-term policy reform. portant role in the emerging market LP community and wise have been willing to take on such exposure. have extensive experience engaging with fund man- agers on ESG-related matters—representatives from • Minimizing ex ante constraints on the fund’s strat- Advisory Board feasible. State should seek out a diverse group of Paki- groups such as the IFC and CDC would add substantial egy or the GP’s authority and decision-making will Additionally, an overarching PII Advisory Board, estab- stani private sector leaders with strong networks and value to the work of the Board, whether brought on as maximize the likelihood of earning strong returns. lished by State to provide general oversight and guid- expertise, but also a commitment to supporting aspir- PII co-investors or independent Advisory Board mem- State can still ensure development impact through ance to fund managers and board members, would be ing entrepreneurs and fostering longer-term policy re- bers. a well-defined performance measurement system, an important component, given the nature of this pub- form. Although certainly not an exhaustive list, we offer robust monitoring and evaluation, and transparen- lic-private collaboration. Advisory committees are one a few examples of the types of Pakistani individuals who Potential Challenges cy. Then, if there is a second stage of investment, of several standard channels used to facilitate commu- we believe would be well-suited for PII Advisory Board It is important to note that, historically, USAID support lessons learned can be applied to select follow-on nication and manage conflicts of interest between GPs membership: for PE funds—for instance, in the Equity Fund for East partners and restructure contracts. and LPs in the private equity industry. Unlike LP advi- African Agribusiness3—has generally consisted of ei- sory committees, which are common to many private • Visionary and highly reputable private sector lead- ther direct grant-financing to the fund, or the provision • Making a strong business case for investment in equity funds, however, the PII Advisory Board would be ers who have navigated among business, govern- of guarantees to investors. Similarly, OPIC provides Pakistan will be the best means to sustained and most effective—and be perceived as most credible—if ment, academia, and philanthropy, and represent long-term debt and risk insurance.4 There is no indica- scalable impact. Allowing the time and flexibility for it comprised PII investors, including U.S. Government strong advocates for reform. Examples include: tion either has ever taken direct equity positions through initial investments to see success will demonstrate representatives, as well as external industry experts. Ishrat Hussain, Dean of the Institute of Business limited partnerships. There are thus open questions the viability of Pakistan’s market, and offers the best Administration (IBA) and former Governor of Paki- about the legal implications of such an arrangement, prospect for substantially increasing job creation. Through active participation on an Advisory Board, stan’s State Bank; Syed Babar Ali, entrepreneur, which necessitate further research into the exact pos- State can play a critical role in ensuring that taxpayer former Finance Minister, and founder of the Lahore sibilities and parameters of State’s becoming an LP. Potential sources of leverage include: dollars are invested in a way that minimizes risk and University of Management Sciences (LUMS); and maximizes economic returns, while safeguarding the Moeen Qureshi, Chair of the Washington, D.C.- There are, however, alternative PE fund structures, ac- • OPIC – The fund could benefit from OPIC involve- independence of fund managers and the commercial based private equity firm EMP Global and former counting for differing investor needs (e.g., tax, regula- ment in multiple ways. OPIC can provide both viability of fund operations. Ideally, the Advisory Board Prime Minister of Pakistan. tory, or other legal considerations), which may provide additional debt financing and loan guarantees to would provide a mechanism through which State, co- options even if the standard LP model proves difficult. encourage equity investors. OPIC can also capital- investors, and investment experts work collaboratively • Successful, well-connected entrepreneurs who These include master-feeder funds, parallel or co-in- ize on existing relationships in Pakistan to bring in and engage regularly with fund managers and board have launched and expanded innovative business- vestment funds, consortia, and special-purpose vehi- investors. members to: es in fast-growing sectors of Pakistan’s economy— cles (SPVs), among others. in particular, entrepreneurs who have secured the • Other DFIs – The knowledge, resources, and shared • Secure alignment of interests among investors, backing of global venture capital investors. Exam- For example, if using State financing for direct equity objectives of other, more established DFIs—like fund managers, and investees. ples include: Monis Rahman, Chairman and CEO investments appeared problematic, a fund manager or the IFC and CDC—including extensive experience • Monitor PII investment processes to ensure invest- of Naseeb Networks, President of The Indus Entre- sponsor could create an SPV. USAID could then pro- in Pakistan, would help ensure the fund’s design ments are made and managed responsibly. preneurs (TiE) Lahore chapter, and Acumen Fund vide a grant to the SPV, which could in turn invest in the is tailored to the Pakistani context. DFIs can also • Provide fund managers with knowledge and re- Partner; and Ali Jameel, CEO of TPL Holdings. fund, which would then take equity positions. Likewise, serve as additional LPs for funds or, potentially, as sources to support value creation at the portfolio * For ideas in these categories, see: the Emerging Markets Private members of a larger PII consortium that pools DFI company level. • Young and dynamic private sector innovators with Equity Association Advisory Council (http://www.empea.net/main- resources into a single, larger fund of funds. • Collect and evaluate information on PII investments bold ideas for building Pakistan’s entrepreneur- menu-category/about/advisory-council.aspx), the Global Impact In- and performance. ial ecosystem and strong local and international vesting Network Investors’ Council (http://www.thegiin.org/cgi-bin/ • ‘Responsible’ Capital – New sources of so-called iowa/council/member/index.html), and the Ewing Marion Kauffman networks. Examples include: Umar Saif, Profes- Foundation’s team of Senior Advisors (http://www.kauffman.org/ responsible capital—such as foundations, impact The Advisory Board would best include a manageable sor at LUMS, founder of the Saif Center of Innova- about-foundation/senior-advisors.aspx). investors, sovereign wealth funds, and pension

32 33 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

funds—who likewise seek returns but with a dual de- velopment objective, are potential co-investors. Ex- amples include the Bill & Melinda Gates Foundation, the Rockefeller Foundation, and the Gatsby Charita- ble Foundation.* USAID’s East Africa agribusiness fund, for example, worked with partners like these.

• ‘Patriotic’ Capital – Pakistan has the seventh-largest Diaspora community in the world, with nearly five million people.5 Pakistani expatriates want to give back—the World Bank ranks Pakistan #11 in terms of remittances; many Pakistanis overseas are highly skilled entrepreneurs and professionals who could provide essential support to the development of a knowledge-based economy in Pakistan. Accord- both venture and growth stages. While each approach seems practicable in Pakistan, ing to interviews, however, these expatriates have Option 3—selecting multiple GPs to manage several not invested directly in local companies, due to the This option closely resembles the basic private equity smaller, specialized funds—has the greatest potential perceived inability to monitor them. The PII can structure, described above. contribution for engagement and impact, without introducing a Byz- therefore provide expatriate Pakistanis a credible • Diffuses benefits, so limits accusations of favoritism antine organizational structure. platform for investing in Pakistani enterprises. A Advantages number of private equity firms and other organiza- • Offers a streamlined management structure and the Drawbacks Potential Partners tions have existing networks for mobilizing Diaspora most direct investment route, facilitating State over- • Has questionable feasibility—finding an implement- Research on emerging market private equity reveals resources, including Abraaj Capital’s Riyada Enter- sight of investments ing partner that can operate as an FOF may be a clear linkage between competent fund management prise Development (RED) and OPEN Silicon Valley. • Is potentially the quickest to set up challenging and fund performance. The experience of the IFC, for • Provides the selected GP the largest potential re- • Can raise overall administrative costs—fees are instance, demonstrates that the key factor contributing • Local Investment – Local investor participation is turn typically higher because they add part of the fees to the success or failure of its funds has been the quality vital to long-term sustainability and success. Fund charged by the underlying funds of the GP—not the risk that comes with a first-time fund managers with strong local connections, as well Drawbacks • Adds a layer of complexity, and so may make moni- or frontier country focus.6 as other partners in the program—e.g., advisory • Does not benefit from specialized management in toring and oversight more difficult board members—can help mobilize financing from either the venture or growth spaces State should select the most qualified investment teams domestic sources. • Has no diversification across fund managers, so Option 3: Multiple Partners, Multiple Funds to manage PII capital, while avoiding excessively high adds idiosyncratic risk Approach: USAID does not limit itself to a single firm selection requirements that crowd out viable or interest- Implementation Mechanisms • Reduces the demonstration effect from multiple and, instead, makes smaller investments in two or more ed candidates. Clearly, an experienced fund manage- new investors entering the Pakistani market GPs. Each GP establishes and manages a fund. Each ment firm with a proven track record of positive invest- Number of Partners fund targets a narrower market segment. ment returns and successful exits would be the best In contrast to an enterprise fund, the PII does not need Option 2: One Partner, ‘Fund of Funds’ candidate for a GP. The nascent nature of Pakistan’s to be a monolithic institution with a single fund manager. Approach: USAID selects and then invests with one GP. This option is not technically a fund of funds, as USAID private equity industry, however, could pose challeng- There is scope for—and potential value in—supporting The GP then establishes and manages the PII as a ‘fund would not operate like a typical active fund manager. es to identifying candidates with long track records of multiple investment platforms, with distinct implement- of funds’ (FOF)—a strategy of pooling investor capital But it replicates the advantages of the FOF approach success. Moreover, inherent in the PII mandate are the ing partners (i.e., GPs), under a broader PII umbrella. and investing in other equity funds, rather than directly without adding complexity. dual goals of generating financial return and achieving in portfolio companies. The fund of funds then estab- development impact and visibility. Beyond firms with A key question, then, is whether it is preferable to es- lishes or invests in external funds, which in turn invest in Advantages track records, therefore, it is worth considering emerg- tablish a single investment vehicle—one large fund for portfolio companies. • All of the advantages of Option 2 ing fund managers and nontraditional players with mis- investing in a wider range of SMEs—or to divide the • Adds potential for visibility and demonstration ef- sions that align with this broader PII mandate—bringing pool of resources to invest in multiple, smaller, more tar- A fund of funds (e.g., the U.K.’s CDC) operates like a fects from investing with two or more firms higher risk, but potentially greater rewards. geted funds? master private equity fund that spawns and manages a • Incentivizes high performance through competi- portfolio of sub-funds, each with its own fund manager. tion among funds managers, especially if a second The IFC provides insight on specific criteria that may This choice presents three broad options. Each em- FOF managers may invest in sub-funds established by round of funding will be limited to top-performing prove useful for selecting fund managers in an emerg- ploys the general limited partnership model, and each the same investment firm or in external funds, but gen- GPs ing market context. Suggested indicators for gauging allows the fund to be levered through outside invest- erally they aim to diversify a portfolio across a variety of • Fosters a learning environment in the PII and the the potential success of a management team include: ment—but they differ in the degree to which authority is investment managers, investment strategies, and mar- broader Pakistani private equity market by provid- whether the GP is locally based; the number of local dispersed and in how many partners are involved. kets. ing exposure to different managers and investment national staff; fund manager skill-set or capacity to add strategies and demonstrating cases of profitable value to investee companies (e.g., prior experience in Option 1: One Partner, One Fund Advantages investing running companies, as entrepreneurs or consultants); Approach: USAID selects and then invests with one GP. • Takes a flexible and decentralized approach and prior experience in private equity. IFC funds that The GP then establishes, raises, and manages the en- • Reduces risk through diversification Drawbacks have met these criteria are overwhelmingly associated tire PII. The fund manager invests in Pakistani SMEs at • Allows specialized sub-fund managers to target dif- • May be constrained by the number of viable GPs with better performance—both in terms of financial re- ferent market segments • Raises questions about how to structure the PII it- turns and overall development impact.7 * A good resource for finding potential partners of this type is the Global Impact Investing Network: http://www.thegiin.org/cgi-bin/iowa/ • Potentially creates more leverage possibilities self and at what level to seek leverage (at the larger council/member/index.html • Lowers the barrier to entry for GPs in terms of equity PII level, or alongside each GP) Strong local knowledge and presence is especially im-

34 35 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE portant for successful fund performance. A local man- Qureshi) or San Francisco-based Draper Fisher Jurvet- The GDA approach has the potential to add significant international applicants. Additional donors or private agement approach is a key factor driving the success of son (Founder and Managing Director Tim Draper is a value to the PII. A GDA is an innovative public-private investors could invest directly into the funds to lever the PE funds in any emerging market. An extensive survey co-investor in some IBH investments)—should also be alliance model that allows State to work with non-tradi- U.S. investment, but securing this co-investment may of IFC funds indicates that domestic and international pursued. tional private sector actors to advance mutual business be challenging. USAID has contracted directly with pri- funds with local offices significantly outperform funds and development objectives,* while leveraging resourc- vate equity firms in the past, but further inquiry into the without a local presence—generating, on average, five There are also several banks and investors in Pakistan es from partners at a level that equals or exceeds the legal requirements may be required to know if the ex- times the returns.8 that could help administer PII funds in some capacity. U.S. contribution (at least a 1:1 ratio, in cash or in-kind).† ecution of a limited partnership model is feasible.‡ United Bank Limited, for instance, is a commercial bank The model requires joint planning and management, The Pakistani market, in particular, is characterized by in Pakistan that provides private equity financing to and would thus give State a platform to share responsi- Option 3: Support public international organization very specific risks and a pervasive trust deficit. These startups. Pakistani investment management firms such bility and capital risk among multiple partners. A GDA State selects a public international organization (PIO) factors, combined with the unavailability of good market as BMA Capital Management and Arif Habib Group also offers the best mechanism for raising additional with experience investing in emerging market private data, make in-depth market knowledge and proximity also have local PE experience and substantial market private sector and donor resources to leverage the U.S. equity funds and a local presence in Pakistan, such as of fund managers to investees all the more important. insight to offer the PII. Moreover, as we explore further, investment in the PII. Structuring one or more PII funds the IFC, and grants U.S. Government resources to man- Most aspects of PII fund management and opera- below, Pakistan offers a number of local organizations through a GDA consortium, in particular, would have age one or more investment funds. In Options 1 and tions—from gaining market access and conducting due and social enterprises that would be ideal partners for the potential to provide a high level of U.S. engagement 2, State partners with a professional fund management diligence to acquiring talent and raising capital—will be a PII component dedicated to promoting entrepreneur- with strategic partners and open the door to a wide team that, in turn, creates a fund entity and governance highly local. ship and supporting the growth of startups in the coun- range of co-investment and technical expertise. structure to invest in Pakistan; under this scenario, State try. supports a PIO’s existing mandate to carry out private While a fully local operation with qualified Pakistani GPs The feasibility of a GDA, however, depends on partners equity investing in Pakistan. The PIO, in turn, uses the would be ideal, the options may be limited given Paki- In Appendix B, we provide a list of potential PII invest- having available funding to contribute and the ability of grant to back one or more private equity funds (e.g., stan’s underdeveloped PE industry. That said, there are ment fund managers. The list includes information State and potential alliance members to align core in- one growth equity fund and one venture capital fund) to a handful of seasoned Pakistani PE fund managers— drawn from the Capital IQ database on local and foreign terests and objectives. Using a GDA to structure PII invest in Pakistani SMEs. such as JS Group—and the industry is beginning to firms with an investment interest or track record in Paki- funds may require a very lengthy process of identify- draw new entrants with attractive investment approach- stan, as well as information on firms that we identified ing and negotiating with partners, and attracting suffi- This approach may have certain advantages—partner- es and strong value-addition strategies. Cyan Limited as possible partners through our research. We mention cient resources for leverage. Moreover, the GDA model ing with a reputable PIO would add expertise, credibil- and Indus Basin Holding Limited (IBH), for instance, the Pakistani firms either as potential fund managers, places a strong emphasis on involving local partners ity, and accountability for financial resources. It would are both recently established PE firms focused on high- or as local affiliates with the capacity and resources to in the alliance as implementing or resource partners. also facilitate significant leverage of U.S. funds—PIOs growth areas of the economy, and which have already support PII investment operations. While State should explore partnerships with Pakistani are well-positioned to catalyze additional donor and pri- attracted international partnership or co-investment.* investment firms or local financial institutions, raising vate investment, as well as longer-term policy reforms Recommendation 6 sufficient co-investment may pose challenges. on the ground in Pakistan, in a way that a bilateral insti- Alternatively, the fund can prioritize foreign partners— Work through multiple implementing part- tution acting alone cannot. The PII would be branded U.S. or regional investment management firms—that ners, as a means to create several smaller Option 2: Partner via competitive bidding process as a truly international initiative. have a local presence or track record in the country. PII funds with more targeted investment State selects one or multiple firms to create and man- Although the options may be limited in this scenario as strategies. Select and invest with profes- age a PII fund through a competitive bidding process, On the other hand, a PIO grant offers a more passive well, there are a handful of qualified regional investment sional fund management firms with relevant and invests U.S. capital through a USAID contract or and potentially less pioneering and impactful approach firms—such as Abraaj Capital and RHT Partners, for in- experience, local knowledge, capacity to grant. This option may be the most straightforward to stimulating investment in Pakistan. While the built- stance—that can bring local investment experience to add commercial value to portfolio com- means to establish a PII investment fund, although the in expertise, multi-donor coordination, and more subtle the table. panies, and ‘skin in the game.’ Consider time required to implement the process and the degree American branding associated with a PIO grant are emerging or first-time fund managers that of U.S. involvement differs across grants and contracts valuable, the U.S. would lose some of the essential ben- Another alternative would be to seek foreign fund man- align with the broader PII mandate, in ad- (e.g., procurements can be lengthy but allow for high efits that come with partnering directly with the private agers that have credible plans and means to either dition to experienced teams with a proven design input). sector. There would be less of an opportunity for the open a local office or establish affiliations with local track record. U.S. to innovate and highlight American engagement, financial institutions that have market access and can Under this scenario, State would be able to open up and the benefit of determining how to distribute pro- help to catalyze deal flow and create value in investee the bidding process to a wide range of competition, ceeds from fund liquidation would no longer be viable. companies. The Small Enterprise Assistance Funds Selection of Partners providing an opportunity to choose one or several part- (SEAF), a nonprofit fund manager, is one example— There are three main mechanisms available to State for ners from a potentially broad audience of Pakistani and Moreover, most of the key advantages of granting fund- while new to Pakistan, SEAF has a proven track record partnering with private investment firms to manage one ing to a PIO can be achieved through either of the first in emerging market SME investing, including in India or more PII investment funds. Although there may be of mechanisms and processes, but the feasibility of a Collaboration two options—particularly a GDA that leverages the ex- Agreement should be explored as an alternative to more standard and Afghanistan, and the capacity to support a rapid other possible approaches, these offer the most fea- obligating tools: http://idea.usaid.gov/gp/collaboration-agreement. pertise and capital of institutions such as the IFC in a start-up in Pakistan. sible solutions: * Non-traditional partners may include private businesses, financial strategic public-private alliance. A PIO grant would institutions, social entrepreneurs, venture capitalists and investors, thus be best pursued as a third alternative, in the case There are also U.S. private equity and venture capital Option 1: Global Development Alliance philanthropists, foundations, Diaspora organizations, and other for- some combination of Options 1 and 2 prove unfeasible. and non-profit non-governmental entities. Resource partners are firms with an existing connection to Pakistan and expe- State identifies prospective partners and negotiates a organizations that contribute resources—cash and/or in-kind—to a rience in emerging markets that may be less adverse Global Development Alliance (GDA), partnering with GDA, including technical expertise, goods and services, market ac- Strategic Guidance to the perceived risk of investing in Pakistan. Partner- anywhere from one firm to a consortium of resource part- cess, etc. For more on the GDA model and what counts as leverage, Private equity investing entails more than mere capital ships with these firms—such as the Washington, D.C.- ners. After negotiations, State directly obligates fund- see http://idea.usaid.gov/gp/aps transfer—often, knowledge transfer is as important a † Only private resources count toward the 1:1 leverage requirement. based EMP Global (run by former Prime Minister Mooen ing to one or more fund management firms by means of The GDA model, however, does allow Public International Organiza- component. SMEs in Pakistan need capital to grow, but a USAID collaboration agreement, which offers a more tions (PIO) and bi/multilateral donors to participate as members of an * See the Cyan and IBH websites for more detail on the firms’ invest- flexible tool compared with traditional awards.† alliance and contribute resources as leverage. See the FY12 GDA ‡ As one example, USAID signed a 5-year contract with The Ban- ment strategies, management teams, and partnerships: http://www. APS for more detail: http://idea.usaid.gov/sites/default/files/attach- croft Group, L.P. in 1995: http://www.bancroftgroup.com/en/history/ cyanlimited.com and http://www.indusbasin.com. † The GDA model allows USAID to disburse funding through a variety ments/2012_GDA_APS.pdf index_history.shtml

