Pakistan Inc. -- The IT Industry Edition

Saturday, May 06, 2006

Bold Policy Actions Needed to Transform Pakistan's IT/ITES Industry -- By Athar Osama

In the Indian IT Industry, there is a popular saying that goes like this: "IT was the only industry that the Indian government didn't understand well-enough to intervene in and hence destroy". In Pakistan as well, public policy, has played a fairly controversial role in the development of IT Industry over the years. For most of the 1990s, Government's policies towards the IT Industry were a little suspect, not because the government was doing too little, but because it was doing too much and mostly in the wrong direction. Dr. Atta ur Rahman, the then Minister of Technology in Pakistan, pushed up the hype of the IT bubble in Pakistan by touting the ease with which developing countries could join the race ("all you need is a computer and an internet connection"). While it sure was easy for someone in the developing world to go online—and many thousands did—developing quality software that could sell in the international market—or even domestically—was an altogether different ballgame.

The hype around IT in the 1990s resulted in the creation of hundreds, if not thousands, of "mom and pop" IT training institutes across the country and the government pumped money in providing Internet to 1000 villages all across Pakistan. The expressed purpose for investing in bringing Internet to Pakistan's thousand villages was that somehow, by doing so, Pakistan would be better prepared to become a software exporter around the world. As if browsing the internet and not reading a book was the most critical skill that was needed to create the next generation of human resources in Pakistan! Indeed, ignoring even the most basic arithmetic of the IT exports business, the government announced that Pakistan would surpass $1 billion mark in software/IT exports by the year 2000. Needless to say, this was never meant to be.

Today, things have changed considerably. On the positive side, I see signs of considerable sophistication through learning within the industry. Many naive entrepreneurs who formed companies in the early 1990s, believing in the mantra of if "I will make it, they will buy", have now come to realize the value of domain expertise, of specialization, of marketing, and of quality in software development. Increasingly one is seeing software operations being set up as having with a real strategy, a focus, and a vision rather than mere glorified software job shops. The reverse "brain drain" of ex-patriots— bringing fresh ideas, capital, and contacts with them—has also aided in the process. On the negative side, however, the industry faces serious organizational and management challenges (the "200-person barrier"), a shortage of middle management, not enough depth in the human resources pool, lack of venture finance, and most importantly, lack of an inspiring world class success story.

For better or worse, we have created thousands, perhaps hundreds of thousands, of relatively low-skilled IT workers and an IT industry has begun to emerge in Pakistan. More than anything else, I believe, it is important that our own little IT "revolution" must see the light of the day and that the hundreds of entrepreneurs that have dared to venture must feel the sweetness of success. The problem with policy now, as against in the 1990s, is that while it is doing several things that are likely to generally affect the growth of IT industry, it is not tackling head-on some of the biggest policy challenges faced by the industry.

The policy calculus is quite clear. Our policymakers need to make a decision whether their objective is to build an industry that challenges some of the emerging countries (even second tier countries like the Philippines, Malaysia, Ukraine etc.) and achieve some level of substance or continue to linger on as a third or fourth tier country with little to show of. Either of the scenarios are possible and the choice between them is one that must be made by the country's policy and business leaders. There is no harm in deciding that we wouldn't compete for a place on the victory stand. Not every country does. However, should the latter be our priority, we must be willing to undertake actions commensurate with that decision.

In short, while the industry continues to grow, it suffers from being caught up in a low-level equilibrium. As is, the industry would continue to grow at a healthy 20-30% per annum--and many entrepreneurs that I spoke to already foresee better years ahead after some depressing times during the dotcom bubble burst and recession of early 2000s--but the industry would probably not go through a major leap-forward or any dramatic transformation--as has happened for the Indian software industry in late 1990s--anytime soon. The reasons for this are both individual (at a company level) and collective (at an industry and policy level). While the company-level issues have been addressed in my report (available at: http://paksoftwarestudy.vttp.org/), here I would address some policy lapses and collective failures. So here goes my list:

Infrastructure, Infrastructure, Infrastructure!

If there is one thing that the Indian Government did, and did well, amongst the otherwise policy of "fits and starts", it was the emphasis on the provision of infrastructure for the software Industry. In 1986, the Indian government launched its Software Technology Parks of India (STPI) scheme that has grown to include over 25 locations across India today. The 1987 landmark decision that allowed Texas Instruments to install the first private satellite link with outside world provided the IT/Software exporters a way out of the government monopoly on telecommunications capacity and created enough backup and supplementary capacity to link Indian software companies with their American counterparts very early on in the IT revolution.

Pakistan's IT industry not only suffers from a lack of physical infrastructure (office space, to be more precise) but also from a lack of more distributed, accessible, and redundant telecommunications bandwidth-capacity. The events earlier this year, that resulted twice in cutting off of Pakistan's only Internet link with the rest of the world (through the SEA-ME-WE3 submarine cable) have been and must be an eye-opener for the country's policy establishment that had pretty much adopted an ostrich-like attitude so far. In the world of BPO and IT-enabled services, you cannot expect to gain any business, what to talk of big business, if you cannot provide fault-free 24-7-365 mission critical reliability to your customers. Any less would not work. One cannot blame the businesses for not doing enough if the culprit is a submarine cable that is clearly a public good and hence the responsibility of the government. The government of Pakistan must do what a government ought to do i.e. invest in common infrastructure that--for reasons of free-riding and collective failure--companies would under-invest in if left to their own device. For the importance of bandwidth redundancy, this must be government's first priority. The government has failed that test in the past.

