This is the story of dodgy payments and shady business practices involving some of the largest, most powerful companies in Pakistan. At stake is the prize of becoming the dominant brand of paint in a country on the verge of a boom in construction activity. These companies will stop at nothing, pay whatever they have to, in order to win that prize.
The recipient of those dicey payments? A high-ranking government official? An elected politician? A wealthy businessman? A high court judge? Nope. The recipient is the daily wage labourer, barely earning more than minimum wage, whom you might hire to come and paint your house.
“Behind every great fortune lies a great crime.” These words, originally written by Honoré de Balzac, and quoted by Mario Puzo in The Godfather and Supreme Court Justice Asif Saeed Khosa in a dissenting opinion on the Panama Papers case, reflect a common perception that wealth generation requires financial malfeasance. It also creates the mistaken impression that only the wealthy are involved in questionable financial transactions.
This story will demonstrate, however, that corruption is not a matter of wealth and power, but incentives. Given a strong enough incentive to engage in unethical behaviour, a distressingly large number of people will do so, regardless of their level of wealth or power. And to be the recipient of an illicit payment, one need not be wealthy or powerful, but merely in a position to offer an undue advantage to an entity looking for it.
The case of the ‘token’
Consider the simple act of getting your house painted. Given most middle-class Pakistanis’ aversion to a do-it-yourself attitude, the vast majority of painting of residential and commercial properties is done by professional painters who are often daily wage labourers who earn barely above the minimum wage. You would not think that bribery (or at least something that has the strong appearance of bribery) would be involved in a matter so simple as that. And yet, you would be wrong.
Why would anyone need to bribe a daily wage labourer? The reason is simple. While the labourer is poor, and usually not very well educated, he (it is almost always a he) has something that the middle-class family getting their house painted does not have: expertise on which paint and how much of it, is required for a paint job. Most people rely on the painter to recommend which paint they should get in order to do the job, and that reliance on the expertise of the painter is what gives him the kind of market power that paint manufacturers are willing to pay big money for.
It all started in the mid-1990s, when a small boom in construction, combined with a large number of new entrants in the paint manufacturing market, led to a serious increase in the level of competition in the paint market in Pakistan. Companies were desperate for market share and willing to offer massive discounts in order to be able to get it.
According to market research conducted by Nippon Paint Pakistan, 60% of paint buying in Pakistan is conducted by the labourer doing the actual painting. Another study found that 70% of consumers and painters stated that the advice of the painter was critical to the decision of which paint was purchased for a paint job.
Under these circumstances, while offering a discount on the wholesale or retail price of the paint would help somewhat, the companies looking to entice more buyers of their paints had to find a way to make sure that it was the labourer who got the discount, even though he was not the one paying for it.
Enter the ‘token’.
The token was an innovative practice invented in the mid-1990s, and it was meant to solve the decision-maker/purchaser dichotomy. Before the anti-token campaign by Master paints, which was followed by litigation in Competition Commission of Pakistan, tokens were strictly speaking not illegal and soon every company realized the sheer genius of the scheme. Paint manufacturers started placing tags or stickers on each paint box with an amount of money written on it. That tag or sticker came to be known as the token, and could be redeemed at any paint retailer or wholesaler for cash.
In order to ensure that it is the painter and not the homeowner who gets the cash from the token, paint companies place the token inside the paint bucket at the bottom, in a concealed packet underneath the actual paint. This is designed to ensure that the person doing the painting would be the first person to be able to access the token.
With the introduction of the token, the labourer all of a sudden saw their incentives flipped. Prior to the advent of the token, the labourer would either buy the cheapest paint or the one with the highest quality, or else a good combination of price and quality, depending on the needs and ability to pay of the person getting their house painted. Now, however, the labourer did not care about price or quality, but instead about which paint company was offering the highest redemption value for the tokens on their paint boxes. In other words, the painter was being offered a bribe.
“In other industries, you have promotions geared towards the end consumer, not the retailer. But in the paint industry that does not happen. Paint manufacturers are selling tokens, not their paint,” said Farooq Amin Sufi, Director Marketing of Master Paints, one of the largest paint manufacturers in Pakistan and the only company that does not use tokens to promote any of its products.
Tokens take over the market
Tokens were initially a secret practice used by paint manufacturers to promote their products, but quickly took on a life of their own after labourers – and some customers – became aware of their monetary value.
“It has become an alternative currency,” said Sufi. “You cannot sell paints without a token. It has become such a mafia.”
Sufi has reason to be bitter about the practice of tokens. His is the only company among Pakistan’s 16 paint manufacturers that does not use tokens in any of its products and as a result saw its business suffer. “People have told me that when they called painters and asked them about what choice of paint they should use for their houses, they were told that if they used Master Paint, it will destroy the walls of their homes. ‘There is some chemical in it that will spoil the walls.’ So painters won’t let the Master Paint to be used, just because it does not have that token worth a few hundred rupees,” Sufi said.
Sufi is being perhaps a bit glib about the value of the token to the painter. The average painter in urban Punjab makes between Rs500 and Rs600 a day, according to data from the Punjab Finance Department. A bucket of paint can have a token of Rs200, meaning that a painter can increase their average daily earnings by up to 40% by choosing a paint brand that offers a token versus one that does not offer a token.
Nonetheless, the impact of the token is massive and the signal from the painters and paint retailers and wholesalers to the manufacturers is quite clear: either offer a token, or be prepared to see your sales suffer.
“In Pakistan, there is no culture of painting your walls yourself. Most people call a team of painters and then take their advice on which paint to use. Painters have besmirched Master Paints’ brand so much in the market that dealers even stopped stocking it. However, now things are changing and I see our products in paint shops,” said Sufi.