36 37 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

some—particularly those toward the smaller end of the Fig. 28 Constellation of Elements in the Entrepreneurial Ecosystem! Elements of the Entrepreneurial Ecosystem spectrum—arguably need mentorship and know-how Domain Category Elements even more than financing. Management teams that • Initiatives (investment, support) • Financial support (R&D, jump-start funds) Government! Leadership ! provide hands-on strategic and operational support will Government • Regulator framework incentives (tax incentives) • Research institutes be most likely to accelerate expansion, maximize com- Policy • Venture-friendly legislation (bankruptcy, contract enforcement, etc.) Early • Unequivocal Support • Entrepreneurship strategy petitiveness, and foster innovation. Customers! Leadership • Social Legitimacy • Urgency and advocacy Policy! • Venture capital funds • Private equity Fund managers, however, are not the only source of Finance Financial Capital • Zero-stage venture capital • Angel investors Networks! • Public capital markets • Debt guidance; State can design this capacity directly into Financial Markets! Finance! Capital ! • Visible successes • International reputation the PII. A thoughtfully selected advisory board, in par- Success Stories • Wealth generation for founders ticular, could provide invaluable guidance to investee Culture • Tolerance of risks, mistakes, failure • Innovation, creation, experimentation Societal Norms firms, fund managers, and USAID staff managing the Educational Entrepreneurship! • Social status of entrepreneur • Ambition, drive, hunger Institutions ! larger program. • Entrepreneurship promotion • Entrepreneur-friendly associations Human ! Success NGOs • • Culture! Stories! Conferences Business plan competitions Capital ! Supports • Telecommunications • Transportation and logistics Infrastructure Recommendation 7 • Energy • Zones, business incubators, clusters Structure PII fund partnerships using one Labor! Supports! Support Professionals • Legal, accounting, investment bankers, technical experts Societal • • or more feasible implementing mechanisms Norms! Labor Skilled and unskilled Serial entrepreneurs Human Capital • Professional and academic degrees • Specific entrepreneurship training Educational Institutions that allow for maximum flexibility, com- Non- • University linkages, collaboration • Business incubators Government Infrastructure! mercial sustainability, and leverage of U.S. Institutions ! Networks • Entrepreneurs, diaspora, universities, multinationals, investment professionals Government resources—prioritize the GDA Support Markets • Expertise in commercializing • First reviews Professions ! Early Customers model but use more traditional contracts © 2011 Daniel Isenberg! • Early adopters for proof-of-concept • Distribution channels and grants as required. Seek substantial Source: Daniel Isenberg, “Introducing the Entrepreneurship Ecosystem: Four Defining Characteristics,” Forbes Online Magazine (May 2011), < http://www.forbes.com/sites/danisenbe Pakistani private sector involvement in rg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/> sourcing and levering investments. programs—scaling them to maximize the impact of the Perhaps the best argument for supporting entrepre- integrate Pakistan’s existing entrepreneurial infrastruc- initiative’s corresponding investments. neurs, however, lies in the expected return on invest- ture, in order to create a startup environment that is both ment. The probability that any major commercial suc- sustainable and broadly accessible. Among the many There is substantial value to be gained by complement- cess will emerge from a U.S.-backed incubator is of recommendations we received from entrepreneurs and Complements & Alternatives ing growth capital with startup capital and entrepreneur- course small—but this small chance that the PII could others working to promote entrepreneurship, five stand There are compelling reasons, given its objectives, for ial ecosystem support, since each stage of the business help develop a Pakistani Instagram, LinkedIn, or even out as areas where State could provide assistance. State to focus on generating investment through the cycle is dependent on another. Entrepreneurs need Facebook is well worth the relatively minor investment establishment of some type of fund or funds. But it is encouragement, technical assistance, and funding to in resources. The returns—not just financially, but in 1) Startup capital – The lack of startup capital is one of also important to consider both alternatives to this ap- start companies, and young and small companies need both development impact and public goodwill—would the most binding constraints to starting or scaling a proach, as well as complementary elements that could growth capital and technical assistance to scale—but be immense. business in Pakistan. Injecting capital is of course enhance its impact. The initiatives, below, do not con- entrepreneurs also need to know that growth capital the main objective of the PII in the first place—but a stitute an exhaustive list of either parallel or substitute is available, if their companies reach that stage, while Defining the Entrepreneurial Ecosystem State-sponsored initative that establishes a distinct policy options—but we identify these as some of the venture and growth funds rely on entrepreneurs’ hav- An entrepreneurial ecosystem, in its broadest sense, VC fund, or even provides initial seed funding, in most promising and feasible, and those with the great- ing successfully navigating the startup phase. These is an enabling environment for startups, at the local, conjunction with a later-stage growth fund, could est potential for impact. initiatives are thus symbiotic and their prospects of suc- regional, and national levels. This ecosystem can be provide much-needed financing to Pakistan’s en- cess improve if State pursues them in tandem. By us- divided into six domains—conducive culture, enabling trepreneurs. Entrepreneurial Ecosystem Support ing the PII to address the ‘full stream’ of the business policies and leadership, availability of appropriate fi- The call for directly supporting entrepreneurship in Pak- cycle—startup to growth capital and support—State will nance, high quality human capital, venture-friendly 2) University programs – There is a shortage of high- istan is resounding. During our fieldwork, promoting better address deficiencies in the Pakistani market and markets for products, and a range of institutional and quality entrepreneurial education programs with- entrepreneurship was one of the most-cited and most- achieve greater impact. infrastructural supports—that interact in complex ways. in Pakistan’s university system. In 2006, USAID impassioned recommendations we heard for strength- Alone, each dimension is conducive to entrepreneur- launched an initiative with the Institute of Business ening U.S. private sector assistance to Pakistan. Pro- The overwhelming demand for entrepreneurship train- ship, but insufficient to sustain it.12 Administration to establish a center for entrepre- ponents of this type of support also made some of the ing and services that we observed during our fieldwork neurial development, but later diverted financing to most compelling arguments for its inclusion. in Pakistan is reinforced by a national development strat- In Pakistan there exists a small but promising network of support flood relief operations.13 While such pro- egy—the Framework for Economic Growth—that calls organizations and initiatives in place to support entre- grams would bolster entrepreneurship in Pakistan, State has already made an effort to support Pakistan’s explicitly for entrepreneurship support and inter-univer- preneurship.* But there is a need to further develop and in the short-run there are other initiatives, which are young entrepreneurs. In March 2012, for instance, the sity alliances to foster research and the commercializa- * When we refer to the ‘entrepreneurial ecosystem’ and Pakistan’s less resource-intensive, that may be more feasible U.S. Embassy and the Islamabad Chamber of Com- tion of technology.10 In a February 2012 study, Robert network of entrepreneurial organizations, we are referring to organi- but of equal impact. Among the many entrepre- merce and Industry organized the inaugural Pakistan Looney of the Navel Postgraduate School affirmed the zations and programs that promote the growth of professional entre- neurs we met, there was a common call to establish Young Entrepreneurs Forum.* At the launch, Secretary importance of the entrepreneurial strategy outlined in preneurial companies, such as software development firms. Previous business incubators† in Pakistan’s universities. In- U.S.-sponsored interventions, such as USAID’s Pakistan Entrepre- Clinton and Ambassador Munter each commended the the Framework. The study, through extensive quanti- neurs program, have aimed to lift low-income, vulnerable populations investment and fostering entrepreneurial companies that may grow to Pakistani entrepreneurial spirit and pledged support for tative analysis of countries’ growth patterns, finds that out of poverty by fostering micro-enterprise development. While such be large firms. Pakistan’s entrepreneurs.9 The PII can build on such those that followed an entrepreneur-led growth strategy programs are vital to Pakistan’s long-term stability, we focus our entre- † Business incubators are programs designed to support the suc- sustained their growth and that, in the short term, sup- preneurial assessment and recommendations on activities that pos- cessful development of entrepreneurial companies through an array * In 2009, USAID also began Pakistan Entrepreneurs, an economic sess the most potential to strengthen Pakistan’s private sector and of business support resources and services. More specifically, busi- development project that aims to raise the incomes of more than port for entrepreneurship efforts could be expanded attract investment. Micro-enterprise development is an appropriate ness incubators can enable technology transfer and innovation, as- 75,000 predominantly female micro-entrepreneurs. even without national governance reform.11 intervention for poverty reduction, but not for attracting professional sist disadvantaged communities or individuals with projects, promote

38 39 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

cubators can be housed within existing Fig. 29 Business Incubator Model! tual property resulting from university Fig. 30 Incubator Program Decision Points! university building space; universities research.* There are, however, sub- Community Technical Rural! can use them as platforms to integrate Linkages! Assistance! stantial differences in the research

entrepreneurs across the country. Giv- Business strengths of Pakistan’s universities. Cluster Funding Streams! Location! en greater resources availability, build- Development Strategy ! For this reason, the focus and struc- Non-Cluster! ing new, well-equipped physical spaces ture of each incubator will likely differ Urban! within universities, designated for use as to some degree. Nevertheless, it is Level of * Incubator! Hi-Tech incubators, would be especially helpful. vital to establish a clear set of ob- Technology! Low Tech! BUSINESS INCUBATOR ! jectives for each incubator, as well The university business incubator model as for the larger network of incuba- is an inviting approach because it can ENTREPRENUER! ENTERPRISE! EMPLOYMENT ! GROWTH! tors. Clear goals and a framework IT, Agro, Focus Area ! Manufacturing, be tailored to the resources, academic will guide critical decision points that Services, Generalist! strengths, and location of any univer- arise during the planning process. sity in Pakistan. While some universities evaluation results and the objectives and framework of may resource their incubators with high- the program. Moreover, universities selected for the Decision Points tech equipment and a full staff—such Knowledge Initial program should demonstrate a long-term commitment Attainment and State Funding! Focus Area: Business incubators can be designed to pro- as NUST—other universities would likely Sharing! mote specific industries or take a more generalist approach. to strengthening—or starting and strengthening—their benefit from a simple physical space business incubators, as well as the will and capacity Cross-University Management Generally, incubators are aligned with the capabilities and from which to work and the part-time as- Linkages! Training! resources of the host university, although a more general- to allocate physical space, professional support, and sistance of a professor. focused incubator is appropriate for most institutions. financing, if possible. The program’s overarching ob- § Level of Technology and Support: Available resources jective should be to improve and integrate the incuba- It is also important that the PII takes a broad view 5) Regulatory reform – Entrepreneurship in Pakistan and sector focus, if any, will drive the technology require- tors. As a guideline, successful business incubators in terms of university programming, and seeks rela- is impaired by government policy, legislation, and ments and the type of business support services of the in- typically include: tionships beyond just the most elite institutions (like regulation. While State may lack the influence to cubator. LUMS and IBA), and beyond the biggest cities (Ka- directly engender policy change in Pakistan, it is in Location: Location will dictate whether or not the incuba- • Clear, well-communicated goals; rachi and Lahore). An ideal program would target a a position to collaborate with powerful constituen- tor can leverage existing business clusters, influence which • An incubator manager responsible for tenant selec- constituencies will have access, and shape the program range of geographically diverse universities in both cies, such as the U.S.-Pakistan Business Council, manager’s capacity to coordinate services and supervise tion, day-to-day operations, the setup and coordi- large and second-tier cities. in the United States, and the American Business the program. nation of business development services and out- Council, in Pakistan, to advocate for a more pro- reach, and for meeting the overall objectives of the Cluster: First, existing business clusters in Pakistan, if any, 3) Mentorship – There is a shortage of good mentors growth regulatory environment. should be identified and assessed on their ability to support incubator; for Pakistan’s entrepreneurs. Almost every entre- and add value to the incubator.† Next, a decision should • Business services, such as management training, preneur we met cited the importance of mentorship. Going Forward be made to either tie the incubator into an existing cluster business plan development, access to financers, Strengthening existing entrepreneurial networks, The guidelines, below, constitute a set of concrete or to utilize the incubator program to jumpstart a new clus- and industry-specific technical assistance; leveraging U.S. private-sector expertise, and con- steps the PII could take to help strengthen Pakistan’s ter. If jumpstarting a new cluster, a cluster strategy—geo- • Shared resources like developer software and com- graphical, sector-based, horizontal, or vertical—should be necting entrepreneurs with business leaders in entrepreneurial ecosystem. This list is informed by our selected.‡14 puters, access to subscription market research, or Pakistan are all important, tangible interventions field research, but it is not comprehensive, so we sug- programming assistance, plus secretarial support, State could undertake to address this need. gest further research to flesh out and refine these pre- high-speed Internet, credit reports, etc.; scriptions: Select, improve, and integrate – University and affili- • Physical space for working and collaborating; 4) Linkages – Current entrepreneurial initiatives in Pak- ate partner selection should align closely with the initial • Financing through corporate partnerships, grants, istan are disjointed and exclusive. Improving link- Evaluate existing entrepreneurial programs and net- permanent university funding, and, eventually, a ages should be a component of any entrepreneurial works in Pakistan – There is a budding network of en- * Private investors generally start incubators as a way to make profit working capital fund; and support program in Pakistan. State should empha- trepreneurial groups, university business incubators, by identifying, training, and investing in multiple companies and gov- • A tenant application process and evaluation crite- ernments may start incubators to jump-start the economy, develop size establishing linkages among universities, do- mentorship programs, business plan competitions, and priority sectors, or create jobs. While the motivations for starting an ria to ensure the incubator support the people and mestically and abroad, and connecting entrepre- business support organizations in Pakistan. As a first incubator may differ among participating groups, the core objec- business ideas that fit its mission.15 neurs with mentors and business opportunities in step, we recommend evaluating the focus, efficiency, tives—business creation, technology transfer/innovation, job creation, the United States. The incubator model would also management, and resources of these elements to iden- and commercialization of university know-how—are generally shared. Monitor, support, and develop – Establishing and † The Framework for Economic Growth identifies several preexisting serve as a conduit to channel startup capital and to tify potential partners for a university-based business “pseudo-clusters”—the IT cluster in Karachi, automotive manufactur- strengthening a university-based incubator program facilitate mentorship and business linkages.† incubator program. The list we provide, at the end of ing in Port Qasim, textile and leather in Faisalabad, sports and surgi- is, of course, a complex, time-consuming process that Appendix B, although not exhaustive, highlights the cal equipment in Sialkot, furniture in Gujranwala, light engineering in will require long-term vision and an implementation local job creation, and help universities and R&D centers commercial- prominent actors and initiatives in Pakistan’s entrepre- Gujrat, heavy industries in Wah, and light weapons manufacturing in plan. Deliberate steps—from the start—to judiciously ize research and know-how. Landikotal—but stresses the need to develop stronger clusters more * Presently, there are a few incubators housed in Pakistan—the Na- neurial sector. It can be used as a starting point for this proactively. See: http://www.pc.gov.pk/hot%20links/growth_docu- select partners, engage key stakeholders throughout tional University of Science and Technology (NUST) launched the assessment. ment_english_version.pdf. the design phase, and to build on promising entrepre- Technology Incubator Center (TIC) in 2004 and the SAIF Center for ‡ Highlights of the development cluster strategies listed above in- neurial programs already in place will best ensure suc- Innovation, a technology incubator, was established in 2008—but the Develop clear objectives and a framework for the incu- clude: 1) geographical: clustering is focused in one geographical cess. The expectation that incubators will expeditiously quality and productive output of these programs are unknown at the area to aggregate a critical mass of resources and skills that results time of this report. Our recommendation focuses on expanding and bator program – There are many incubator types and in a sustained competitive advantage for a particular industry (e.g., improving Pakistan’s incubator network by strengthening existing in- structures. Generally, universities develop incubators Silicon Valley, Hollywood); 2) sector-based: a group of businesses § Integration refers to building and institutionalizing best practice and cubators and establishing new incubators in Pakistan’s universities, to commercialize the science, technology, and intellec- from within the same sector operate together to share knowledge knowledge-sharing processes, expanding mentorship opportunities, where appropriate. and common resources; 3) horizontal: businesses share general re- and cultivating an entrepreneurial community within and among par- † While regulatory reform is important, it is not an objective directly opportunities and linkages to financing sources, as well as, other uni- sources, such as best practices; and 4) vertical: entire supply-chains ticipating universities. More specifically, recommendations for inte- tied to the activities of a business incubator. There is, however, an versities and the private sector within the university-based business work together to make the system—from production to sale—more gration will depend on other factors, such as the focus and location opportunity to integrate mentorship programs, university educational incubator model. competitive. of each incubator.