A Clear, Consistent, and Uniform IT Investment Policy Regime.

The second element of a suggested policy regime is the presence of a clear, consistent, and uniform IT investment policy. Attracting IT investment into Pakistan is not only critical for creating an image of success and hence the "buzz" that would feed onto itself but also to exposing the local market to foreign ideas, management practices, and capital. This cannot, however, be done if the government policy on the matter is inconsistent, confused, and arbitrary. The government needs to develop a policy case that determines the right parameters of an investment policy to attract foreign investment in the IT sector.

The policy of providing tax-free status to the IT industry has clearly not worked as well as one would have expected primarily because countries are locked-in into a race to the bottom as far as providing incentives is concerned. If the government of Pakistan decides that attracting investment is a big priority--and it should be if IT industry in Pakistan is to get out of is current low-level equilibrium--it must take an unconventional approach to incentivizing investment in Pakistan. One of the ways to do so is to develop a package of incentives specifically designed at attacking other policy bottlenecks (e.g. real estate, manpower training etc.) that would level the playing field for foreign companies looking at alternative offshore destinations. It is not necessary that these incentives be an outright subsidy but rather a carefully designed package that recovers its value ( e.g. through employment generation, tax revenues) in a short period of time.

What is very important, however, is not only that such a policy exists but also that it is openly communicated and, based on a pre-defined criteria, is automatically available to all, and is applied in a fair, transparent, and consistent manner. This would ensure that when a local company gets into negotiations with a large foreign partner for acquisition or a major customer that requires mobilization of considerable resources and upfront investment, it has a bankable guarantee from the government of Pakistan to put on the negotiation table that clearly says: if you invest $x in Pakistan, GOP will support (and make it cheaper for) you to do so by providing a set of incentives amounting to $y. This way it would be possible for foreign entities contemplating investing in Pakistan to assess and incorporate these incentives in their decision calculus. This would also put an end to the politics of backdoor incentives and create a level playing field for all. The math for this policy arrangement must be worked out, and the investment strategy and/or incentives offerings must be devised with great care because of the possibilities of misuse inherent in such an open-to-all commitment. Careful analysis must be undertaken as to what sort of incentives are most likely to sweeten the bargain for a potential foreign investor just enough to push him/her over the edge and clinch the deal for us.

Fighting the Image Problem Systematically and Collectively.

Pakistan has a serious image problem around the world. There are no two ways about it. Even though the image problem might merely be an issue of perception rather than reality, it can have serious consequences for economic interactions of the kind that are needed to jumpstart an IT/ITES industry in a major way. While some companies may be able to get around the image issue through clever tactics or due to the long-established reputations of their founders, it is difficult for an average Pakistani entity to knock on its clients' doors and introduce itself as coming from what is largely seen as world's backwater. The image becomes all the more important if one attempts to sell Pakistan as a possible destination for migrating a critical part of a client's business operation. While every one of us tries to do something about this as a necessary cost of doing business, branding Pakistan is not the job that any company can seek to achieve individually. It is the collective job of the entire industry and one that the government must become an equal partner in.

Developing Pakistan's image vis-a-vis the IT industry would require concurrent action on two fronts. On the economic/industry level, Pakistan's IT industry must brand itself as a dependable destination of quality products and services very much like India Inc. and IITs have now become well-recognized brands of hard-work, intelligence, and quality. This is something that is best undertaken by the Industry itself, not only by providing quality services and products in the first place but also by actively undertaking activities that generate and disseminate knowledge and success stories about the industry (e.g. for an example of one of the several ways India does this, look at the work of India Brand Equity Foundation, a public-private partnership: http://www.ibef.org/). Why is it that Pakistan's IT industry does not participate in conferences at major US Universities (e.g. like India does at Wharton, Stanford, Kellog etc. every year) or PASHA fund a regular series of reports and studies like NASSCOM does. Clearly, the industry has thus far lacked the collective will to cooperate and undertake what is necessary for its collective future.

In addition to this economic/industry branding, Pakistan also requires concurrent political/country branding as well, for without the latter the former alone would not work. Twice a year, our president, prime minister, and/or the minister of IT visits America, makes a few statements on TV, and believes that their job is done. Nothing can be far from that. In Washington, and elsewhere, country's image are made through sustained and meaningful interaction with academic and business leaders, policy-makers and politicians. We have to make a strong political statement and Washington (and elsewhere) that Pakistan is a very important strategic ally and that its makes perfect economic and political sense for the US business community to engage with and invest in Pakistan. It must be emphasized that making Pakistan a partner and beneficiary of the global economic order is only going to strengthen Pakistan's resolve to fight extremism in its own society and elsewhere. Pakistani decision-makers need to understand and appreciate how the game is played in Washington and play along.

