How not to launch a diaspora bond
What hurdles impeded the success of Pakistan Banao Certificate?
I went on a twitter rant when I read the following by the Prime Minister on the Pakistan Banao Certificate aka diaspora bond.
I had written a few threads before the bond was launched and a few afterwards about some of the steps government can take to make it a successful launch or at least less of a failure. The steps weren’t complicated and would have shown that government is serious in raising funds through this mechanism by making it easier for investors to invest the money. But homework isn’t a forte of this government. Mantra appears to be, “Move Fast, Launch Things”.
I blame PM for the failure of the bond. If there is another person that should be held accountable, it should be PM’s chum Sayed Zulfi Bukhari, Special Advisor to PM on Overseas Pakistanis who is quick to make an appearance to take credit e.g. when British Airways announced its arrival at Islamabad Airport or when the bond was launched but is nowhere to be seen when it failed. If anyone deserved sacking in the recent reshuffling, it was him. He had one job i.e., get overseas Pakistanis to invest in the bond, and he couldn’t do it. But enjoy the pictures.
Also partly to be blamed is the social media army of PTI which goes on “Thank You PM”, “another promise delivered” etc. campaign every time PM makes an announcement overwhelming the social media timeline such that if there is any analysis or criticism, it gets drowned out. Dude, he has just made an announcement. Wait for him to deliver on it.
Anyone wishing to read a short serious write up can read this paper by Tabadlab
But for the constructive criticism, here it goes.
1. Before launching an instrument, estimate how much funds you expect to raise and from which country. The government was estimating $500Million in 5 months i.e. by June 30, 2019. Where did this number come from? Is it because it is a nice little round number? Or is this the number government thought can help it negotiate on a firmer footing with IMF? Government could have asked its banker friends. Scratch that. Don’t ask them. I saw many bankers (current, retired, based locally as well as abroad) on LinkedIn and twitter praising this announcement. This is the tragedy of this government. Once they drink the Kool Aid, the Ivy League and internationally experienced professionals start believing that the word “impossible” does not exist anymore in the dictionary as IK is at the helm. The word they should actually be cutting out is “rational”.
2. What type of instrument it should be? If it is a security, you need regulatory approval to market it to retail investors. Jumping through the regulatory hoops isn’t hard but it is time consuming and requires some work. Probably the banker friends advised them that getting approval as a security instrument would be hard. Hence, the government decides on a scrip-less online registry format. But the government kept on announcing that we will go on roadshows to market this instrument. Probably a case of speaking first and thinking later.
Israel has successfully been raising funds through this mechanism by having securities issued at local level. There is a method to doing it. These are the three websites of local set up of Israel bonds in US, UK and Canada (there may be in other countries as well but I am too lazy to google now).
US: Israelbonds.com
Canada: israelbonds.ca
In some cases, these securities are eligible for retirement accounts. Investors donate those to university endowments and write them off as charity. But this calls for long time planning and cannot be accomplished if the strategy is “Move Fast, Launch Things”.
3. Let’s say government estimates there are three countries where it expects the maximum investment from say UAE, UK and US. UAE and UK have the largest footprint of Pakistani banks. Why not make it seamless process for the investor. SBP calls in all the local banks and advises them to facilitate this at their overseas branch. All the investor to do is to walk into the bank, open a bank account (after doing the anti-money laundering checks) and transfer the money to SBP. All the processing is taken care by the banks and SBP in the background. The profit and principal repayment will be remitted by SBP in the same accounts.
How does the current system work? Investors are required to register at the clunky site and generate a unique number. When remitting money to SBP, have the following data in field 70/72 of SWIFT message.
When it is asking for money, it behooves the government to make it as smooth as possible. Not that reports like this appear in the newspaper.