40 41 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

develop and launch successful businesses is short- ize the identification, evaluation, and replication of high- Partial Credit Guarantees (PCGs) renewable electricity generation source. A FIT program sighted. Rather, the short-term value of an incubator performing initiatives. Partial credit guarantees, often called credit guarantee is a mechanism designed to accelerate investments program is its enabling and ‘catalytic’ effect.* In other schemes (CGSs) in Pakistan, are programs that ensure in renewable energy technologies. These programs words, the initial value of an incubator is the conditions SIBs are not bonds in the conventional sense—while partial repayment of a delinquent loan to motivate lend- incentivize renewable energy investment by offering and resources that it provides to make entrepreneur- they operate over a fixed period of time, they do not ers to lend to borrowers, which normally do not have long-term contracts to private renewable energy pro- ial pursuits possible. While there is noticeable interest offer a fixed rate of return as conventional bonds do. access to credit from the formal sector. Within the ducers based on their cost of production. FIT values and support for the incubator program, predicting how Repayment to investors is instead contingent upon last four years, the State Bank of Pakistan (SBP) has differ among renewable energy subsectors to account people will respond to the program is difficult. To miti- designated social outcomes being achieved. In this re- launched two CGSs: the Microfinance Credit Guaran- for the varying costs of production.† gate risk, the program should start small, be monitored gard, SIBs are more similar to an option contracts than tee scheme in 2008, and the Credit Guarantee Scheme closely, and adjust and scale as circumstances dictate. conventional bonds.† for Small and Rural Enterprises in 2010. Each program Many FIT programs include tariff reduction schedules, was funded with a £10mm grant from the U.K.’s DFID and, sometimes, staged application rounds. Each Social Impact Bonds (SIBs) SIBs are a relatively new type of instrument, and there and provides a 40% loan guarantee for partnering com- mechanism is intended to incentivize efficiency im- A social impact bond is a type of outcome-based con- are few precedents; they are currently being piloted in mercial banks.17 Although the programs are ongoing, provements: tract in which public sector representatives commit to the United States and United Kingdom—for instance, they have already increased commercial lending to pay for significant improvement in social outcomes for to fund programs to reduce recidivism among released Pakistan’s SMEs, and could offer State an alternative • Under tariff reduction schedules, tariffs decline on a defined population.16 In other words, it is a type of prisoners. New initiatives, such as Instiglio, seek to approach for financing SMEs. predetermined dates over the lifespan of the con- security that investors can purchase, but which pays extend the model to developing countries.‡ SIB pro- tract in order to incentivize companies to cut costs out based on development results—i.e., private-sector grams have been successful in targeted social reform If circumstances dictate, State should explore the pos- and improve efficiency. investors pay in, but SIBs only pay back returns when programs and could provide a unique opportunity to sibility of implementing a partial credit guarantee pro- • A staged application mechanism increases tariffs programs are successful. In this way, they move risk leverage private sector strengths to promote reform ini- gram as an alternative to the PII. USAID’s Develop- over several rounds, but issues the funds on a first- from the public sector to the market, and they incentiv- tiatives in Pakistan. SIBs are a particularly appealing ment Credit Authority is specialized in structuring and come-first-served basis, thus incentivizing compa- way of attracting Diaspora funding—i.e., ’patriotic capi- implementing partial credit guarantee programs and nies to opt in earlier at lower rates. * The “enabling and catalytic effect” refers to the disruptive change tal’—as expatriates can invest directly in programs at would be an ideal partner for establishing an SME loan and subsequent realignment of resources, interests, and priorities home with the promise of impact, but also hope to earn program in Pakistan.* Energy shortages and rising fuel costs, coupled with that occurs when a new opportunity—the business incubator—is established and discovered by students, entrepreneurs, and private a financial return. the crippling effects of government monopolization, companies in Pakistan. In other words, the very act of creating a Feed-in Tariff (FIT) for Renewable Energy present tremendous challenges for Pakistan’s energy space for people to develop and start companies will likely facilitate A feed-in tariff is a premium rate paid for electricity that sector. Several FIT program proposals have been un- the exchange of ideas, new relationships, and the pursuit of new is fed back into the electricity grid from a designated entrepreneurial ventures. Add a selection process and incentives— † More on this model is available at: http://www.socialfinance.org.uk/ † For example, solar power is relatively cheap to produce compared business development services, financing, etc.—and the enabling work/sibs * More on this model is available at: http://www.usaid.gov/our_work/ to tidal power, therefore, FITs for solar power are typically less than and “catalytic’ effect will likely respond in equal measure. ‡ See: http://www.instiglio.org/. economic_growth_and_trade/development_credit/ tidal power FITs.

42 43 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Sources mentation Thereof,” State Bank of Pakistan, An- nual Performance Review of SBP BSC - FY11 1 “Taxonomy of Private Equity,” Illinois Private (December 2011). http://www.sbp.org.pk/sbp_ Equity Association (accessed March 2012), bsc/apr/Perf-10-11/Ch-07.pdf 1. http://www.illinoisvc.org/filebin/PDFs/IV_Pri- vate%20Equity%20Taxonomy.pdf 18 Haris Anwar, “Pakistan Offers Renewable- Energy Incentives to Tackle Shortages,” Bloom- 2 “How Funds Work,” Overseas Private Invest- berg Online (August 25, 2011). http://www. ment Corporation (accessed May 2012). http:// bloomberg.com/news/2011-08-25/pakistan- www.opic.gov/investment-funds/how-funds- offers-renewable-energy-incentives-to-tackle- work shortages.html 3 “USAID and Impact Investors Capitalize new 19 Nancy Birdsall, Wren Elhai, and Molly Kinder, Equity Fund for East African Agribusinesses,” “Beyond Bullets and Bombs: Fixing the U.S. Ap- JPMorgan Chase & Co. (September 28, 2011). proach to Development In Pakistan: Report of the http://investor.shareholder.com/jpmorganchase/ Study Group on a U.S. Development Strategy in releasedetail.cfm?releaseid=609172 Pakistan,” Center for Global Development (June 2011). http://www.cgdev.org/files/1425136_file_ 4 Josh Lerner, “A Note on Private Equity in De- veloping Countries,” Harvard Business School, CGD_Pakistan_FINAL_web.pdf 2008. 20 Tara Beteille and Kalpana Kochhar, “Paki- stan’s Most Favored Nation Status to India: A 5 Dilip Ratha, Sanket Mohapatra, and Ani Silwal, Migration Remittances Factbook Win-Win for the Region?” Ending Poverty in 2011, Wordl Bank Migration and Remit- South Asia (World Bank Blog) (August 2012). tances Unit (2011). http://siteresources. http://blogs.worldbank.org/endpovertyinsoutha- worldbank.org/INTPROSPECTS/Resourc- sia/pakistan%E2%80%99s-most-favored-nation- es/334934-1199807908806/Top10.pdf status-india-win-win-region 6 David Wilton (IFC), “Characteristics of Suc- cessful GPs in Emerging Markets,” Emerging Fig. 28 Isenberg (2011). Markets Private Equity Association (accessed May 2012) http://www.ifc.org/ifcext/cfn.nsf/At- Fig. 31 Social Finance (2012). tachmentsByTitle/Characteristics_of_Success- Fig. 33 Christopher Neidl, “How a Feed-In-Tariff ful_GPs_in_EM_by_D_Wilton/$FILE/Characteri Works,” World Future Council (accessed May stics+of+Successful+GPs+in+EM_D+Wilton_ 2012). http://www.area-net.org/fileadmin/user_ IFC_EMPEA+editorial.pdf. upload/AREA/AREA_downloads/Policies_Grid/ 7 Ibid. WFC_How_FiT_works.pdf 8 Heino Meerkatt (BCG) and Heinrich Liech- tenstein (IESE), “New Markets, New Rules: Will Emerging Markets Reshape Private Equity?” (November 2010), 10. 9 “Munter, Clinton Commend Pakistani Entrepre- neurial Spirit,” Pakistan Today (March 28, 2012) http://www.pakistantoday.com.pk/2012/03/28/ news/profit/munter-clinton-commend-pakistani- entrepreneurial-spirit/ 10 Government of Pakistan, Planning Commis- successfully championed in Pakistan over the last few in Pakistan, but recognize the limitations of such broad sion, Pakistan: Framework for Economic Growth years. Fortunately, this year, Pakistan introduced a FIT recommendations. Although comprehensive trade re- (May 2011), 55. to expand wind power in Sindh province.18 A national form is a complicated, politically difficult issue, efforts 11 Robert Looney, “Entrepreneurship and the Process of Development: A Framework for Ap- FIT program, or simply strengthening, monitoring, and should be made—where possible—to complement pri- plied Expeditionary Economics in Pakistan,” expanding the Sindh province wind FIT program, could vate sector development initiatives with targeted trade Kauffman Foundation Research Series (Febru- ary 2012). http://www.kauffman.org/uploaded- prove helpful in attracting much-needed private sector assistance. files/pakistan_ee_framework.pdf * investment. Moreover, neighboring China’s preemi- 12 Daniel Isenberg, “Introducing the Entrepre- nence in the renewable energy industry heightens the Additionally, Pakistan’s decision to grant India ‘most- neurship Ecosystem: Four Defining Characteris- tics,” Forbes Online Magazine (May 2011). http:// appeal of using a FIT to develop affordable energy al- favored nation’ status (MFN) in 2011 is a major step in www.forbes.com/sites/danisenberg/2011/05/25/ ternatives in Pakistan. reducing transaction costs between the two countries20 introducing-the-entrepreneurship-ecosystem- four-defining-characteristics/ and presents an opportunity for the United States to 13 Kazim Alam, “Funds diverted: USAID backs Trade Assistance advocate for a stronger Pakistan-India bilateral trade off from earlier commitment to provide IBA with Trade assistance includes any initiative or program that partnership. $5 million,” The Express Tribune (December 19, 2011). http://tribune.com.pk/story/308404/ facilitates access to markets. Extending Pakistan’s trade funds-diverted-usaid-backs-off-from-earlier- freedom by reducing trade barriers would facilitate an commitment-to-provide-iba-with-5-million/ expansion of exports and imports and, as a result, in- 14 M.N. Shivram, “Promoting Business and Technology Incubation for Improved Compe- crease domestic efficiency and generate new business Recommendation 8 tiveness of Small and Medium-Sized Industries opportunities for export-based businesses. This rec- Incorporate an explicit component to de- Through Application of Modern and Effective Technologies in India,” United Nations Social ommendation is not new and has been put forth a num- velop Pakistan’s entrepreneurial ecosystem. and Economic Commission for Asia and the Pa- ber of times, including in a study submitted to Congress Allocate between $10mm and $20mm for cific (May 25, 2004). http://www.unescap.org/ tid/publication/indpub2323_part2ivc.pdf from the Center of Global Development (CGD): “As part startup capital and other incubator initia- 15 Teresa Gillotti and Ryan Ziegelbaue, “Seven of an overall plan to spur private investment and job tives. Work through local entrepreneurship Components of a Successful Business Incu- creation in Pakistan, we urge Congress and the admin- networks and universities. Implement from bator,” Let’s Talk Business (July 2006). http:// www.uwex.edu/ces/cced/downtowns/ltb/lets/ istration to work together to extend duty-free, quota-free the level of the PII as an overarching com- LTB0706.pdf access to U.S. markets for all Pakistani exports from ponent or through a partner as a smaller 16 “A New Tool for Scaling Impact: How Social all of Pakistan for at least the next five years.”19 We sub-fund. Impact Bonds Can Mobilize Private Capital to Advance Social Good,” Social Finance (Febru- echo CGD’s call to continue removing barriers to trade ary 2012). http://www.socialfinance.org.uk/sites/ default/files/small.socialfinancewpsinglefinal.pdf * More on this model is available at: http://www.nrel.gov/docs/fy09o- sti/45549.pdf 17 “Credit Guarantee Schemes of SBP – Imple-

44 45 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

Fig. 36 Estimated Likelihood of 75% Success Rate—Given Three Trials at Actual Probabilities of .65, .75, & .85—over 50 Investments! velopment impacts. If the fund does not perform Risk & Impact Analysis 1.00! well, this will be much more visible than poor per- 0.90! formance in a traditional development project. It This program faces two principal types of risk: financial But just because there might be a high probability of will thus be more subject to criticism in the case 0.80! and political—though, of course, these are interrelated. success, with a small portfolio of investments this far of failure, or even performance below expectations It is important to acknowledge these risks—to the extent from guarantees actual success. This may seem an 0.70!

0.60! P(.75) #1! they can be mitigated, they should be. But some risk— obvious point—but it is important to consider. P(.75) #2! • Making investments in specific businesses risks the P(.75) #3!

systematic risk—is unavoidable, and this sets limita- 0.50! P(.65) #1! appearance of favoritism. If investment decisions P(.65) #2! tions on the PII. One way to think about this risk is with Bayesian anal- P(.65) #3! are not transparent or well-justified, critics could in- 0.40! P(.85) #1! * P(.85) #2! ysis. Each new investment in the Pakistani market P(.85) #3! dict State for picking winners and losers in the Paki- Financial Risks provides outside observers—investors in waiting—a 0.30! stani market.

The most pressing risk for the PII—like with any invest- chance to update their ‘priors’ (i.e., their previous as- 0.20! ment vehicle—is that it will not earn a return. Historical- sessments of the probability of investing successfully in • Though no discussion during our research sug- 0.10! ly, Pakistan has been both economically and politically the Pakistani market). While we cannot know potential gested this was a major concern, it is important to 0.00! volatile—both chief reasons why investors have been investors’ priors on Pakistan, we can make an educated 0! 10! 20! 30! 40! note that, by working directly with Pakistan’s private wary—and a crisis of either kind could spawn a crisis guess. 50 trials than they were before. Their experience is also sector, State is explicitly not working with the gov- of the other. There are also severe market distortions highly sensitive to changes in the actual success prob- ernment. As such, there is risk that this initiative (e.g., monopolies, corruption, bureaucratic inefficien- To use an extremely simplified model, consider returns ability—if this moves to 85%, for instance, an investor’s could be seen as diverting assistance away from cy), which could stymie the prospects of even promis- from the KSE 100 and S&P 500 over the last 50 years. assessment of whether the real probability is at least the Pakistani government, and thus be perceived ing investments. Furthermore, investment is inherently In about 75% of years, the KSE earned positive returns, 75% becomes much more likely to be confident. as a slight against the traditional recipients of Amer- probabilistic; even the best bets on paper can pull up whereas in about 65% of years the S&P saw gains. In- ican aid. lame when the race is run. deed, KSE stocks on average typically earns higher re- This analysis is simplified and inexact. But it does il- turns than do American stocks—but they are also much luminate a core problem for the PII and the Pakistani More than this, though, the PII’s success also depends It is intrinsically important that PII funds earn a return— more volatile, and thus riskier. market as a whole: There is little good evidence on in- on investors’ forming close relationships with invest- but it is even more important that they do so because of vestment performance in Pakistan because there has ees. Trust in Pakistan’s business world is already very the implications for the larger private equity market. A To account for higher risk, investors seem to seek re- been so little activity to date. Moreover, the fund is weak—conspiracy theories associated with U.S. in- key goal of the PII is to be a ‘first mover’ in order to cata- turns roughly twice what they would see in the United limited in what it can accomplish—it can only make so volvement could doom the PII’s prospects for forming lyze further investment. The success of this strategy States. Anecdotally, foreign investors seek minimum many investments, for so much value. This will in the these essential partnerships. Exactly how State brands depends on the success of PII funds themselves—if the IRRs of 30–35%. This is 20–25% above returns earned end contribute to the increasingly informative pool of the PII, then, may in fact affect directly its prospects for program does not work well as an investment vehicle, on average in the U.S. market. So, to proxy this high evidence on the Pakistani market. That said, even if the success. no other positive externalities will follow. hurdle rate, assume they estimate a one-third probabil- prospects of success are quite good, the fund may not ity that investments in Pakistan actually do have a 75% do much to reveal this, through no fault of the capabili- Mitigating Risks & Maximizing Impact Fig. 34 Densities of Annual Returns on Equity Indices! success rate, and a two-thirds probability they are more ties of its managers or the strategy of the initiative. The uncertainties inherent even with high probabilities 1961–2011! 0.5! like U.S. returns (i.e., 65%)—thus, 2:1 odds against. In of success, as well as the challenges of the current po- other words, they assume there is only about a one-in- There are two important conclusions to the draw from litical context, reinforce the importance of taking every

0.4! three chance that Pakistani businesses really earn high this: First, it is worth acknowledging that this fund may step to maximize the PII’s likelihood of success. Ulti- enough returns to justify their increased risk, and a two- well not see huge financial success, due merely to mately, the PII’s performance as a business, develop-

0.3! in-three chance their returns are more modest and thus chance. But second, the more the fund is able to di- ment, or diplomatic venture hinges, above all, on its not worth this risk. (In actuality, there is also downside versify its portfolio, and to maximize the number of posi- functioning well as an investment vehicle.

0.2! risk to equity investments—i.e., that investors will lose tions it takes (without reducing the quality of those in- money. But to simplify, we assume they are merely vestments), the greater the demonstration effect is likely Research shows that there is a positive relationship be-

0.1! judging the probabilities of success versus failure.) to be, and the less randomness will play a pivotal role. tween fund performance and development impact in emerging market private equity—State will best cata-

0! We use Bayesian updating to model the continually up- Political Risks lyze follow-on effects and foster improved engagement -1! -0.8! -0.6! -0.4! -0.2! 0! 0.2! 0.4! 0.6! 0.8! 1! 1.2! 1.4! 1.6! 1.8! 2! dated probability of an investor, over 50 investments, Pakistan, of course, also presents a difficult political cli- with actors in the Pakistani economy by adopting a well- KSE 100! S&P 500! given actual success rates of 65%, 75%, and 85%, us- mate. As with any U.S. program in Pakistan, even the managed, commercially viable investment approach Fig. 35 Annual Volatility vs. Returns for KSE100 & S&P500! ing a random variable. If iterated infinitely, the investor’s slightest mishap is in danger of ballooning into a cri- that supports business growth and delivers strong re- 1961–2011! updated probability would converge to the true proba- sis. Recent events—the Raymond Davis incident, the turns.* 200.00%! bility. With a much more limited number of investments, Bin Laden raid, the border post confrontation—have

150.00%! like PII funds are likely to see, however, there can be strained the political relationship between Pakistan and This starts with hiring the best fund managers avail- substantial variability. We use three trials (think: funds), the United States. The news media and the broader able—by looking widely and especially locally for top- 100.00%! with 50 iterations each (think: investments). Pakistani public are primed to assume the worst about quality private sector partners, and by paying them any U.S. intervention. While there is substantial appe- market rates. Additionally, it includes giving manag- 50.00%! Even when the probability of success is in fact 75%, tite for a U.S. initiative that invests directly in Pakistan’s ers the broad flexibility to exercise their judgment and 0.00%! given a limited set of investments and the randomness private sector, and significant enthusiasm for trying 0.00%! 1.00%! 2.00%! 3.00%! 4.00%! 5.00%! 6.00%! 7.00%! 8.00%! of the market, investors may be no more confident after something new and innovative when it comes to eco- * The experience of the IFC, for instance, shows that invest- -50.00%! ment returns and impact are highly correlated: http://www1.ifc. P(B | A)P(A) nomic development, this approach also poses certain * Bayes’ Theorem states: P ( A | B ) = . One can use this infer- org/wps/wcm/connect/1c84b00049bdb98d95e6d7a8c6a8312a/ P(B) political risks: -100.00%! ence to ‘update’ a prior probability, given new information—one’s new Private%2BEquity%2BPioneer.pdf?MOD=AJPERES. See IFC Private KSE! S&P! KSE Avg.! S&P Avg.! probability estimate (A) is conditioned on the experience (B). Equity and Investment Funds ‘News & Presentations’ for additional € • Financial returns are easier to measure than de- articles.

