The draft of the Ehsaas Program: Policy to Promote Startups has been sent to the Ministry of Science and Technology along with all the relevant departments for further consideration before it is made official.
The policy looks into the problematic areas, opportunities, challenges, and prospects of growth within the startup ecosystem in Pakistan. It has been formulated with multiple stakeholders, including private and public entities and relevant government ministries and funding organizations.
Here is everything you need to know about it:
Pakistan’s Economic and Employment Dynamics
Pakistan’s population currently has the highest number of young people ever in its history, which makes this youth one of the biggest assets of the economy. The new draft policy to promote startups in Pakistan focuses on this asset.
At the same time, unemployment is an ever-present and recently worsening, challenge for the economy. In 2019, unemployment was registered at 4.45 percent, and it is expected to further increase in the future. This translates into nearly 3.5 million out-of-work individuals in the country. Every year another 1.4 million people enter the working-age joining the labor force. To maintain stability in the employment sector, 0.9 million jobs need to be created every year.
There is a dire need to promote a “job-creating” mindset in Pakistan as opposed to a “job seeking” bulge in youth. The incumbent government has taken multiple steps so far to tackle this issue. These include Youth Entrepreneurship Scheme that offers loans for businesses; Hunarmand Pakistan Program that offers technical vocational and educational training; Jawan Markaz Initiative that offers an interactive platform for engaging, counseling, and mentoring youth; and Startup Pakistan Program that aims for a wider national-level startup ecosystem that launches 10,000 startups by 2023.
Despite these efforts, the response from the entrepreneurs and the wider population has not been up to the expectations, or the projected potential of the economy.
Startup Growth in Pakistan has been Promising but Fallen Short of Potential
According to a report, 720 startups have been established in Pakistan since 2010, which include some super successful names like Zameen.com, Rozee.com, Finja, and Daraz.pk, etc. However, Pakistan still lags behind the developed and some developing economies when it comes to the growth and expansion of startups. In 2017, only nine Pakistani startups were able to receive Venture Capital funding, as compared to 34 in Nigeria, 38 in UAE, and a whopping 790 startups in India.
In global rankings, Pakistan stands at 75th among the top 100 countries, with neighboring India and China at much higher ranks of 20th and 7th in terms of startups proliferation. Even a city-wise comparison puts Lahore at 257th place as opposed to Bangalore at 10th and Beijing at 3rd spot.
This new draft policy then aims to tackle the very bottlenecks and challenges that are causing the Pakistani startup ecosystem to lag.
Challenges to Startups in Pakistan
Some of the challenges identified through interactions with stakeholders, as explained in the policy, include lack of a conducive educational system that helps in cognitive, innovation, and creativity development; lack of government support and regulatory policy framework; lack of industrial clusters and R&D; nascent startup and entrepreneurial ecosystem; lack of networking and resourcing; and non-availability of startup related data.
Barriers to access to finance and issues related to intellectual property rights are also among the notable challenges faced by Pakistani startups.
There is also a significant dearth of information and awareness among potential entrepreneurs on how to establish a new startup in the country. This is aggravated by the lack of global acceleration programs that harm the new and mature businesses alike, as well as a lack of specialized incubators who do not suffice when it comes to startups that are highly technical or required specialized development services in sector-specific areas.
The new draft policy aims to tackle these challenges by making provisions for infrastructure augmentation, venture capital funding, improving ease of doing business, leveraging IT to foster partnerships and co-creation, promoting innovation and providing global exposure, and nurturing young talent.
The policy also includes the establishment and expansion of national incubation centers, as well as establishing business incubation centers at higher educational institutes. It provides actionable plans for bringing in specialized incubators, and science and technology parks, developing a national industrial database, as well as developing linkages among universities, industries, and R&D organizations.
The draft policy also says that a startup infrastructure fund shall be institute with an amount of Rs. 10 billion to assist such organizations and relevant agencies to cover capital and operational expenditures of the establishment and expansion of incubators and other such facilities.
The draft policy also has a detailed framework for promoting international payment options, exit policies, as well as local funding opportunities for startups in the country. Digital payment systems will be introduced, including PayPal, Stripe, Venmo, and Mercury, along with escrow and crowdfunding platforms like Kickstarter.
There is also a provision for tax exemptions for new startups. These exemptions would include withholding taxes, general sales tax, corporate income tax, and other relevant e-commerce or digital taxes. These would be applied for different lengths of time and would include joint audits by the Securities and Exchange Commission of Pakistan (SECP) and the Federal Board of Revenue (FBR).
What is missing from the Proposed Policy?
While there is a comprehensive plan outlined in the draft policy on the promotion of the beginning of the startups, there is little to no detailed plan on how those startups will be encouraged and ensured to succeed.
According to global estimates, 90 percent of the startups fail, with 10 percent of them bringing down the shutters within the first year of operations. The years two through five bring down nearly 70 percent of those startups that survive the first year. Furthermore, while some industries might be more challenging than the rest, the failure rate for new businesses is quite similar across all economic sectors.
The only provision that the policy provides for startups to flourish in these risky years is tax exemptions. There is an obvious risk of such startups becoming highly dependent on such external support in the form of exemptions and grants, and therefore, the training and mentoring programs need to focus on preparing these startups for self-sustainability.
Secondly, while SECP has proven extremely effective in promoting newer businesses, the laws and regulations of other regulatory bodies, including the State Bank of Pakistan (SBP), and other relevant organizations like the Competition Commission of Pakistan (CCP) remain stringent and un-tailored to newer and more specifically ‘digital’ businesses. The policy needs to have provisions for the joint working of different regulatory bodies in coming up with uniform laws for digital space and startup ecosystem in the country.
Finally, to ensure that the startups’ growth does not further worsen the gender and geographical divide, it is imperative that the policy also focuses on improving financial literacy and financial inclusion for the masses, even outside of the target group of entrepreneurs. The digital wallets currently operating in the country have significantly impacted to reduce this financial inclusion gap but the new policies – such as SBP limiting the transaction fee on digital wallets – may have adverse impacts for the operators of such wallets, rendering them unprofitable to sustain.
In a nutshell, while the draft startup policy may have covered almost all key areas that can assist in promoting startup culture, there is still a need to look beyond the target market, and tweak and improve the root causes that are causing challenges for this ecosystem to bloom in the country.