4. Try the above at a US bank. Diaspora in US is scattered and mostly bank with retail branches. Most of the staff wouldn’t know where to put the line 70/72 message. Some systems only allow for standard messages “family support”, “loan repayment”, “tuition fees” etc. In addition, in these countries, banks are trying to move most of the transaction stuff online. Getting the transfer done from a branch can set you off by at least $20 in most cases.
5. In addition, there are correspondent charges that the investor has to bear.
These can be around $25 per transaction. Outside US, they can be higher as local currency isn’t dollar and the bank may charge extra. These charges may be applicable both when you are investing principal to buy the bond and also deducted from the semi-annual profit payment. Overall impact becomes smaller if the investment is large, but at the minimum $5,000 threshold level, your return has already reduced from 6.25% to 5.29%.
Despite what the social media army and LinkedIn bankers tell you, for the junk rated country, 6.25% isn’t a high return. The return should be in the range of 8%. At least what the government could do was for UAE and UK, when the transaction is between Pakistani banks and NBP, absorb the correspondent charges or share it with the banks not reducing the already low return the investor is getting.
But for the love of the country, people were still willing to invest in the bond. Unfortunately, most of them couldn’t make it through the website. Twitter had a quite a few complaints from investors or prospective investors tagging government and ruling party accounts to help them through the investment process but seems government wasn’t concerned about small investors it after launching it.
6. The government couldn’t do roadshows. The next best thing would have been to market it through the TV. Diaspora and overseas Pakistanis mostly tune into Pakistan talk shows and news. Previous Chief Jester forced the channels to market his scam, sorry, dam fund 24/7. It was the least this government can do when it came to these bonds. But the belief in the social media prowess bordered on naiveté. Marketing consisted of same news reported about the launch of the bond every two weeks. A few tweets by Khaqan Najeeb. First when the bond was launched and then the same news one month later. Then another tweet 19 days later. He also did a small TV spot but not able to located it now. Finally, this by Shehzad Roy 4 month after the launch.
7. Like the “go, no go” with IMF, the government wasn’t also not clear on how to get the certificates marketed. “Move Fast, Launch Things” on March 5, a month after the launch.
You may wonder who these banks are that are getting money by cutting subsidies (FFS!!!). Wonder no more.
JS Bank? The bank doesn’t have notable presence abroad. Probably they are in touch with some high network individuals and may be able to get them to invest in the bond by using HBL, SCB or other branches. I was pleasantly surprised that Askari Bank wasn’t here otherwise khakis have their hands in every till. Probably they knew that this wasn’t going to fly so why bother.
You must wonder, what services this consortium delivered that they needed to be compensated with a share in the lollipop of Rs.180 million? Wonder no more. All three of them… wait for… had tweeted on almost on the same day directing diaspora to Pakistan Banao Certificate website.
Banks going all out to market Pakistan Banao Certificate. Brought tears to my eyes. Value for money I tell you.
8. The government is aware that significant segment of overseas Pakistanis prefer sharia compliant instruments. Government could have easily tapped a larger investor base by launching a sukuk instead of a bond. Addition steps would be, get an underlying (government owned) asset, issue a sukuk against it and get one of the Usmani clan members to issue a fatwa on it.. Conventional investor may invest in a Sukuk but a sharia compliant investor will not invest in a bond. The bond isn’t an institutional issuance that you have jump a lot of hoops. It was just scrip-less instrument in SBP MIS. Could have easily been done. May have taken a month longer to launch but hey “Move Fast, Launch Things”.
9. This heartburn could have been avoided if the presidents of the banks that government has on its on WhatsApp gave it their frank opinion. Asad Umar calls some of them his friends and they are international bankers. Either their advice wasn’t sought, or if it was sought it wasn’t listened to or bankers knew what PM wanted to hear and became yes men.
People did think it was a well-planned instrument.
I leave it to you to decide how well planned it was. Do I have the answers to how it could have been done better? No. But I do think if the smartest guys in the room just stood up for once and said that you are naked when they saw that emperor was wearing no clothes, we would have been in a much better place.
To end this, I leave you once again with this.