46 47 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

expertise and not placing undue constraints on their in emerging markets is its focus on helping underlying takes into account several factors to decide whether or along four key parameters, including: financial perfor- decision-making authorities, while providing clear ob- portfolio companies to grow, both by providing capital not to undertake an investment, ERRs form an integral mance, economic performance, environmental and so- jectives and effective oversight to ensure alignment of and by improving business practices—the role of fund part of that process, as well as the basis for subsequent cial performance, and broader private sector develop- interests. It also includes creating the PII itself as an managers in helping to raise ESG standards is an inte- monitoring and evaluation.* CDC, according to the in- ment effects.§ adaptable program that values learning, innovation, gral part of this process. There is a growing recognition stitution’s 2011–2015 business plan, is also establish- and transparency, and strives for multiplicative impact. in the PE industry that integrating ESG standards—into ing a methodology to assess the development impact Transparency & Branding Finally, it includes exhibiting patience from the outset to both investment decision-making and management ac- of each investment during the appraisal stage. Transparency is critical to insulate the U.S. against po- let investments mature. tivities—helps to better align the interests of LPs, GPs, litical risks, as well as to communicate the impact of PII and portfolio companies, and ultimately generates both The terms of the partnership agreements between State investments and attract new and sustainable sources of Among the specific tools that State can leverage to superior returns for investors and more sustainable lo- and fund managers should also clearly define the rights commercial investment in Pakistan. Requirements that minimize the financial and political risks facing the PII, cal markets.*2 CDC, for instance, makes a strong busi- and responsibilities of the Advisory Board, particularly fund managers regularly disclose information on PII in- and maximize the program’s prospects for impact are ness case for fund managers to factor in analysis of regarding sensitive questions such as member voting vestments and performance, and the development of the following: ESG risks and opportunities, alongside financial per- rights, veto power, and resolution of conflicts of interest. systems to disseminate this information to external au- formance considerations, when valuing and managing It is important for State to retain the legal authority to diences and make it publicly accessible, are both key Incentive Compensation investments. In particular, sound ESG management change course and, possibly, to veto transactions, if it is elements. Incentive compensation is essential to attract and retain has been found to improve portfolio company financial determined necessary to maintain the overall develop- talented fund managers and motivate performance. performance—through cost savings, risk reduction, ment and financial effectiveness of the PII. Visibility should be a core component of the program, Many impact investment funds have endorsed impact- productivity improvements, brand enhancement, and but the manner in which this is sought is important. based incentive structures that link at least a portion of greater market and capital access, for instance—and Information Collection & Learning More so than other initiatives, it is imperative that the GP compensation to social and environmental perfor- to add significant value to investments over time.3 PII funds will require access to useful market informa- branding and publicity associated with the PII be subtle. mance—rather than to the maximization of profits, as tion and performance data to adapt to an evolving Heavy-handed branding or publicity that ties the PII too is common practice in traditional private equity funds.1 OPIC, the IFC, and CDC offer useful models for struc- investment environment. State should incorporate in- closely to American foreign policy, rather than broader This type of structure could be an effective tool to align turing an appropriate investment policy, which specifies formation collection and performance monitoring and business and development relationships, could under- fund managers with U.S. Government interests and necessary requirements and exclusions and defines evaluation as core functions of the PII to institutionalize mine the intended diplomatic objectives. foster development impact. The approach could also, the bounds—in broad terms—of permissible invest- learning and drive fund performance. Using metrics however, introduce unnecessary complexity and con- ment practices, without placing overly burdensome such as ERR will help promote the accountability of The PII will face systematic risk that cannot be con- straints on fund managers, and prove unfeasible in the constraints on fund managers.† The UN Principles for fund managers to the broader PII objectives and allow trolled for—it is important to recognize this underlying absence of sufficient interest among GPs and demand Responsible Investment (UNPRI) also provide an es- State to capture a more comprehensive picture of the uncertainty and calibrate expectations around it. A from other investors. sential underlying framework for addressing ESG inte- impact of investments. well-functioning investment vehicle that institutionalizes gration.‡ adaptability, learning, and transparency, however, can It is important to ensure that PII investments are made The evaluation methodologies used by the Small En- help to mitigate financial and political risks and increase and managed in a way that maximizes financial returns A critical role for the PII Advisory Board should be to terprise Assistance Fund (SEAF), DFIs such as the IFC any investment’s prospects for success. High-quality and generates benefits for the local economy—but it monitor implementation of the policy and, as necessary, and CDC, and the Emerging Markets Private Equity fund management, effective oversight, information col- is not clear from existing research that penalizing or provide guidance to support GP and portfolio company Association’s (EMPEA) ‘Library of Development Indica- lection and evaluation, and transparency, in particular, rewarding fund managers based on the non-financial adherence to ESG standards and other requirements tors for Private Equity Funds’ are useful resources for are essential features for driving fund performance. Ul- impact of fund investments will help to achieve this. during each stage of the investment process.§ identifying and measuring the broader performance of timately, unless a fund can exit its investments, it can- Commercial structures—based on the standard 2&20 fund investments. SEAF uses the ERR—which quanti- not earn a return. State can best improve the possibil- compensation model—are proven tools for incentivizing State can also explore the feasibility of fund managers’ fies the overall development impact of an investment ity of profitable exits and broader economic impact by fund manager performance and should be incorporat- incorporating economic cost-benefit analysis into the by combining the financial rate of return with net social allowing investments the time to see success and by ed into the PII design for optimal impact. investment decision-making process, alongside ESG returns—as well as a measure of the multiplier effect of drawing in new investors—either as equity partners, or factors and more traditional financial appraisal tech- each investment.†‡ Similarly, the IFC and CDC evalu- merely as conscious observers of the Pakistani market, Investment Policy & Oversight Mechanism niques. The Millennium Challenge Corporation (MCC), ate the overall development outcome of each fund in- with an eye toward future investment. It is important that PII fund managers have principal dis- for instance, uses economic rate of return (ERR) esti- vestment by merging indicators that measure progress cretion over investment decisions. State, however, can mates and sensitivity analysis during the pre-invest- Sources posed investment (e.g., financial expenses) and the potential ben- play an important role in overseeing and, where neces- ment stage to forecast the sustainability and likely eco- 1 “Impact-Based Incentive Structures: Aligning Fund Manager sary, influencing the policies and management systems nomic impact of proposed projects.¶4 While the MCC efits of those costs (e.g., expected increases in household income Compensation with Social and Environmental Performance,” Global or value added of firms). To calculate ERR, MCC compares the ex- Impact Investing Network (December 2011). used to arrive at these choices to ensure investments * The Emerging Markets Private Equity Association (EMPEA), UNPRI, pected outcome with the project investment against a counterfactual 2 “How Virtue Creates Value for Business and Society: Investigating are accountable to U.S. objectives and consistent with and CDC all offer a wealth of resources describing the benefits of scenario. An ERR represents the interest rate at which the discounted the Value of ESG Activities,” Boston College Center for Corporate market best practices. A PII Investment Policy—de- ESG integration to fund performance. net benefits of a proposed investment equal the discounted costs— Citizenship and McKinsey & Company (2009). veloped by State and adopted by fund managers up- † OPIC Office of Investment Policy documents, CDC’s Investment the higher the ERR, the larger the expected economic impact. To 3 “CDC Toolkit on ESG for fund managers: Adding value through ef- Code, and the IFC’s Policy and Performance Standards on Social and account for uncertainty, MCC also conducts sensitivity analysis on its fective environmental, social and governance (ESG) management,” front—can serve as a tool for encouraging sound in- Environmental Sustainability are available online for more information. ERRs to project a range of possible outcomes. CDC Group (2010). vestments aligned with the broader goals of job creation ‡ The UNPRI is an investor initiative carried out in partnership with * For more details on how MCC uses ERR analysis to make invest- 4 “Fact Sheet: Economic Rates of Return on the Web,” Millennium and private sector development, and managing risks at UNEP Finance Initiative and the UN Global Compact. More than 900 ment decisions, see: http://www.mcc.gov/pages/activities/activity/ Challenge Corporation (April 2008). both the GP and portfolio company levels. The policy organizations are signatories, including at least 100 private equity economic-rates-of-return. Fig. 34 GFDatabase, Global Financial Data (March 2012). https:// firms. The U.S. Private Equity Growth Capital Council also issued a † SEAF calculates the multiplier effect as the net dollars generated www.globalfinancialdata.com should define a clear PII mandate and set forth guide- set of Guidelines for Responsible Investment in 2009, which builds in the local economy for each dollar invested. SEAF estimates that, Fig. 35 Ibid. lines for incorporating U.S. Government requirements on the UNPRI standards. PEGCC members include many of the most on average, each dollar invested generates an additional $13 in the and environmental, social, and corporate governance well-known private equity firms. local economy. § See CDC ‘Evaluation Methodology’ for a complete description of the (ESG) standards into fund investment processes. § The CDC ‘Toolkit on ESG for Fund Managers’ is a useful resource ‡ For a more detailed analysis of how to use the ERR metric to as- that provides step-by-step guidance for fund managers to apply ESG sess an investment’s overall development impact, see “An Economic framework and indicators. analysis and management at every stage of the investment process. Framework for Assessing Development Impact” (Benjamin Esty, Car- One of the core advantages of the private equity model ¶ In MCC’s analysis, an ERR is a comparison of the costs of a pro- rie Ferman, Frank Lysy, Harvard Business School, 2002).

48 49 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Recommendation 4 Recommendations Disaggregate the ‘SME’ space and focus on small- and medium-sized firms, separately. Define these as firms in the $50k–$1mm and $1mm–$10mm revenue ranges, respectively. Focus on SMEs with the strongest exit In order to best serve the financial needs of Pakistan’s private sector, as well as capitalize on opportunities for prospects—target investments in companies led by promising entrepreneurs who have vision but lack the financial investment and improved American engagement, we provide a set of eight core recommendations to structure the and institutional support to scale. PII. These recommendations take into account and accommodate the already proposed partnership with SEAF, as one component of the larger investment initiative. Recommendation 5 Structure the PII to include venture capital and growth equity components. Plan for ticket sizes of $50k–$400k and $2mm–$7mm, respectively. Employ the limited partnership structure common in private equity and adopted by the Recommendation 1 CDC and other major DFIs, in line with international industry standards. Establish a vehicle to address Pakistan’s immediate financing needs, but acknowledge its limitations—ultimately, governance failures constrain private investment and entrepreneurship. Design the PII to invest in relatively Recommendation 6 unconstrained market areas and to act as a catalyst for reforms to improve the business environment. Work through multiple implementing partners, as a means to create several smaller PII funds with more targeted investment strategies. Select and invest with professional fund management firms with relevant experience, local Recommendation 2 knowledge, capacity to add commercial value to portfolio companies, and ‘skin in the game.’ Consider emerging Invest U.S. Government resources using the private equity fund model. Work with private sector partners. The or first-time fund managers that align with the broader PII mandate, in addition to experienced teams with a proven private equity model is proven in emerging economies, and private sector partners bring critical experience to the track record. partnership—both are important for PII success and attracting new investment. Recommendation 7 Recommendation 3 Structure PII fund partnerships using one or more feasible implementing mechanisms that allow for maximum Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with high flexibility, commercial sustainability, and leverage of U.S. Government resources—prioritize the GDA model but use potential for growth and multiplicative impact in Pakistan’s economy. Prioritize further information collection, more traditional contracts and grants as required. Seek substantial Pakistani private sector involvement in sourcing collation, and dissemination to address the deficit of good market data in Pakistan and attract new private and levering investments. investment. Recommendation 8 Incorporate an explicit component to develop Pakistan’s entrepreneurial ecosystem. Allocate between $10mm and $20mm for startup capital and other incubator initiatives. Work through local entrepreneurship networks and universities. Implement from the level of the PII as an overarching component or through a partner as a smaller sub-fund.

50 51 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

• Performance incentives – Determine a feasible Key Considerations compensation model, management fee structure, Two Potential Models for the PII We also offer a set of complementary considerations and general partner commitment level—adopt the and more specific action steps. We highlight these standard 2&20 carried interest model and require points to guide the design and implementation of the fund managers to make significant equity contribu- PII, with the objective of mitigating risk and maximizing tions to PII funds to best align GP-LP interests. impact. In order of priority, we recommend that State: • Policy for handling investment proceeds – Deter- • Develop a plan to address the full stream of invest- mine, for instance, whether financial returns will be ment—from startup to growth capital. reinvested in Pakistan’s economy or go back to the • Specify key PII features and terms in alignment with U.S. Government. private equity standards. • Structure an investment policy and oversight mech- Create a framework for evaluating results anism. Incorporate rigorous performance monitoring and eval- • Create a framework for measuring impact. uation into the fund’s design. • Define U.S. added value. • Formulate transparency and branding guidelines. • Definea set of core performance indicators to iden- • Determine how to leverage the PII to support lon- tify and measure the financial and development ef- ger-term policy reform. fects of the fund.

Address the ‘full stream’ • Consider using measures of ‘economic rate of re- Structure the PII to implement all three proposed com- turn,’ as used by the IFC, Millennium Challenge ponents—entrepreneurial ecosystem support, venture Corporation, and Acumen Fund, to gain a broader capital, and growth equity—simultaneously, as part of perspective on the impact of investments. an overarching and flexible strategy to promote entre- preneurship and business growth. Ensure the three ele- Define and measure U.S. added value ments are interlinked, rather than compartmentalized in Leverage America’s greatest resources—its business vertical silos, to best address deficiencies in the Paki- and academic communities—to multiply the PII’s im- stani market and achieve optimal impact. pact. In addition to serving as a source of capital, act- ing as a catalyst for third-party investment, and sup- • Develop a strategy to roll out and integrate the three porting fund performance through an Advisory Board, components, including definition of the number of State should use the PII as a platform from which to fund managers and appropriate implementing engage a broader audience and assist more directly mechanisms. Two possible PII structures—of sev- the development of a vibrant entrepreneurial culture. eral options—are shown, at right. • Definean explicit role for the PII in deploying Ameri- • Consider leveraging the partnership with SEAF for can knowledge, networks, and market access con- entrepreneurship support and startup investments, nections in support of Pakistani entrepreneurs—for given the organization’s track record investing in example, by creating linkages between U.S. and early-stage businesses and managing business Pakistani businesses, assisting local firms in regis- accelerator programs through its Center for Entre- tering and filing patents, establishing university-to- preneurship and Executive Development (CEED). university connections, and using programs such Partner with two or more additional private invest- as Fulbright to foster stronger connections with ment firms to establish the growth equity and ven- mentors and investors in the Pakistani Diaspora. ture capital components. • Consider including metrics of direct value added Define key PII features and terms by the United States in the PII M&E framework to Determine specific fund features and partnership terms, evaluate the amount of entrepreneurial activity, in- in accordance with private equity best practices and novation, and new private investment triggered as principles, at the start. Establish a clear vision for PII a result of this assistance. funds and build market-oriented principles into fund de- sign to attract and retain top talent, and align interests Structure an oversight mechanism and expectations among all PII stakeholders. Among Develop an oversight mechanism to ensure fund man- the key issues that require definition: agers operate in alignment with U.S. requirements and ESG standards, as well as to collect information and pro- • Criteria for success – Define what constitutes a suc- vide guidance. Use partnership agreements to clearly cess—e.g., breaking even or some combination of define the U.S. role—including questions regarding the returns and development impact. Additionally, de- authorities of State to veto transactions, suspend fund- cide on trigger points that warrant a suspension or ing, and change fund terms in the face of violations termination of the U.S. resource commitment. or poor results. Otherwise, safeguard the discretion

52 53 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

of GPs to make and manage investments, and rely on market-based incentive structures to effectively align stakeholder interests and motivate fund performance.

• Devise an overarching PII Investment Policy to pro- vide parameters for responsible fund investments and define exclusions, drawing from the UNPRI and DFI best practices.

• Form a PII Advisory Board with split Pakistani-Amer- ican membership—and explicitly define member rights and responsibilities in PII partnership agree- ments. Include experienced private equity and venture capital investors from the United States, as well as dynamic Pakistani business leaders with extensive knowledge and connections, but also an eagerness to mentor younger entrepreneurs.

Formulate transparency and branding guidelines Ensure that information on PII funds is as visible as pos- sible, to demonstrate the broader value of private equity to Pakistan’s economy and attract new commercial in- vestment. Require fund managers to disclose detailed information—financial, operational, portfolio, risk man- agement, etc.—regarding fund investments, while ob- serving commercial confidentiality requirements.

• Determine reporting requirements for fund manag- ers and create mechanisms for collecting and dis- seminating information on PII fund investments—in- cluding a consolidated, state-of-the-art database that is publicly accessible.

• Prioritize transparency but avoid the temptation to oversell America’s contribution and the value of the PII prematurely—the initiative inherently entails a long-term investment horizon and recent expe- rience highlights the dangers of raising false ex- pectations among the Pakistani public. Develop a subtle branding strategy and allow funds the time to ‘work’ and demonstrate returns before publicizing.

Leverage the PII to support policy reform The Planning Commission’s Framework for Economic Growth is a forward-thinking document—but it faces an uphill battle. Use the PII as a platform to engage with public- and private-sector actors in the ongoing dia- logue about how to improve Pakistan’s business envi- ronment and relax the underlying constraints on growth.

• Incorporate in the PII’s design a function to collect and disseminate information on Pakistan’s invest- ment opportunities and problematic aspects of the business environment that stifle entrepreneurship or limit existing firms’ productivity.

• Leverage this information and the PII’s network of partners to inform the Pakistani government about obstacles and propose policy solutions to incentiv- ize new investment and business activity.

54 55 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Conclusion | Common Ground Throughout the course of this study, our core objective has been to offer informed, objective analysis. As best we could, we have aimed to provide evidence-based recommendations that will both engender positive change in Pakistan’s private sector and ensure the responsible stewardship of U.S. dollars. We understand that results matter, and we believe that our analytical approach and recommendations reflect that understanding, but to discount the human element of our research would be shortsighted.