Quality and Quantity of Human Resources.

The quality and quantity of human resources is another critical issue facing Pakistan's IT industry. "cheap" labor that is often touted by the government (and the industry) as a strategic advantage for Pakistan is, in reality, a major weakness. Not only do we produce software professionals (programmers, managers, entrepreneurs) in numbers that are sub-critical for the development of an industry but we also fail to provide the kind of quality that is needed to do so. According to one senior policy-maker, of the 5000 or so IT professionals produced within Pakistan's various IT institutions only 1000 or so are immediately employable.

Yet the policymakers in the country fail to take the issue by the horns. In fact, they are in a state of denial. I learnt about this first hand when I was doing the study on Pakistan's software industry last year. Having talked to tens of industry leaders and CEOs, and tabulated the data on policy bottlenecks, it became quite clear to me that the industry suffers from a serious shortage of quality manpower. Yet, when I approached one of the senior policymakers on the subject, (s)he refused to even acknowledge the problem. "The Industry leaders don't know how to run their businesses, and end up blaming the government for their own problems", was the typical response I got. Needless to say that during the consultative sessions held with the industry leaders, that this policymaker also attended, (s)he was forced to undergo a 180-degree change in his/her viewpoint on the subject. It would take still greater effort for this change to trickle down to actual policy in the field and even more for this policy change to have an effect on the ground.

The human resource situation is an issue that requires serious acknowledgement and action on the part of our policymakers. It is also something that cannot be transformed overnight. Substantive changes in the country's human resource situation requires years, if not decades, to come about. It would also require the IT policymakers to work closely with those in HEC as well as the industry in designing a quality curriculum and bridging the deficiency of trainers in the country. This must, however, be done at the earliest so that its benefits may be reaped several years down the lane. Failing to act would only render Pakistan's IT industry stunted, sub-critical, and hollow from within.

Everything Else: Domestic Market, Venture Capital, Intellectual Property Rights etc.

While it is important for the Pakistani policymakers to take on the four challenges identified above, namely, infrastructure, investment, image, and HR, head-on, other policy actions may also be necessary to ensure an unrestricted growth of Pakistan's IT/ITES/BPO industry. The creation of a vibrant domestic market for IT is one such area. Several of the IT leaders that I spoke to complained about the lack of government contracts to IT Industry. They complained about the slow progress on the e-Government initiative, the award of major contracts to large public sector (chiefly, NADRA) and foreign entities etc. They rightly argue that America's Silicon Valley or Boston Route 128 would probably not have been developed had it not been for major defense R&D contracts given to local industry in these regions. The government policymakers, on the other hand, complain about the industry's lack of sophistication. "They can't even properly reply to RFPs, what to talk of actually having the capability to deliver even a moderate complexity e-Government software", claims one leading policy-maker, suggesting that how can (s)he, in good conscience, give a multi-million dollar project to a company that doesn't demonstrate the capability to deliver. There is some truth to both sides on this argument.

In the end, however, what is perhaps required is a careful calculation on the part of both the policymakers and the industry as to what sort of "investment" should the former be willing to make in a certain amount of "learning-by-doing" for the industry. True, it might take $3 million (and a lot of hits-and-trials) instead of $2 million to make a software the first time around, but that cost maybe justified as investment in future capacity. It happens all the time even in the developed world and there is no harm if it happens in Pakistan as well, provided it happens in a manner that is carefully thought through and monitored so that it doesn't end up becoming one of those deletion programs of yesteryears. Creative use of policy (for example, by requiring "local content" requirements or partnerships on foreign contracts) can further reduce the cost of this learning-by-doing.

Other issues that require some policy interventions, although not at the level alluded to above and certainly not as urgently as in the cases identified above, are the provision of venture-risk capital, and the establishment of intellectual property rights etc. Each of these issues require careful analysis of the various policy options and the development of a comprehensive policy regime that addresses these in a substantive manner. It would also require concurrent commitment on the part of the industry itself. This can be achieved through a public-private partnership designed at making (and realizing the benefits of) contingent commitments by both the public and private sectors.

A contingent commitment model would require the industry to identify its most urgent policy needs that are really, to their best judgment, are hampering the growth of the industry followed by a commitment to grow the industry (revenues or size) to a pre-set target if these needs were met. This would ensure that the industry brings forth issues that are really show-stoppers for it--and not merely resort to asking for undue favors or subsidies--and is then held accountable for showing results once these issues are addressed. The process of issues identification, target-setting, and performance monitoring must also be carried out in a consultative and transparent manner to avoid under-the-table favors and/or launching yet another initiative that fails to deliver.

The author is a Doctoral Fellow at the Frederick S. Pardee RAND Graduate School for Policy Studies in Santa Monica, CA and specializes in Technology and Innovation Policy. He may be contacted for comments and suggestions at Athar.Osama@gmail.com.

A Modified version of this article was published in Dawn, Science and Technology (February 4, 2006) and Science and Development Network (SciDev.Net) at: http://www.scidev.net./Opinions/index.cfm?fuseaction=readopinions&itemid=484&language=1

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