The negative press that is emblematic of a strained U.S.-Pakistan relationship belies our experiences in Pakistan. We do not refute that this bilateral relationship is fragile, but for this particular initiative, support from both sides is overwhelmingly positive. We believe that establishing the Pakistan Private Investment Initiative presents a unique opportunity both to promote meaningful economic development and to strengthen incrementally the U.S.-Pakistan relationship—in particular, by forming new bonds with Pakistan’s dynamic private sector leaders and entrepreneurs. Private Investment he T Pakistan Initiative

56 57 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Appendix A: Abridged Growth Diagnostic vestment. Low Demand for vs. Low Supply of Financing* ing current account indicate little pressure to mobilize Pakistan suffers from The cost of finance does not appear to be the bind- foreign savings. Pakistan’s foreign debt is high com- longstanding shortcom- ing constraint on growth in Pakistan. In short, loanable pared to neighbors in South Asia and has been climbing ings in its physical and funds are available and lending is relatively affordable, since 2006—but the current debt is still a remarkable educational infrastruc- but demand for investment is subdued. Investment improvement from the 1990s and early 2000s.** While ture; the World Economic is instead held up due to uncertainty about any given the current account deteriorated from 2003 to 2008, the Forum’s Global Competi- firm’s ability to reliably capture the future profits of in- balance has been improving over the last two years and tiveness Index (WEF/GCI) vestments made today. registered a deficit of only 0.85% in 2010.†† mentions inadequate supply of infrastructure A country’s savings is a good indicator of access to fi- Moreover, if Pakistan’s economy were constrained by as the fourth-most prob- nance—lower savings indicates a greater need for other low aggregate savings, then an increase in foreign sav- lematic factor for do- sources of financing. Pakistan’s gross national savings ings would result in increased investment and growth. ing business. Electricity rate was 22.3% of GDP in 2010 and has consistently But in Pakistan’s case, rising foreign assistance and shortages, in particular, been below those of regional peers in South Asia. Paki- remittance rates have not translated into productive in- impose a huge burden on stan’s savings rate ranks 107th of 142 globally.1 vestments or sustained growth. Increases in foreign aid the economy.* and remittances in 2008 and 2009 corresponded with a Real lending interest rates, however, have also re- decline in the investment rate.‡‡ Despite these record- Measured by other in- mained low—even dropping below zero in the last 10 high remittances and increasing total reserves, Paki- dicators, however, Paki- years.† Since 2000, Pakistan has had by far the lowest stan is actually experiencing astonishing capital flight. stan’s infrastructure is average real interest rate in South Asia.‡ comparable to its neigh- Access to finance is consistently mentioned as a top bors in South Asia. As Pakistan’s low real interest rate would suggest that there concern for doing business in Pakistan§§—Pakistan well, recent policies focused on the development of Governance Indicators (WB/WGI) show Pakistan per- is high bank liquidity and that lenders chase borrow- is one of the world’s least banked nations.¶¶ As noted large public sector infrastructure projects have not suc- forming poorly across all six governance dimensions.§ ers, offering incentives for borrowing. But, compared above, the financial sector has been prospering on a cessfully improved investment or growth. to other countries in South Asia, Pakistan has the lowest high spread between lending and deposit rates,*** indi- In the WEF/GCI, Pakistan has one of the worst rank- investment rate as a share of GDP.§ Domestic credit to cating a profitable Pakistani banking industry. Commer- Pakistan also has among the lowest levels of primary, ings worldwide for its macroeconomic environment the private sector in Pakistan has been low and declin- cial banks are highly liquid and capable of increasing fi- secondary, and tertiary school enrollment in the world, (138/142). Uncertainty due to Pakistan’s macroeco- ing in recent years.¶ nancial intermediation. The problem is that banks have and only 50% of the population is literate.† An inade- nomic risks has likely increased investor concerns been reluctant to enter the SME, agricultural credit, and quately educated workforce is among the top concerns about the possibility of policy shifts that could lead to Despite the availability and affordability of capital, there housing finance markets in the face of perceived high when it comes to doing business in Pakistan. But re- unpredictable movements in private returns. Pakistan’s is weak demand for Pakistan’s limited savings, sug- risks and opportunity costs. Government securities turns even for those who receive a good education are poor country credit rating may also have weakened gesting that there must be other factors constraining make up the dominant share of banks’ portfolios. The not high—highly educated Pakistanis leave the country investment as a result of expected losses associated investment. For instance, investment has been relative- risk-averse banking system has no incentive to diver- in large numbers to seek employment abroad. with a debt crisis.¶ Similarly, the government’s negative ly unresponsive to changes in the interest rate. In the sify its portfolios and innovate, while it continues to gain budget balance can increase fears of future inflation latter part of the last decade, when real interest rates ‘monopoly rents’ from high spreads elsewhere.††† Problems in the energy and education sectors pose and taxation to service the debt, further discouraging dropped below zero, investment declined. serious challenges, but they seem neither incapacitat- investment. So, while evidence supports the argument that financial ing nor fundamental. They are instead symptoms of the Likewise, there is a weak relationship between savings intermediation is weak in Pakistan, there is no indication same, underlying problems that constrain growth more Pakistan, however, has enjoyed sustained real ex- and investment. From 2000 to 2004, as savings in- this is the binding constraint. Inefficiencies in the finan- generally. change rate stability since 2008.5 Moreover, past im- creased, the investment rate remained relatively stable. cial sector point to deeper governance-related prob- provements in the macroeconomic environment have Since 2008, as the savings rate increased further, the lems that hamper competition and innovation. Government Failures vs. Market Failures not resulted subsequently in increased investment. The investment rate experienced a decline. So the invest- Government policies are a major impediment to foster- fiscal deficit has been improving since 2008, but the ment rate appears to be insensitive to movements in the Low Social Returns vs. Low Appropriability ing risk-taking and innovation in Pakistan, which is criti- investment rate has been declining. While the deficit savings rate. Returns to physical and human capital are low in Paki- cal to accelerating growth in most sectors. Indicative of and inflation are undoubtedly serious problems, there is stan, but these also do not seem to be constraining in- this, industries that do not depend on the government no evidence to suggest that concerns over macroeco- As well, while FDI has been declining in recent years,2 for advantages, such as the mobile phone industry, are nomic stability represent the main constraint on invest- Pakistan’s lessening levels of external debt and improv- ** External debt fell from 46% of GNI in 2002 to 31% in 2009 (WB/WDI). the few that are thriving and competitive.3 ment and growth. †† The current account deficit was 9.55% of GDP in 2008 (WB/WDI). * This growth diagnostic is a shortened version of one written by ‡‡ Foreign inflows have produced sharp increases in growth at certain th Dustin Cathcart, Andrew Fitzpatrick, and Meredith Gloger for PED- points, but because these were not put into productive capital forma- Pakistan ranks 118 out of 142 countries in overall com- A number of sector- and firm-specific risks resulting 130, “Why Are So Many Countries Poor, Volatile, and Unequal?” with tion, growth has never been sustained. petitiveness.4 Four of the five-most problematic factors from a weak institutional environment also weaken the Prof. Ricardo Hausmann, Harvard Kennedy School. (“PED-130 Final §§ Access to finance is ranked the sixth-most problematic factor for do- for doing business in Pakistan are related to govern- appropriability of returns, however—and the govern- Assignment: Growth Diagnostic—Pakistan,” December 2011). ing business in Pakistan (World Economic Forum, Global Competitive- ment failures.‡ Similarly, the World Bank’s Worldwide ment’s role in the economy poses a number of micro- † From 2000 to 2010, real interest rates fluctuated from -4.5% to 3.8% ness Index). (World Bank, World Development Indicators). ¶¶ Only 4–15% of Pakistan’s total population has access to basic finan- economic risks that particularly discourage investment. ‡ Pakistan has a relatively high deposit rate (~8%), but high inflation cial services (Auerswald et al.). * Pakistan has one of the world’s worst rankings for quality of electricity renders real return to depositors low. *** The interest rate spread was 7.58% in March 2011 (Ministry of Fi- supply (World Bank, Doing Business Report; WEF/GCI). § These are: 1) voice & accountability, 2) political stability & lack of § Pakistan’s private investment rate was 16.58% in 2010, compared to nance, Pakistan Economic Survey). † Pakistan is ranked 136, 126, and 119 out of 142 countries on primary, violence/terrorism, 3) government effectiveness, 4) regulatory quality, 32.46% in India (WB/WDI). ††† Corporate profitability is concentrated in a few large companies in secondary, and tertiary school enrollment, respectively (WEF/GCI). 5) rule of law, and 6) control of corruption. ¶ Pakistan has the lowest credit-to-GDP ratio among emerging econo- the energy, telecom, and banking sectors, even though SMEs make ‡ These are: 1) government instability/coups, 2) corruption, 3) policy ¶ Pakistan has a credit rating of 26.4 out of 100, and a ranking of mies (Planning Commission, Framework for Economic Growth). up more than 99% of the market, by some definitions (MOF/PES). instability, and 5) inefficient government bureaucracy (WEF/GCI). 123/142 (WEF/GCI).

58 59 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

On one side, excessive government engagement in and Ultimately, if government failures that disincentivize regulation of the economy impedes the development of investment are the most binding constraint on Paki- Appendix B: Potential Partners efficient and competitive markets. The government ac- stan’s private sector, then an investment fund—which POTENTIAL PII INVESTMENT FUND MANAGERS & LOCAL PARTNERS (Sources: Capital IQ, interviews in Pakistan) tively intervenes in every sector of the economy and rep- increases the supply of financing—is not the ideal solu- resents more than 50% of national income, presenting tion to this problem. That said, there is more than one PAKISTANI FIRMS Company Name Investment Type Company Type Business Description Main Office Contact significant barriers to private sector entry and expan- constraint on the Pakistani economy—and, in the short AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive 6 range of investor focused services, including equity brokerage, economic and securities sion. While privatizations in the early-2000s decreased term, Pakistan’s circular debt, interest rate spread, de- research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. The AKDS Investment Banking team looks after the company's equity advisory and arrangement activities, and private public participation in sectors like telecommunications, valued rupee, and image as risky all serve to severely AKD Securities Ltd. Private Equity Financial Service equity deals. AKDS is presently working on major private equity transactions including raising Karachi, Pakistan www.akdsecurities.net (AKDS) Investing Investment Arm banking, and finance, the government has since ex- limit access to finance for businesses. Moreover, the private equity for one of the largest integrated steel making facilities envisaged to be set up in Pakistan. AKDS is involved in IPO, private equity and placement transactions that are unique in panded its role in other industries, like agriculture, con- United States must focus on the problems it can rea- size and structure, and works in diversified sectors including investment banking, gases manufacturing, electronic media, steel, electrical equipment, real estate, cement, power and a struction, and transport. Pakistan’s longstanding policy sonably address—and the financing gap is the one it is host of other sectors. Arif Habib Corporation Limited (AHCL) is the holding company of the Arif Habib Group. The approach of picking priority sectors to be protected and best-placed to fill. Company has a diversified portfolio across sectors including Chemical and Fertilizers, Financial Services, Construction Materials, Industrial Metals, Dairy Farming and others. Pakistan Private Arif Habib Group - Venture Capital Financial Service Equity Management Limited was incorporated in Pakistan on 6th September 2006 under the Pakistan Private Equity Investing; Private Karachi, Pakistan www.arifhabib.com.pk subsidized has resulted in severe economic distortions. Investment Arm Companies Ordinance, 1984 as a public limited company (Un-Quoted). The Company is a Fund Management Ltd. Equity Investing Management Company (FMC) registered, under the Non-Banking Finance Companies, with the In particular, government industrial licensing policies, Also—importantly—there is stratification in the Pakistani Securities and Exchange Commission of Pakistan and licensed to carry out Private Equity and Venture Capital Fund Management Services. price-fixing, and other restrictive regulations have led to economy: while, overall, access to capital may not be BMA is amongst the leading financial groups in Pakistan. BMA Capital's core areas of business BMA Capital, Investment Private Equity Financial Service include Equity Markets, Treasury Markets, Corporate Finance & Advisory, Research, and Retail Karachi, Pakistan www.bmacapital.com the prevalence of monopolies. the paramount problem, for certain segments of the Arm Investing Investment Arm Brokerage. BMA Capital, Investment Arm is a private equity firm specializing in industry consolidation investments. economy—namely, small- and medium-sized business- Established in 2011 by the Dawood Group, Cyan Limited (formerly known as Central Insurance Company Limited) is a public listed company focused on making equity investments in high The World Bank’s “Doing Business” report (WB/DB) sup- es—it is often the biggest obstacle. And, importantly, potential companies. As a growth equity investor seeking meaningful minority ownership, Cyan aims to invest alongside high quality management teams with a track record of success, a desire Venture Capital Private Investment to achieve scale and a commitment to observe ethical business practices. Cyan manages a ports the view that Pakistan’s regulatory environment is it is these businesses precisely who will be the engines Cyan Limited Investing; Private Karachi, Pakistan www.cyanlimited.com Firm portfolio of listed securities comprising of government debt and equity instruments of listed Equity Investing not conducive to innovation, entrepreneurship, or in- of job growth in Pakistan. Without capital, they will be companies as well as investments in mutual funds. Cyanʼs Growth Equity portfolio will provide investors with an opportunity to participate in attractive sectors of the Pakistanʼs economy that vestment.* Tax rates and tax regulations rank among unlikely to grow. are not readily accessible via public markets. Primary investment criterion is partnering with high potential management teams that are well positioned to capitalize on Pakistanʼs core strengths. Indus Basin Holding Ltd (“IBH”) develops and operates a portfolio of modern agribusiness the most problematic factors for doing business in Paki- projects, based in the Indus Basin region, the geographical area drained by the Indus River and Venture Capital Private Investment its tributaries. IBH aims to develop agribusiness projects which have a lasting and meaningful Indus Basin Holding Ltd. Investing; Private Mauritius www.indusbasin.com stan. The tax environment is one of the most burden- An investment fund can also have important, second- Firm impact on small-hold farming communities. Indus Basin Holding Ltd is incorporated in Mauritius, Equity Investing and licensed by the Mauritius Financial Services Commission (FSC). The company is privately some on domestic firms—medium-sized firms spend ary effects. It demonstrates a long-term commitment owned with offices in Pakistan. JS Private Equity is a private equity and venture capital arm of Jahangir Siddiqui & Company, twice the time preparing, filing, and paying taxes com- to Pakistan, one not beholden to the whims of public Ltd. investing through its fund, JS Private Equity Fund I. The firm specializes in investments in 7 expansion capital, growth capital, and buyout investment opportunities. It invests in privately held Venture Capital companies and makes PIPE investments. The firm makes Greenfield investments. The firm pared to their counterparts elsewhere in South Asia. opinion or short-term strategic considerations. As well, Financial Service www.js.com/investment- JS Private Equity Investing; Private seeks to invest in export-related industries, such as textiles, leather and medical supplies, and Karachi, Pakistan Investment Arm opportunity.asp Tax policy also favors vested interests, and poor public by strengthening the private sector, it can foster a stron- Equity Investing domestic-demand related industries, such as consumer goods, media and advertising. It also 8 invests in infrastructure, transportation and logistics, as well as agriculture and horticulture. The administration weakens collection and enforcement. ger bloc to lobby for those policy reforms so essential to firm invests in companies based in Pakistan. It takes minority stakes in its portfolio companies. JS Private Equity was formed in 2006 and is based in Karachi, Pakistan. Pakistan Kuwait As a result of exemptions and rampant evasion, Paki- improving the business environment in Pakistan. Venture Capital Financial Service Investment Co., Pakistan Kuwait Investment Co., Investment Arm specializes in seed stage investments. Karachi, Pakistan www.pkic.com Investing Investment Arm stan has one of the world’s lowest tax-to-GDP ratios.9 Investment Arm TMT Ventures Limited is a venture capital firm specializing in startup investments. The firm Venture Capital Private Investment TMT Ventures Limited prefers to invest in telecom, media, and technology sectors. It typically invests in companies Karachi, Pakistan www.tmtventures.net Investing Firm It is important to understand the limitations of such an based in Pakistan. TMT Ventures Limited is based in Karachi, Pakistan. United Bank Limited is one of the oldest and largest commercial banks in Pakistan. UBL has Government policies foster monopolized markets that intervention, of course—by itself, it will not address the assets of over Rs. 747 billion and a solid track record of over fifty years - in addition, the bank operates 1200 branches all over Pakistan including 7 Islamic banking branches, and 1 branch in stifle competition and crowd out private investment core problems in the Pakistani economy. Nevertheless, Karachi export processing zone and 17 branches outside Pakistan. UBL is the only commercial bank in Pakistan actively providing private equity financing to start-up companies. In a short through regulations that impose a high cost of doing the PII presents a pragmatic solution to a substantial period of 2 years, UBL has completed seven private equity/start-up transactions. Current portfolio United Bank Limited Private Equity Commercial Bank comprises companies in the information technology, alternate energy and entertainment sector. Karachi, Pakistan www.ubl.com.pk (UBL) Investing business. By allowing for monopoly rents and regu- problem, and could well have follow-on effects that help As part of private equity, we focus on start-up companies which are in the development stage or in the earliest stage of commercialization with an investment horizon of 5 to 7 years. Financing lating entry, the government encourages ubiquitous address the more entrenched deficiencies. for second stage expansion of recently established firms is also included. Such companies may have set up operations but need large infusions of capital to accelerate their growth or secure a rent-seeking in the private sector—many firms vie for stable market share. Private companies with turnaround potential may also be included in UBL's private equity portfolio licenses, subsidies, tax exemptions, or tariff protection Sources FOREIGN FIRMS for short-term gains, rather than investing in long-term 1 Klaus Schwab (ed.), “Global Competitiveness Report 2011–2012,” World Economic Forum (2011). http://www3.weforum.org/docs/WEF_ Company Name Investment Type Company Type Business Description Main Office Contact GCR_Report_2011-12.pdf Abraaj Capital is a private equity and venture capital firm specializing in early venture, seed, growth. Moreover, unsustainable public sector enter- growth capital, industry consolidation, mezzanine/subdebt, PIPES, buyouts, and buy and build in mature companies. It seeks to invest in small and medium sized enterprises in emerging prises generate annual losses of 1.5% of GDP. Untar- 2 World Bank, World Development Indicators (March 2012). http:// markets. The firm typically invests in oil, gas and consumable fuels, metals and mining, data.worldbank.org/indicator agricultural machinery and equipment, agricultural services, auto parts and equipment, leisure geted subsidies also place an enormous strain on the facilities, pharmaceuticals, services outsourcing, water utilities, real estate, health care, 10 3 Philip Auerswald, Elmira Bayrasli, and Sara Shroff, “Creating a Place Venture Capital manufacturing, food products, telecommunications, education, information technologies, fiscal deficit. Investing; Private Private Investment logistics, agribusiness, energy, and food industries. It invests in companies based in the Middle Abraaj Capital Dubai, UAE www.abraaj.com for the Future: Toward a New Development Approach for the Islamic Equity Investing; Firm East, North Africa, and South Asia with a focus on Egypt, Lebanon, Jordan, Algeria, Pakistan, Republic of Pakistan,” Competitiveness Support Fund (December Mezzanine Investing Turkey, the Palestinian territories and the six Gulf Arab nations that make up the Gulf 2010), 26. Cooperation Council. The firm prefers to invest between $100 million and $300 million in its Inefficient public sector management also adds to the portfolio companies. It acquires controlling or significant interest and seeks board representation Schwab (2011). in its portfolio companies. The firm typically exits its investments within a period of three years to cost of doing business by threatening the security of 4 five years through structured exits to strategic and trade buyers or onto public markets in the region. It seeks minority position in public enterprises. Abraaj Capital was founded in 2002 and is 5 “Pakistan Economic Survey 2010–2011,” Ministry of Finance (2011). headquartered in Dubai, United Arab Emirates with eight additional offices across Asia. life, contract, transaction, and property—thereby weak- Abu Dhabi Commercial Private Equity Financial Service Abu Dhabi Commercial Bank, Investment Arm is an investment arm of Abu Dhabi Commercial Abu Dhabi, UAE www.adcb.com 6 Pakistan: Framework for Economic Growth, Planning Commis- Bank, Investment Arm Investing Investment Arm Bank. ening claims to private returns. Beyond the increasing Abu Dhabi Group, Venture Capital Arm is a venture capital arm of Abu Dhabi Group specializing sion, Government of Pakistan (May 2011), 12. http://www.pc.gov.pk/ Abu Dhabi Group, Venture Venture Capital Corporate Investment in investments in Pakistan, Bangladesh, Iran, Uganda, Republic of Congo, and the Middle East. Abu Dhabi, UAE www.adcb.com Capital Arm Investing Arm cost of business due to terrorism and violence, Paki- hot%20links/growth_document_english_version.pdf The firm is based in Abu Dhabi, United Arab Emirates. Abu Dhabi Investment Company, Investment Arm is the private equity and venture capital firm stan’s weak institutional environment—particularly in 7 “Doing Business 2012: Doing Business in a More Transparent specializing in direct and fund of fund investments in specializes in buyouts, growth capital, mid World,” International Finance Corporation, World Bank (October to late stage, and expansion capital. The firm seeks to invest in acquisitions. It also invests the judicial system—places a host of informal taxes on proprietary and client capital in private equity funds. It does not invest in real estate. The firm 2011). http://www.doingbusiness.org/~/media/FPDKM/Doing%20 typically invests in healthcare; education; media; technology; telecom; consumer goods; Abu Dhabi Investment Venture Capital infrastructure projects like greenfield assets, transport networks, power, water, and health and investors. According to the WB/DB and WEF/GCI, Paki- Business/Documents/Annual-Reports/English/DB12-FullReport.pdf Financial Service www.investad.ae/en/OurBusiness Company, Investment Investing; Private education facilities; logistics; and distribution sectors. It seeks to invest in the MENA region Abu Dhabi, UAE Investment Arm es/PrivateEquity.aspx stan has among the worst rankings worldwide in terms 8 “Doing Business 2012,” (2011), 63. Arm Equity Investing Egypt, Saudi Arabia, Pakistan, North Africa, the United Arab Emirates, and Turkey. The firm to make equity investments between $25 million and $200 million in companies with enterprise of property rights protection and contract enforcement. WB/WDI (2012). values between $50 million and $500 million. The firm prefers to acquire majority control or 9 significant minority control in its portfolio companies along with board representation. Abu Dhabi Pakistani entrepreneurs also confront high transaction Framework for Economic Growth (2011). Investment Company, Investment Arm was founded in 1994 and is based at Abu Dhabi, United 10 Arab Emirates. costs in the form of corruption and lack of transparency Diagram Ricardo Hausmann, Bailey Klinger, and Rodrigo Wagner, Actis Capital, LLP is a private equity and venture capital firm specializing in expansion capital, “Doing Growth Diagnostics in Practice: A ‘Mindbook,’” CID Working PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going in government policymaking.† private transactions, property development finance, and mezzanine finance investments in Paper No. 177, Center for International Development, Harvard Univer- emerging and growing companies. The firm primarily seeks to invest in business services, sity (September 2008), 22. consumer services, healthcare, financial services, industrials, infrastructure, logistics, and real * Pakistan ranks 105/183, nine places lower than last year’s rank. estate. The firm typically invests in Emerging Markets including Africa, Egypt, China, Latin Venture Capital America, Asia, South Asia, and South East Asia. In infrastructure sector, it invests in all stages, Perception Index gives Pakistan a poor ranking of 134 out of 183 Investing; Private Private Investment from development or expansion capital to acquiring mature operational assets and focuses † Business surveys identify corruption as a top concern for doing Actis Capital, LLP London, UK www.act.is countries in terms of perceived levels of public sector corruption. Equity Investing; Firm investment on power, roads, ports, and airports in Africa, Latin America, South Asia, and South business in Pakistan. E.g., Transparency International’s Corruption Mezzanine Investing East Asia. In South Asia, Actis specializes in expansion capital, management buyouts, privatizations, and PIPEs. It focuses on pharmaceuticals and biotech, consumer products, outsourcing (tech based), financial institutions, knowledge-based services, manufacturing, and oil and gas. The firm typically invests in the range of $8 million and $35 million in this region. The firm seeks controlling or minority stake in the portfolio companies. It seeks to invest for a period 60 of three to six years. Actis Capital, LLP was founded in July 2004 and is headquartered in London, with additional offices in Africa, Latin America, South Asia, and South East Asia. 61 Acumen Fund is a venture capital firm specializing in growth, direct equity investments, debt, guarantees, quasi-equity, and lab investments. The firm seeks to invest in critical and affordable goods and services. It primarily invests in water, healthcare, energy, agro, cleantech, and housing. It prefers to invest in India; East Africa with a focus on Kenya, South Africa, and West Africa with a focus on Ghana and Nigeria; and Pakistan. The firm typically invests between $0.3 million and $2 million in equity or debt with exit period ranging from five to seven years. The firm seeks to invest between $2 million and $4 million in Kenyan healthcare businesses and Venture Capital Private Investment New York, NY, United Acumen Fund manufacturers of health consumables in 2011. It seeks to invest in business models that can be www.acumenfund.org Investing Firm States effective in reaching the billions of poor without access to clean water, reliable health services, or formal housing options. The firm primarily invests in non-profit organizations, small and medium for-profit companies in need of capital, and larger companies that are starting specific business units to serve the poor. The firm typically holds minority stakes in equity investments and prefers a board seat in its portfolio companies. Acumen Fund was founded on April 1, 2001 and is based in New York, New York with additional offices in Maharashtra, India; Nairobi, Kenya; and Karachi, Pakistan. Aga Khan Fund for Economic Development is a venture capital arm of The Aga Khan Development Network specializing in equity investments in seed capital to launch projects. It Aga Khan Fund for Venture Capital Corporate Investment Geneva, Switzerland seeks to invest in tourism, aviation services, and financial services sectors. The firm primarily www.akdn.org/agency/akfed.html Economic Development Investing Arm invests in South and Central Asia and sub-Saharan Africa and in Africa for investments in aviation services. Aga Khan Fund for Economic Development is based in Geneva, Switzerland. FOREIGN FIRMS

Company Name Investment Type Company Type Business Description Main Office Contact Abraaj Capital is a private equity and venture capital firm specializing in early venture, seed, growth capital, industry consolidation, mezzanine/subdebt, PIPES, buyouts, and buy and build in mature companies. It seeks to invest in small and medium sized enterprises in emerging markets. The firm typically invests in oil, gas and consumable fuels, metals and mining, agricultural machinery and equipment, agricultural services, auto parts and equipment, leisure facilities, pharmaceuticals, services outsourcing, water utilities, real estate, health care, Venture Capital manufacturing, food products, telecommunications, education, information technologies, Investing; Private Private Investment logistics, agribusiness, energy, and food industries. It invests in companies based in the Middle Abraaj Capital Dubai, UAE www.abraaj.com Equity Investing; Firm East, North Africa, and South Asia with a focus on Egypt, Lebanon, Jordan, Algeria, Pakistan, Mezzanine Investing Turkey, the Palestinian territories and the six Gulf Arab nations that make up the Gulf Cooperation Council. The firm prefers to invest between $100 million and $300 million in its portfolio companies. It acquires controlling or significant interest and seeks board representation in its portfolio companies. The firm typically exits its investments within a period of three years to five years through structured exits to strategic and trade buyers or onto public markets in the region. It seeks minority position in public enterprises. Abraaj Capital was founded in 2002 and is headquartered in Dubai, United Arab Emirates with eight additional offices across Asia. Abu Dhabi Commercial Private Equity Financial Service Abu Dhabi Commercial Bank, Investment Arm is an investment arm of Abu Dhabi Commercial Abu Dhabi, UAE www.adcb.com Bank, Investment Arm Investing Investment Arm Bank. EMP Global is a private equity firm specializing in investments in later stage, expansion stage, Abu Dhabi Group, Venture Capital Arm is a venture capital arm of Abu Dhabi Group specializing mature companies with restructuring opportunities, and leveraged buyouts. It does not make Abu Dhabi Group, Venture Venture Capital Corporate Investment in investments in Pakistan, Bangladesh, Iran, Uganda, Republic of Congo, and the Middle East. Abu Dhabi, UAE www.adcb.com investments in start-ups. The firm seek to make equity and quasi-equity investments in Capital Arm Investing Arm The firm is based in Abu Dhabi, United Arab Emirates. infrastructure; fixed and wireless telecommunications; cable television; power generation and Abu Dhabi Investment Company, Investment Arm is the private equity and venture capital firm transmission; transportation; oil and gas; other industrial sectors like petrochemicals, cement, specializing in direct and fund of fund investments in specializes in buyouts, growth capital, mid and glass; agribusiness sectors; and restaurant sector. It primarily invests in emerging market economies and some developed markets, which include Japan and Hong Kong and the new to late stage, and expansion capital. The firm seeks to invest in acquisitions. It also invests Venture Capital member countries of the European Union. The firm seeks to invest from $10 million to $100 proprietary and client capital in private equity funds. It does not invest in real estate. The firm Investing; Private Private Investment Washington, D.C., EMP Global million. The firm prefers to invest in control position as a sole investor or in partnership with other www.empglobal.com typically invests in healthcare; education; media; technology; telecom; consumer goods; Equity Investing; Firm United States Abu Dhabi Investment Venture Capital infrastructure projects like greenfield assets, transport networks, power, water, and health and financial investors and can consider minority positions in companies controlled by either a Financial Service www.investad.ae/en/OurBusiness Mezzanine Investing Company, Investment Investing; Private education facilities; logistics; and distribution sectors. It seeks to invest in the MENA region Abu Dhabi, UAE reputable local sponsor or an international strategic investor. The firm seeks to structure its Investment Arm es/PrivateEquity.aspx Arm Equity Investing Egypt, Saudi Arabia, Pakistan, North Africa, the United Arab Emirates, and Turkey. The firm to investments as hybrid debt and equity securities. It considers investing in "greenfield" projects make equity investments between $25 million and $200 million in companies with enterprise either in association with a strategic corporate partner experienced in developing and operating values between $50 million and $500 million. The firm prefers to acquire majority control or projects or in certain regulated industries in which development risk is reduced through licenses, Pakistan Private Investment significantInitiative minority control in its portfolio companies along with board representation. Abu Dhabi off–take agreements,HARVARD etc. EMP Global was KENNEDY founded in 1992 and is SCHOOLbased in Washington, D.C.POLICY ANALYSIS EXERCISE Investment Company, Investment Arm was founded in 1994 and is based at Abu Dhabi, United with additional offices in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a Arab Emirates. subsidiary of BMB Group. Established in 1999, ePlanet Capital (then known as ePlanet Ventures) pioneered the Actis Capital, LLP is a private equity and venture capital firm specializing in expansion capital, Venture Capital development of a truly global venture and growth capital business model. It was the first venture PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going Private Investment San Jose, CA, United ePlanet Capital Investing; Private capital firm to utilize a global model with offices in Asia, Europe and the United States. ePlanet www.eplanetventures.com/ private transactions, property development finance, and mezzanine finance investments in Firm States Equity Investing consists of a team of more than 30 professionals across the globe in our offices located in emerging and growing companies. The firm primarily seeks to invest in business services, Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and consumer services, healthcare, financial services, industrials, infrastructure, logistics, and real Euro Asia Capital & Equity Pte Ltd. is an independent venture capital firm that focuses on estate. The firm typically invests in Emerging Markets including Africa, Egypt, China, Latin technology, internet, telecommunications, manufacturing, utilities and environmental products in Venture Capital America, Asia, South Asia, and South East Asia. In infrastructure sector, it invests in all stages, Venture Capital Euro Asia Capital & Private Investment Asia Pacific. The company invests in start-ups, early stages, later stages, turnaround, Investing; Private Private Investment from development or expansion capital to acquiring mature operational assets and focuses Investing; Private Singapore, Singapore NA Actis Capital, LLP London, UK www.act.is Equity Pte Ltd. Firm restructuring, privatization, bridge loan, and public market purchase. It will provide only equity or Equity Investing; Firm investment on power, roads, ports, and airports in Africa, Latin America, South Asia, and South Equity Investing equity and loans, from $250,000 to $20 million, and active management and financial advice in Mezzanine Investing East Asia. In South Asia, Actis specializes in expansion capital, management buyouts, exchange for a major stake in the company and a seat on the Board of Directors. privatizations, and PIPEs. It focuses on pharmaceuticals and biotech, consumer products, Global Capital Management Ltd. is a private equity and venture capital arm of Global Investment outsourcing (tech based), financial institutions, knowledge-based services, manufacturing, and oil House K.S.C.C., specializing in investments in mid venture, late venture, growth capital, middle and gas. The firm typically invests in the range of $8 million and $35 million in this region. The market, mature, PIPEs, and buyouts. It offers both conventional and Shariah-compliant products. firm seeks controlling or minority stake in the portfolio companies. It seeks to invest for a period The firm prefers to invest in oil and gas, consumer durables and apparel, education services, of three to six years. Actis Capital, LLP was founded in July 2004 and is headquartered in hotels, restaurants and leisure, energy, manufacturing, real estate, healthcare and healthcare London, with additional offices in Africa, Latin America, South Asia, and South East Asia. Venture Capital Global Capital Financial Service equipment, pharmaceuticals, laboratories, hospital construction services, transportation and Safat, Kuwait www.globalinv.net/contentdisp.as Investing; Private Acumen Fund is a venture capital firm specializing in growth, direct equity investments, debt, Management Ltd. Investment Arm logistics, retail, infrastructure, telecommunications, utilities, education, and financial services p?pageid=553 Equity Investing guarantees, quasi-equity, and lab investments. The firm seeks to invest in critical and affordable sectors. It seeks investments in the MENA region with focus on Bahrain; Egypt; Jordan; Kuwait; goods and services. It primarily invests in water, healthcare, energy, agro, cleantech, and Morocco; Lebanon; Oman; Qatar; Saudi Arabia; Turkey; and United Arab Emirates and in Asia housing. It prefers to invest in India; East Africa with a focus on Kenya, South Africa, and West Pacific region with a focus on Hongkong, India, Pakistan, and China. Global Capital Management Africa with a focus on Ghana and Nigeria; and Pakistan. The firm typically invests between $0.3 Ltd. was established in 1998 and is based in Safat, Kuwait with additional offices in Cairo, Egypt; million and $2 million in equity or debt with exit period ranging from five to seven years. The firm Dubai, UAE; Istanbul, Turkey; Saudi Arabia; and Safat, Kuwait. seeks to invest between $2 million and $4 million in Kenyan healthcare businesses and Venture Capital Private Investment New York, NY, United Global Environment Fund is a private equity and venture capital firm specializing in investments Acumen Fund manufacturers of health consumables in 2011. It seeks to invest in business models that can be www.acumenfund.org Investing Firm States in growth equity. It seeks to invest in independent power, gas distribution, consumer products, effective in reaching the billions of poor without access to clean water, reliable health services, or clean technology and energy, sustainable forestry, timberland, and emerging markets in formal housing options. The firm primarily invests in non-profit organizations, small and medium businesses that provide cost-effective solutions to environmental and energy challenges. Within for-profit companies in need of capital, and larger companies that are starting specific business growth equity it seeks to invest in products or services in the renewable energy, energy efficiency units to serve the poor. The firm typically holds minority stakes in equity investments and prefers and environmental infrastructure industries that are helping to meet growing commercial demand a board seat in its portfolio companies. Acumen Fund was founded on April 1, 2001 and is based in key sectors of the core economy such as energy generation, transportation and manufacturing in New York, New York with additional offices in Maharashtra, India; Nairobi, Kenya; and Karachi, Venture Capital to be more clean and efficient. In emerging markets it seeks to invest in clean energy, integrated Maryland, United Private Investment Pakistan. Global Environment Fund Investing; Private waste management, water and wastewater treatment, clean industrial technology, and healthcare States www.globalenvironmentfund.com Firm Aga Khan Fund for Economic Development is a venture capital arm of The Aga Khan Equity Investing services. The firm primarily focuses on China, India, Brazil, Turkey, Mexico, South Africa, Development Network specializing in equity investments in seed capital to launch projects. It Aga Khan Fund for Venture Capital Corporate Investment Geneva, Switzerland Southeast Asia, and Eastern Europe for emerging markets. The firm seeks to invest between $15 seeks to invest in tourism, aviation services, and financial services sectors. The firm primarily www.akdn.org/agency/akfed.html Economic Development Investing Arm million and $30 million in companies with sales value between $10 million and $30 million. It invests in South and Central Asia and sub-Saharan Africa and in Africa for investments in seeks a board seat on its portfolio companies. The firm typically holds its investment for five aviation services. Aga Khan Fund for Economic Development is based in Geneva, Switzerland. years or more and seeks to exit its investments through listing on a major stock exchange or sale AIDEC Management Co. Ltd. is a venture capital firm, which provides start-up/early stage to a strategic buyer. Global Environment Fund was founded in 1990 and is based in Chevy financing and growth capital to small and medium sized companies operating in the consumer Chase, Maryland with additional offices in Johannesburg, South Africa; Sao Paulo, Brazil; and related, computer related, electronic related, communication, energy, transportation and Mumbai, India. AIDEC Management Co. Venture Capital Private Investment construction industries. The firm's investments are focused in the South East Asia, Indian Sub- Global MENA Financial Assets Limited specializes in middle market investments in turnaround Singapore, Singapore NA Global MENA Financial Private Equity Grand Cayman, Pte. Ltd. Investing Firm Continent, and Far East Asia. The firm's minimum investment is 20% of capital (negotiable). Public Fund and PIPE transactions. It seeks to invest in the financial services sector. The fund prefers to www.gmfa.com Assets Limited Investing Cayman Islands AIDEC also provides financing for private sector infrastructure projects (i.e., electricity, gas, invest in Middle East, North Africa, India, China, Pakistan, and Hong Kong. airports, ports, roads, water and sewage) through debt financing, loans and equity-linked IFU is a venture capital firm specializing in financing private-sector projects in the developing investments. countries. The firm can only invest in countries whose 2008 GNI capita income is below $3,084, Asian Finance and Investment Corporation Ltd. (AFIC) was formed in August 1989 in Singapore with an exemption granted to South Africa, Botswana, and Namibia. Also the host countries of as a merchant bank. The company offers direct loans and equity participation, underwriting, investments must be on the OECDʼs DAC list of development aid recipients. It finances both Venture Capital syndication and guaranteeing corporate obligation to the private sector enterprise in the Asia Asian Finance and small and large projects, including pilot projects, green-field projects, expansion of existing Investing; Private Private Investment Pacific region. the company provides from $1 to $10 million equity or equity and loans, in Investment Corporation Singapore, Singapore www.aficltd.com projects, and privatization of state-owned enterprises. The firm seeks to finance projects in Equity Investing; Firm exchange for a minor stake in the portfolio company and a seat on the Board of Directors. AFIC collaboration with the Danish trade and industry. It seeks to participate as a partner in the joint Ltd. Copenhagen, Mezzanine Investing specializes in mezzanine or bridge financing, turnaround and restructuring and later stage Venture Capital Private Investment ventures through committing equity capital and granting loans. The firm seeks to co-invest with IFU Denmark www.ifu.dk transactions. It operates in the Asia Pacific region and in a wide spectrum of industries. Asian Investing Firm Danish businesses in projects based in developing countries, but only if such projects have a Finance and Investment Corporation has offices in Manila, Philippines. lasting positive effect on development. It prefers to take a board membership. The firm also offers Asian Infrastructure Fund Advisers Ltd. is a principal investment firm specializing in start up, special assistance to Small and Medium-sized Enterprises which employs less than 300 Venture Capital development, and turnaround / restructuring stage businesses. It seeks to invest in Asia. It Asian Infrastructure Fund Private Investment employees, with an annual revenue of up to DKK 300 million ($53.16 million), and has a positive Investing; Private targets investing between $10 and $75 million. It seeks board representation in its investee Hong Kong NA Advisers Ltd. Firm result in two out of three latest financial years. It also provides advisory services to business Equity Investing company. The firm seeks to acquire minority stakes in its portfolio companies. Asian investments in developing countries. The firm prefers to exit its investments within five to seven Infrastructure Fund Advisers Ltd. Was founded in 1994 and is based in Central, Hong Kong. years. IFU was founded in 1967 and is based in Copenhagen, Denmark with additional offices in Augustus is the private investment and holding company of Baron Lorne Thyssen-Bornemisza. Beijing, China; New Delhi, India; Nairobi, Kenya; Accra, Ghana; and Johannesburg, South Africa. Venture Capital Based in Monaco, Augustus has a global investment portfolio, which includes public and private Private Investment JAFCO Investment (Asia Pacific) Ltd is a venture capital firm specializing in investments in Augustus Ltd. Investing; Private equities, commercial real estate and art. He is also a substantial shareholder of the NYSE-listed Monaco NA Firm technology and technology related companies. The firm typically invests in companies based in Equity Investing IHS Inc, an information services company with a market cap in excess of $5billion . The Thyssen- Asia Pacific region with a focus on Northern China, Southern and Eastern China including Bornemisza family is one of Europeʼs oldest and most distinguished industrial families. Venture Capital Yangtze and Pearl River Delta regions, Taiwan, Korea, South Asia and Australia, India, and Hong JAFCO Investment (Asia Private Investment Capital Advisors Partners Asia Pte Ltd. is the private equity arm of CIMB Group Sdn Bhd. The Investing; Private Kong. It prefers to have board representation in its portfolio companies. The firm seeks to exit its Singapore, Singapore www.jafcoasia.com Capital Advisors Partners Private Equity Financial Service firm seeks to invest in infrastructure sector. It typically invests in in South-East Asia and Central Pacific) Ltd. Firm Singapore, Singapore www.cap-asia.net Equity Investing investments through an IPO or a trade sale. JAFCO Investment (Asia Pacific) Ltd was founded in Asia Pte Ltd. Investing Investment Arm Asia. Capital Advisors Partners Asia Pte Ltd was founded in 2006 and is based in Singapore with 1990 and is based in Singapore with additional offices in Taipei, Taiwan; Seoul, South Korea; additional offices in Kuala Lumpur, Malaysia; Jakarta, Indonesia; and Bangkok, Thailand. Shanghai, China; London, United Kingdom; Central, Hong Kong; and Beijing, China. JAFCO Catalyst Microfinance Investment Company is a venture capital firm specializing in start-up and Investment (Asia Pacific) Ltd. operates as a subsidiary of JAFCO Co., Ltd. growth capital investments. The firm seeks to invest through its fund. It primarily seeks to invest Kellett & Singleton Investments Ltd. is a principal investment firm specializing in investments in in emerging micro finance institutions with a focus on banks, non-bank financial institutions, co- seed stage and early stage companies. The firm generally provides expansion capital and growth operatives, and NGOs which are willing and able to transform into a commercial for-profit capital to the portfolio companies. It seeks to invest in shipping services including ship operations Venture Capital Catalyst Microfinance Venture Capital Private Investment institution. The firm invests in companies based in Asia and Africa. It also considers investments Kellett & Singleton Private Investment and chartering, aviation, logistics, advertising and marketing, floriculture, tea, information Mauritius www.catalyst-microfinance.com Investing; Private Dubai, UAE www.kellettsingleton.com Investment Company Investing Firm through equity, equity-linked securities, debt, and convertible debt instruments. The firm prefers Investments Ltd. Firm technology, consulting, asset management, commodities, hospitality FF&E, and marine sectors. Equity Investing to invest in newly issued equity of greenfield institutions, recently established institutions and/or The firm prefers to invest in companies based in the Middle East and South Asia. It also forms in existing institutions. It typically holds its investments for a period of five to seven years. strategic partnerships and joint ventures in the Middle East markets. Kellett & Singleton Catalyst Microfinance Investment Company was founded in 2005 and is based in Utrecht, Investments Ltd. was founded in January 2000 and is based in Dubai, UAE. Netherlands with an additional office in Dhaka, Bangledesh and Andhra Pradesh, India. Kuwait Finance & Investment Company, Investment Arm is the private equity arm of Kuwait Catalyst Private Equity is a private equity firm specializing in investments in small and medium- Finance & Investment Company. The firm invests through its fund KFIC Private Equity Fund. It Kuwait Finance & sized enterprises. The firm seeks to invest in water and energy sectors, and in industrial product Private Equity Financial Service seeks to make investments in telecommunications, banks, investments, insurance, real estate, Safat, Kuwait Investment Company, www.kfic-kw.com/sub.php Private Equity Private Investment and technology companies and environmentally-friendly technologies including water treatment Investing Investment Arm and media sectors. It also invests in GCC countries including; Lebanon, Pakistan, Yemen, and Catalyst Private Equity Amman, Jordan www.catalystpe.com Investment Arm Investing Firm and alternative energy technologies. It prefers to invest in Jordan, Lebanon, Egypt, West Bank, Jordan. Kuwait Finance & Investment Company, Investment Arm was established in 2000 and is and certain OPIC-eligible countries in the MENA region. The firm also invests in Pakistan and based in Safat, Kuwait. Afghanistan. Catalyst Private Equity was founded in 2005 and is based in Amman, Jordan. Leopard Capital LP is a private equity and a venture capital firm specializing in investments in DIB Capital, Investment Arm specializes in expansion capital, turnarounds, early and late stage early stage venture, emerging growth, growth capital, buy-out, and mid-market companies. The seed financing, management buy-outs and buy-ins, family-owned enterprises, privatizations, and firm invests in financial services, retailing, infrastructure, construction materials, agribusiness, greenfield. It invests in Shariah-compliant transactions. The firm prefers to invest in the financial Venture Capital tourism, health care, natural resources, and property development sectors. It seeks to make DIB Capital, Investment Financial Service services, energy, telecom, transportation & logistics, healthcare, retail, hospitality, and real estate www.dibcapital.com/PrivateEquity investments in South East Asia with a focus on Cambodia, Laos, Vietnam, Philippines, Burma, Investing; Private Dubai, UAE Venture Capital Arm Investment Arm sectors. It prefers to invest in companies based in Middle East and North Africa region, Turkey, .aspx Private Investment India, Bangladesh, Sri Lanka, Maldives, Nepal, Bhutan, Pakistan, Kazakhstan, Kyrgyzstan, Phnom Penh, Equity Investing Leopard Capital LP Investing; Private www.leopardasia.com and South Asia including GCC, Egypt, Jordan, Lebanon, Tunisia, and Morocco. The firm may Firm Uzbekistan, Azerbaijan, Tajikistan, Mongolia, and North Korea. It prefers to invest in an average Cambodia Equity Investing also invest in companies located in China, India, and Pakistan. DIB Capital, Investment Arm is of $3 million per transaction. The firm may make a controlling or minority investments. The firm based in Dubai, United Arab Emirates. prefers to exit through listing on Cambodia's upcoming stock exchange or on other Asian DFJ backs extraordinary entrepreneurs everywhere who set out to change the world. DFJ exchanges, and/or private sales to strategic investors, co-investors, and other funds. Leopard achieves its mission through its DFJ Global Network of Partner Funds with operations in the US, Capital LP was founded in 2007 and is based in Phnom Penh, Cambodia with additional offices China, India, Korea, Vietnam, Russia, Europe, Israel, Brazil, and Japan. Over the past 25 years, in Central, Hong Kong; Grand Cayman, Cayman Islands; and Colombo, Sri Lanka. Draper Fisher Jurvetson Venture Capital DFJ and its partners have backed over 600 companies, and have pioneered the way in emerging Menlo Park, CA, Venture Capital A 50/50 joint venture between Mayban Ventures Sdn Berhad ("Mayban Ventures"), a subsidiary www.dfj.com Maybank Meacp Pte. Ltd, Corporate Investment (DFJ) Investing technology markets including the Internet, mobile communications, clean energy and health care. United States Investing; Mezzanine of Malayan Banking Berhad ("Maybank") and Mumtaz Khan, founder of Middle East & Asia Singapore, Singapore www.maybankmeacp.com Investment Arm Arm DFJ has been proud to back industry changing successes including Baidu, Skype, Overture, Investing Capital Partners Pte. Ltd. ("MEACP"). Hotmail, Parametric Technologies, Focus Media, AdMob, Mobile365, EnerNOC, Tesla, SolarCity, Venture Capital Middle East & Asia Capital Partners Pte., Ltd is a private equity firm. Founded by Mumtaz Khan, Brightsource Energy, Athenahealth, Epocrates, SpaceX and Synthetic Genomics. Middle East & Asia Capital Investing; Private Private Investment a leading private equity infrastructure professional in the Middle East and Asia, is focused on Singapore, Singapore www.meacp.com EMP Daiwa Capital Asia Limited is a private equity firm and venture capital firm specializing in Partners Pte., Ltd Equity Investing; Firm infrastructure investment opportunities in emerging markets. It is based in Singapore. middle market, growth capital, and buyouts. It prefers to invest in telecoms, transportation, Mezzanine Investing power, and natural resources. The firm primarily invests in companies based in Greater China, Venture Capital Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, Investment Arm EMP Daiwa Capital Asia Private Investment India, South Korea, Southeast Asia, and Japan. For Japan, it also acquires and provides growth Investing; Private Hong Kong www.asia.empglobal.com specializes in direct and fund of fund investments. The firm invests in seed capital, mezzanine Limited Firm capital to Asian subsidiaries of Japanese companies and partners with Japanese companies in financing, small, mid sized enterprises, and regional private equity funds. The firm seeks to Equity Investing Nederlandse their regional expansion in Asia. The firm was founded in 2007 and is based in Central, Hong Venture Capital invest in agriculture and fisheries, mining, agribusiness, manufacturing industry, service sector, Financierings- Kong. EMP Daiwa Capital Asia Limited operates as a joint venture of EMP Global and Daiwa Investing; Private Financial Service and banking and insurance industry. It primarily invests in the in the housing, finance, energy, Maatschappij voor Netherlands www.fmo.nl Securities Group Inc. Equity Investing; Investment Arm trade industry, and infrastructure sectors. It seeks to invest in developing companies and Ontwikkelingslanden NV, EMP Global is a private equity firm specializing in investments in later stage, expansion stage, Mezzanine Investing emerging markets with a focus on South Africa, India, China, Poland, Russia, Turkey, Mexico and Investment Arm mature companies with restructuring opportunities, and leveraged buyouts. It does not make Brazil. The firm takes minority equity stakes between 10% and 35% in private companies and investments in start-ups. The firm seek to make equity and quasi-equity investments in invests between €3 million ($4.28 million) and €5 million ($7.14 million) per company. The firm infrastructure; fixed and wireless telecommunications; cable television; power generation and makes seed capital investments of minimum €1 million ($1.43 million) per company or fund. transmission; transportation; oil and gas; other industrial sectors like petrochemicals, cement, New Silk Route is a private equity and venture capital firm specializing in growth capital and and glass; agribusiness sectors; and restaurant sector. It primarily invests in emerging market buyout investments. It prefers to invest in the consumer services, education, infrastructure, economies and some developed markets, which include Japan and Hong Kong and the new Venture Capital Venture Capital Private Investment telecoms, manufacturing, IT, engineering, medical devices, restaurant chains, and financial New York, United member countries of the European Union. The firm seeks to invest from $10 million to $100 New Silk Route Investing; Private www.nsrpartners.com Investing; Private Private Investment Washington, D.C., Firm services sector. The firm prefers to invest in India, South Asia, Middle East, and other emerging States EMP Global million. The firm prefers to invest in control position as a sole investor or in partnership with other www.empglobal.com Equity Investing Equity Investing; Firm United States Asian economies. New Silk Route was founded in 2006 and is based in New York, New York with financial investors and can consider minority positions in companies controlled by either a Mezzanine Investing additional offices in Bengaluru, India; Dubai, United Arab Emirates; and Mumbai, India. reputable local sponsor or an international strategic investor. The firm seeks to structure its investments as hybrid debt and equity securities. It considers investing in "greenfield" projects either in association with a strategic corporate partner experienced in developing and operating projects or in certain regulated industries in which development risk is reduced through licenses, off–take agreements, etc. EMP Global was founded in 1992 and is based in Washington, D.C. with additional offices in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a subsidiary of BMB Group. Established in 1999, ePlanet Capital (then known as ePlanet Ventures) pioneered the Venture Capital development of a truly global venture and growth capital business model. It was the first venture Private Investment San Jose, CA, United ePlanet Capital Investing; Private capital firm to utilize a global model with offices in Asia, Europe and the United States. ePlanet www.eplanetventures.com/ Firm States Equity Investing consists of a team of more than 30 professionals across the globe in our offices located in Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and Euro Asia Capital & Equity Pte Ltd. is an independent venture capital firm that focuses on technology, internet, telecommunications, manufacturing, utilities and environmental products in Venture Capital Euro Asia Capital & Private Investment Asia Pacific. The company invests in start-ups, early stages, later stages, turnaround, Investing; Private Singapore, Singapore NA Equity Pte Ltd. Firm restructuring, privatization, bridge loan, and public market purchase. It will provide only equity or Equity Investing 62 equity and loans, from $250,000 to $20 million, and active management and financial advice in 63 exchange for a major stake in the company and a seat on the Board of Directors. Global Capital Management Ltd. is a private equity and venture capital arm of Global Investment House K.S.C.C., specializing in investments in mid venture, late venture, growth capital, middle market, mature, PIPEs, and buyouts. It offers both conventional and Shariah-compliant products. The firm prefers to invest in oil and gas, consumer durables and apparel, education services, hotels, restaurants and leisure, energy, manufacturing, real estate, healthcare and healthcare Venture Capital Global Capital Financial Service equipment, pharmaceuticals, laboratories, hospital construction services, transportation and Safat, Kuwait www.globalinv.net/contentdisp.as Investing; Private Management Ltd. Investment Arm logistics, retail, infrastructure, telecommunications, utilities, education, and financial services p?pageid=553 Equity Investing sectors. It seeks investments in the MENA region with focus on Bahrain; Egypt; Jordan; Kuwait; Morocco; Lebanon; Oman; Qatar; Saudi Arabia; Turkey; and United Arab Emirates and in Asia Pacific region with a focus on Hongkong, India, Pakistan, and China. Global Capital Management Ltd. was established in 1998 and is based in Safat, Kuwait with additional offices in Cairo, Egypt; Dubai, UAE; Istanbul, Turkey; Saudi Arabia; and Safat, Kuwait. Global Environment Fund is a private equity and venture capital firm specializing in investments in growth equity. It seeks to invest in independent power, gas distribution, consumer products, clean technology and energy, sustainable forestry, timberland, and emerging markets in businesses that provide cost-effective solutions to environmental and energy challenges. Within growth equity it seeks to invest in products or services in the renewable energy, energy efficiency and environmental infrastructure industries that are helping to meet growing commercial demand in key sectors of the core economy such as energy generation, transportation and manufacturing Venture Capital to be more clean and efficient. In emerging markets it seeks to invest in clean energy, integrated Maryland, United Private Investment Global Environment Fund Investing; Private waste management, water and wastewater treatment, clean industrial technology, and healthcare States www.globalenvironmentfund.com Firm Equity Investing services. The firm primarily focuses on China, India, Brazil, Turkey, Mexico, South Africa, Southeast Asia, and Eastern Europe for emerging markets. The firm seeks to invest between $15 million and $30 million in companies with sales value between $10 million and $30 million. It seeks a board seat on its portfolio companies. The firm typically holds its investment for five years or more and seeks to exit its investments through listing on a major stock exchange or sale to a strategic buyer. Global Environment Fund was founded in 1990 and is based in Chevy Chase, Maryland with additional offices in Johannesburg, South Africa; Sao Paulo, Brazil; and Mumbai, India. Global MENA Financial Assets Limited specializes in middle market investments in turnaround Global MENA Financial Private Equity Grand Cayman, Public Fund and PIPE transactions. It seeks to invest in the financial services sector. The fund prefers to www.gmfa.com Assets Limited Investing Cayman Islands invest in Middle East, North Africa, India, China, Pakistan, and Hong Kong. Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

PROPARCO SA is a private equity and venture capital arm of Agence Francaise de Developpement specializing in direct and fund of fund investments. Within direct investmenst the firm makes equity and loan investments in expansions and leveraged buyouts. It also invests in Appendix C: Interviews small and medium enterprises and investment firms. The firm also provides mezzanine loans. The firm seeks to invest between €500,000 ($708,660) to €20 million ($28.34 million) per Venture Capital transaction in private equity and €2 million ($2.83 million) to €100 million ($141.73 million) per Investing; Private Corporate Investment PROPARCO SA transaction in senior loans, junior loans, mezzanine debt, and subordinated loans. The firm also Paris, France www.proparco.fr , Pakistan Country Director, Acumen Fund Equity Investing; Arm PAKISTAN Aun Rahman provides guarantees including bond guarantee; bank loan guarantee; local currency loan Mezzanine Investing guarantee; and liquidity guarantee of mutual funds, investment funds, and local savings Feb. 18–26, 2012 mobilization funds. It seeks to acquire minority stakes and exits an investment within a period of Mir Ibrahim Rahman, CEO, GEO TV Network six years via sale to shareholders or in the financial market. The firm seeks to co-invest. PROPARCO SA was founded in 1977 and is based in Paris, France with an additional offices in Karachi Brazil, China, Egypt, Kenya, Nigeria, Morocco, South Africa, Thailand, and Tunisia. Kalim ur Rahman, President and CEO, JS Bank Ltd. RHT Partners is an independent investment management firm based in the UAE that works with, and on behalf of, a group of discrete prominent family and institutional investors to make direct Adnan Afridi, Advisor to Shaukat Tarin, Silkbank Ltd. private equity investments in the Middle East and internationally. Through its network of exclusive , Provincial Chief, SMEDA relationships in the Middle East and beyond, RHT sources quality, proprieatary investments with Muslim Raza Private Investment RHT Partners a post investment focus on generating industry-leading returns on the capital it deploys. RHT's Dubai, UAE www.rhtpartners.com Firm Fawad Anwar, Owner, Al-Karam Textile Mills team consist of high calibre investment professionals with backgrounds in private equity, venture , Head of Growth Equity Investments, capital, banking, industry consulting, business development, restructuring and operational Isfandiyar Shaheen management. RHT's core team values are grounded in high ethics and thoughtful, considered , President, P@SHA Cyan Ltd. judgement in investment decision making. Jehan Ara SEDCO Dubai is a Shariah-compliant private equity firm specializing in growth capital investments for expansion, acquisitions, scaling up of operations, and management buyouts. The firm seeks to make investments across the Middle East and North Africa (MENA) region, Humayun Bashir, Country General Manager, IBM Imran Shaikh, Vice President—Head of Marketing, JS including Turkey, and selected countries in South and South East Asia, including India, Pakistan, Private Equity Private Investment Malaysia, Indonesia, Singapore, Thailand, and Vietnam. The firm seeks to make investments sedco.com/business- Bank Ltd. SEDCO Dubai Dubai, UAE Investing Firm ranging from 10 percent to 49 percent with investments typically ranging from $20 million to $40 groups/subsidiaries/sedco-dubai/ Nasim Beg, CEO, Arif Habib Investments Ltd. million. It seeks to invest in medium sized private companies with annual sales of between $100 million and $400 million. The firm usually takes a significant minority stake in an investee Rehan Shaikh, COO, HBL Asset Management Limited company and representation on the board of each of its investee companies. SEDCO Dubai is Abid Butt, CEO, e2e Supply Chain Management (Pvt) headquartered in Dubai, United Arab Emirates. SEAF is an investment management group that provides growth capital and business assistance Ltd. Aasim Siddiqui, Director, Pakistan International Venture Capital to small and medium enterprises (SMEs) in emerging and transition markets underserved by Small Enterprise Private Investment Washington, D.C., Investing; Private traditional sources of capital. Through its network of offices around the world, SEAF invests in www.seaf.com Assistance Fund (SEAF) Firm (Non-Profit) United States Container Terminal Ltd. Equity Investing entrepreneurs to build successful businesses, realizing both attractive returns for our investors , CEO, Team Ants and a measurable development impact in local communities. Shahjahan Chaudhary Swicorp, Investment Arm is the private equity arm of Swicorp specializing in investments in buy Sohail Wajahat Siddiqui, Chairman, Pakistan State Oil and build, buyouts, and growth capital. It invests in energy, petrochemicals and energy-intensive , CEO, Cyan Limited and Dawood Private Equity industries, industrial goods, consumer goods and retail, communications and the financial Samad Dawood Financial Service Swicorp, Investment Arm Investing; Mezzanine services sectors. The arm focuses geographically on the Middle East and North Africa region. It Dubai, UAE www.swicorp.com/?section=pe Investment Arm Corporation , Chairman, Silk Bank Ltd. Investing prefers to invest between $15 million and $150 million in its portfolio companies. Swicorp, Shaukat Tarin Investment Arm was founded in 2004 and is based in Dubai, UAE with additional offices in Riyadh, Saudi Arabia, Jeddah, Saudi Arabia, Tunis, Tunisia and Algiers, Algeria. , Managing Director and Country Head, Temasek Holdings (Pte), Ltd. is a sovereign wealth fund of the Government of Singapore Nadeem Elahai specializing in growth capital, restructuring, and divestiture transactions. The firm also invests in private equity and debt funds, such as buyout and growth capital funds, mezzanine funds, debt The Resource Group funds, technology venture capital funds, and life sciences venture capital funds. It prefers to Lahore make investments in companies engaged in the telecommunications and media, banking, real Temasek Holdings (Pte) Private Equity Private Investment estate, financial services, property, industrial, life sciences, transportation and logistics, , CEO, HBL Asset Management Ltd. Singapore, Singapore www.temasekholdings.com.sg Shahid Ghaffar Ltd. Investing Firm consumer and lifestyle, education, energy and resources, infrastructure, engineering and Pir Saad Ahsanuddin, Entrepreneur and investor technology, and healthcare, pharmaceuticals and biosciences sectors. The firm generally invests in the Americas, Asia, Singapore, Africa, Middle East, and OECD economies. Within Asia, it Fahd Haroon, CNBC Pakistan invests in companies based in India, Pakistan, South Asia, China, North Asia, Vietnam, and Zehra Ali, Lahore University of Management Sciences ASEAN Countries. Temasek Holdings (Pte), Ltd. was founded in 1974 and is based in Singapore with additional offices in India; China; Hong Kong; Shanghai, Brazil; Mexico; and Vietnam. Zaid Haroon, Assistant Vice President, Marketing and The Carlyle Group is an investment firm specializing in direct and fund of fund investments. Asim Fayaz, Curator, TEDxLahore Within direct investments, it specializes in management-led buyouts, divestitures, strategic Corporate Communications, JS Bank Ltd. minority equity investments, equity private placements, consolidations and buildups, leveraged finance, and venture and growth capital financings. The firm typically invests in agriculture, , Co-founder and CEO, Kualitatem (Pvt) Venture Capital aerospace, defense, automotive, consumer, retail, industrial, infrastructure, energy, power, , Director, SME Finance, State Bank Jamil Goheer Investing; Private Private Investment healthcare, software, technology, real estate, financial services, transportation, business Washington, D.C., Syed Samar Hasnai The Carlyle Group LP www.carlyle.com Ltd. Equity Investing; Firm services, telecommunications, and media sectors. It seeks to invest in companies based in Sub- United States Mezzanine Investing Saharan Africa, Asia, Australia, Europe, Middle East, North America, and South America. The of Pakistan/SMEs firm typically invests between $5 million and $50 million for venture investments and between $50 million and $1 billion for buyouts. It typically holds its investments for three to five years. The Saba Gul, Co-Founder and Executive Director, BLISS Carlyle Group was founded in 1987 and is based in Washington, D.C. with additional offices Dr. Ishrat Husain, Dean and Director, Institute of across North America, Latin America, Asia, Africa, and Europe. The National Investor Private Equity is a private equity and venture capital arm of The National Business Administration Monis Rahman, Chairman and CEO, Naseeb Networks, Investor specializing in leveraged buyouts, growth capital, and late stage pre-IPO investments. The firm seeks to invest in companies throughout the Levant and Middle East, North Africa, and Inc. Venture Capital South Asia regions including Egypt, Pakistan, India, Jordan and countries in the Gulf Cooperation The National Investor Financial Service , CEO, Creative Chaos Investing; Private Council. It focuses its investments in consumer and retail, oil and gas, contracting and real Dubai, UAE www.tni.ae/private_equity.php Shakir Husain Private Equity Investment Arm Equity Investing estate, financial and business services, telecom and media among others. It acquires both , Adjunct Professor, Lahore University of controlling and minority stakes in its portfolio companies. The firm invests through TNI prop book , President and CEO, Tameer Jazib Zahir investments. It seeks a board seat in its portfolio companies. The National Investor Private Equity Nadeem Hussain Management Sciences was founded in 1994 and is based in Dubai, United Arab Emirates. TLG Capital is a private equity investment firm specializing in growth capital investments and Microfinance Bank Private Equity special situations investments. The firm prefers to invest in the frontier markets. It invests in Private Investment TLG Capital Investing; Mezzanine companies based in the emerging markets and Sub Saharan African region. The firm typically London, UK www.tlgcapital.com Firm Investing invests in larger as well as smaller deals of $15 million or less. TLG Capital was founded in 2009 Ali Jameel, CEO, TPL Holdings and is based in London, United Kingdom. Venture Capital Islamabad YES Bank, Investment Financial Service Investing; Private YES Bank, Investment Arm is a private equity arm of YES Bank. Mumbai, India www.yesbank.in , SVP and Corporate Head – South, National Arm Investment Arm Irtiza Kazmi Equity Investing Bank of Pakistan Vinay Chawla, Deputy Coordinator for Economic & Development Assistance, U.S. Embassy, Islamabad , CEO, Asia Care Health & Life Potential PII Entrepreneurship Support Partners Dr. M. Mehdi Kazmi Lahore University of Management Sciences (LUMS) National University of Sciences and Technology (NUST) Insurance , Economic Counselor, U.S. Embassy, Universities Robert Ewing Institute of Business Administration (IBA) National University of Computer and Emerging Sciences (FAST) Islamabad The Indus Entrepreneurs (TiE) Pakistan Software Houses Association for IT and ITES (P@SHA) , CEO, Inbox Business Technologies (Pvt) Local Associations & Networks The Organization of Pakistani Entrepreneurs (OPEN) PeaceNiche Ghias Khan Social, Entrepreneurship, and Equity Development (SEED) Ventures Ltd. Bilal Gilani, Executive Director, Gallup Pakistan Business Support Organizations Small and Medium-Size Enterprise Development Authority (SMEDA) SME Business Support Fund (BSF) Universities with Presence or Massachusetts Institute of Technology (MIT) University of Pennsylvania – Wharton Business School Saad Amanullah Khan, President, American Business Ahmad Jalal, Riyada Enterprise Developmet, Abraaj Experience in Pakistan Babson College Harvard University Organizations with Presence or Kauffman Foundation Invest2Innovate Council of Pakistan Capital Global Experience in Pakistan American Pakistan Foundation Center for International Private Enterprise (CIPE) Organizations without Presence The Unreasonable Institute TechnoServe , Director, PeaceNiche , Islamabad Stock Exchange or Experience in Pakistan Small Enterprise Assistance Fundsʼ (SEAF) Center for Entrepreneurial and Executive Development Sabeen Mahmud Ayla Majid William Martin, U.S. Consul General, Karachi Nadia Naviwala, Country Representative, U.S. Institute of Peace Asif Misbah, Managing Director, Macter International (Pvt) Ltd. Jonathan Peccia, Deputy Economic Counselor, U.S. Embassy, Islamabad Jay Munir, Political and Economic Chief, U.S. Consulate, Karachi

Mohsin Nathani, CEO, Standard Chartered Bank (Pakistan) Ltd.

64 65 Pakistan Private Investment Initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE Appendix D: Acronyms This appendix includes a list of acronyms, with their defi- LDI – Long distance & international WASHINGTON, D.C CAMBRIDGE, Mass. nitions, used throughout this study, in alphabetical order. Dec. 7–10, 2011; Jan. 18–20, 2012; Mar. 22, 2012 Nov., 2011–Mar., 2012 LP – Limited partner 2&20 – Two-and-twenty incentive structure LUMS – Lahore University of Management Sciences , Associate Professor at the George , Doctoral Fellow, Growth Lab, Philip Auerswald Juan Pablo Chauvin CAGR – Compound annual growth rate M&E – Monitoring & evaluation Mason University School of Public Policy, Senior Fellow Center for International Development, Harvard Kennedy CDC – formerly Commonwealth Development Corpora- MCC – Millennium Challenge Corporation at the Kauffman Foundation School of Government tion, now simply CDC Group (United Kingdom) MIT – Massachusetts Institute of Technology , Director, Office of Pakistan Affairs, U.S. , Professor of the Practice of CEED – Center for Entrepreneurship & Executive De- Jeffrey Bakken Ricardo Hausmann MOF – Ministry of Finance (Pakistan) Agency for International Development Economic Development, Harvard Kennedy School of velopment Government CGS – Credit guarantee scheme MQM – Muttahida Quomi Mahaz , Analyst, Eurasia Group; Senior Shamila Chaudhary CNG – Compressed natural gas NAIRU – Non-accelerating inflation rate of unemploy- Fellow, New America Foundation; Vally Khamisani, Mid-Career Master in Public ment Administration, Harvard Kennedy School of Government DB – Doing Business report (World Bank) Jeremy Chen, Pakistan Desk Officer, U.S. Department NIS – New independent states (Western NIS Enterprise DCA – Development Credit Authority (United States Fund) of State Asim Khwaja, Professor of International Finance and Agency for International Development) Development, Harvard Kennedy School of Government NUST – National University of Science & Technology , Policy Analyst, Center for Global DFI – Development finance institution Daniel Cutherell OPEN – Organization of Pakistani Entrepreneurs Development Jake Liebschutz, Master in Public Policy, Harvard DFID – Department for International Development (Unit- Kennedy School of Government ed Kingdom) OPIC – Overseas Private Investment Corporation (Unit- , Senior Advisor for Pakistan to the ed States) Robert Deutsch DISCO – Power distribution company Special Representative for Afghanistan and Pakistan, Ambassador Cameron Munter, U.S. Ambassador to PCG – Partial credit guarantee DOD – Department of Defense (United States) U.S. Department of State Pakistan PE – Private equity DOS – Department of State (United States) , Vice President of Structured PEGCC – Private Equity Growth Capital Council Robert Drumheller EBITDA – Earnings before interest, tax, depreciation, & Finance, Overseas Private Investment Corporation PEPCO – Pakistan Electric Power Company PHONE INTERVIEWS amortization Ziad Haider, White House Fellow Nov., 2011–Mar., 2012 EMPEA – Emerging Markets Private Equity Association PES – Pakistan Economic Survey ERR – Economic rate of return PII – Pakistan Investment Initiative Mark Karns, Multi-Sector Advisor, Office of Afghanistan Garrett Johnson, Co-Founder, SendHub; former and Pakistan Affairs, U.S. Agency for International Professional Staff, U.S. Senate Committee on Foreign ESG – Environmental, soclal, & corporate governance PIO – Public international organization Development Relations standards R&D – Research & development EV – Enterprise value S&P – Standard & Poor’s , Sr. International Attorney, Millennium U.S. Agency for International David Kassebaum Richard Johnson, FDI – Foreign direct investment Challenge Corporation Development (Retired) SBA – Standby agreement FIT – Feed-in tariff SBP – State Bank of Pakistan , Economic Advisor, U.S. Department , Founder and CEO, Invest2Innovate Rebecca Lawlor Kalsoom Lakhani FOF – Fund of funds SCI – Saif Center of Innovation of Treasury Josh Lerner, Jacob H. Schiff Professor of Investment FY – Fiscal year SEAF – Small Enterprise Assistance Funds Senator Richard G. Lugar, U.S. Senate Banking, Harvard Business School GCI – Global Competitiveness Index (World Economic SEED – Support for East European Democracy Act Forum) Damian Murphy, Senior Policy Advisor for Foreign Policy, Ali Siddiqui, Principal, JS Group SIB – Social impact bond National Security and Homeland Security, Senator Bob GDA – Global Development Alliance (United States – Small & Medium Enterprise Development Au- , Partner and Director of International Agency for International Development) SMEDA Casey Stephen Smith thority (Pakistan) Operations, JS Private Equity G DP – Gross domestic product SMEs – Small & medium-sized enterprises David Nobles, Pakistan Desk Officer, U.S. Department GE – General Electric of State SPV – Special-purpose vehicle GENCO – Power generation company Advisor TFBSO – Task Force for Business & Stability Operations Michael Phelan, Senior Professional Staff Member, U.S. GNI – Gross national income (United States) Senate Committee on Foreign Relations , Jeane Kirkpatrick Professor of Meghan L. O’Sullivan GoP – Government of Pakistan TIC – Technology Incubator Center the Practice of International Affairs, Harvard Kennedy , Senior Advisor for Pakistan GP – General partner Ambassador Robin Raphel School of Government TiE – The Indus Entrepreneurs to the Special Representative for Afghanistan and IBA – Institute of Business Administration (Karachi) U.K. – United Kingdom Pakistan, U.S. Department of State IBH – Indus Basin Holdings UN – United Nations Sara Shroff, Director, Buxton Initiative Policy Area Concentration Seminar Leaders ICT – Information & communications technology UNPRI – UN Principles for Responsible Investment IFC – International Finance Corporation (World Bank) Milan Vaishnav, Visiting Fellow, Center for Global Stephen Kosack, Assistant Professor of Public Policy, U.S. – United States Development Harvard Kennedy School of Government IMF – International Monetary Fund USAID – United States Agency for International Devel- IPO – Initial public offering opment , Associate Professor of Public Policy, Monica D. Toft USD – United States dollar Harvard Kennedy School of Government IPP – Independent power producer IRR – Internal rate of return USG – United States Government IT – Information technology VC – Venture capital KLB – Kerry-Lugar-Berman Bill (aka Enhanced Partner- WB – World Bank ship for Pakistan Act) WDI – World Development Indicator KSE – Karachi Stock Exchange WEF – World Economic Forum

66 67 about the authors Dustin Cathcart received a Master’s in Meredith Gloger received a Master’s in Aaron Roesch received a Master’s in Public Policy from Harvard University’s Public Policy from Harvard University’s Public Policy from Harvard University’s John F. Kennedy School of Government John F. Kennedy School of Government John F. Kennedy School of Government in 2012, with a concentration in Political in 2012, with a concentration in Interna- in 2012, with a concentration in Interna- and Economic Development, and is a tional and Global Affairs. In the summer tional and Global Affairs. In the summer Master in Business Administration can- of 2011, she worked with the Pakistan of 2011, he worked with the Aid Policy didate at Dartmouth’s Tuck School of Poverty Alleviation Fund in Islamabad. Unit of the Government of Pakistan’s Business. In the summer of 2011, he Earlier, Meredith served as Acting Resi- Economic Affairs Division in Islamabad. worked with the Inter-American Develop- dent Country Director for the Interna- Earlier, he spent more than three years ment Bank’s Private Sector Development tional Republican Institute in Bogota, with the International Rescue Committee, Group in Port-au-Prince, Haiti. Earlier, Colombia, and has more than six years in Uganda, Kenya, and the United King- Dustin served five years as an infantry of- of experience working on U.S. Govern- dom, working on project management, ficer in the United States Army, including ment-funded political and economic de- budgeting, financial management, and a 15-month deployment to Iraq. He is a velopment projects in Latin America and risk analysis. He is a Harvard Kennedy Truman National Security Fellow, Harvard South Asia. Meredith is a recipient of a School Public Service Fellow and ex- Kennedy School Public Service Fellow, 2012 Boren Fellowship for Urdu study in pects to begin work with USAID’s Office and a Pat Tillman Military Scholar. Dustin India. She expects to begin work with of Policy in the Bureau for Policy, Plan- graduated from Norwich University in the U.S. Department of State’s Bureau of ning, and Learning in the fall of 2012, as 2004 and is originally from Indianapolis, South and Central Asian Affairs, Office of a Presidential Management Fellow. Aar- Indiana. Press and Public Diplomacy, in the fall on graduated from Stanford University of 2012, as a Presidential Management in 2006 and is originally from New York, Fellow. Meredith graduated from the New York. University of Pennsylvania in 2004 and is originally from Marin County, California.

Harvard Kennedy School | May 2012