Paint shop owners and dealers seem to have mixed views. Luqman, the owner of a two-story paint shop near Bhatta Chowk in Lahore does not have any Master Paint in stock and said that there is not that much demand for it.
“We have invested millions in [building inventory for] other products. What do we have to lose if we buy some Master Paints stock too? But there is no demand for it in the market.”
Another dealer, Haji Abdul Latif, who sells paints in the busy area of Defence Housing Authority in Lahore was of a somewhat similar opinion. “We have some buckets [of Master Paint] in our stocks but there are so many other brands with good quality as well, so we don’t get many customers asking for Master Paints.”
Painters were unambiguous in their views. Two painters taking a tea break under the shadow of a tree during a job painting a house in Lahore Cantt said: “We are using ICI on this house. It is the best and we get a token from it too. All paints should have tokens. We have to do the same amount of work with almost all brands, so what’s wrong with getting some extra money to have tea or lunch while working?”
Meanwhile, a homeowner of a 300-square-yard (10 marla) house in DHA said that he does not mind if painters keep the token. “If I force them to give that token to me, I will only have to give myself the extra hassle of having to go and convert them into cash by going to a paint shop. Furthermore, they adjust it in the wages they ask me for, or if they don’t, it’s hard to tell. It is easier this way because fighting over a Rs 200 token in a bucket costing almost Rs 10,000 is not even smart.”
Where the law stands
In 2011, the Competition Commission of Pakistan, then chaired by activist chairman Khalid Mirza, decided to take action against the practice of placing tokens that were clearly designed to benefit the labourer at the expense of the end consumer. Over a period of seven months, beginning in June 2011, almost all of the major paint manufacturers in Pakistan submitted public documents explaining their marketing practices of using tokens for the very first time.
The hearings were a fascinating insight into the corporate culture of the companies involved in the paint industry.
The most forthright was Nippon Paints Pakistan, which admitted that it started the practice in 2009, two years after entering the Pakistani market and discovering that tokens were standard market practice. They admitted that the target of the token is the painter, and not the end consumer and that the purpose is to persuade the painter to buy their paint, or recommend to the homeowner to buy their paint.
Nearly all of the local manufacturers admitted up front that it was a marketing practice born out of intense competition in the market for paint and that they would rather not use tokens to promote their business and erode their profit margins in the process. Many also gave the Competition Commission a list of the brands and sizes of paint buckets and the value of the token on each of those buckets. The numbers varied by both company and size of the bucket, ranging from Rs 20 to Rs 400 per bucket.
The one company that admitted absolutely no wrongdoing and would not even admit that the tokens had anything to do with marketing was ICI Pakistan (the paint manufacturing business of which is now known as AkzoNobel Pakistan), which claimed that the tokens were a means of trying to combat counterfeiting of their paint brands. One can practically hear the commissioners scoffing at the mendacity of that claim in the written report about the hearings.
After three hearings over a period of seven months, the Commission issued an order on January 13, 2012, and found that the use of tokens without proper disclosure constituted deceptive marketing practices, and was a violation of Section 10 of the Competition Act of 2010. The commission ordered paint manufacturers to begin prominently disclosing both the existence and the redemption value of tokens on the paint buckets. The order read as:
“The disclosure with respect to the token on the paint pack as mentioned at (i) above should be made with the use of bright/conspicuous colors distinct from the color of the packaging of the paint pack and should be printed in clear, bold and legible size.”
However as per Profit’s market research, barring multinationals like AkzoNobel (formerly ICI), Nippon and a few local companies, CCP’s order is still not being implemented in its true spirit. See the image below in which only the Paintex brand by AkzoNobel (centre image) has prominently disclosed the coupon on the top front of its paint bucket in a bright orange colour.
Other players like Brighto Paints (left image) displays it at the back of its pack and that too at the bottom of it while Diamond paints (right image) just stamps it anywhere on the pack. Both are not exactly following CCP’s directions. And then there are also those who in complete violation of the law are not disclosing anything at all.
The vicious cycle of tokens
Master Paint does not use tokens to promote its brand of paint, and Sufi claims the decision was made at least in part for ethical reasons. But he also says that another reason was that the company simply did not want to enter the race to the bottom of trying to continually increase and match token values of its competitors. And in part, Master Paint also had some luck on its side: the bulk of its sales come from enamel paint -, a category of paint in which none of its competitors uses tokens owing to its relatively lower price point – rather than vinyl or decorative that are the main products in which most companies use tokens as a selling technique.
Nonetheless, even its competitors admit that tokens are an expensive way to promote their sales. Mir Shoaib, CEO of Diamond Paints, said he agrees that using tokens without disclosing their redemption value to the end-buyer is an unethical practice. Shoaib, a religious man who is an active member of the Tableeghi Jamaat, goes so far as to refer to the practice of using tokens without disclosure as a “sinful activity”. “You see I am no Islamic scholar but the general fatwa about government orders is that one is bound to follow them unless they are against shariah. Hence we are fully disclosing the token on our packs,” he said.
Beyond the ethics of tokens, there is also the economics of the matter: tokens have become big business for painters, and the amount of money every company has to spend on tokens is growing every year, and growing faster than overall revenues. In 2002, the paints division of ICI Pakistan spent 10% of its revenues on discounts and tokens. In 2016, the successor company – AkzoNobel Pakistan – spent closer to 18% of its gross revenues in discounts and tokens. This is despite that AkzoNobel does not use tokens in most of its products, like Dulux, Enamel etc which constitute 70% of its total sales revenue.
And the amount of money involved in tokens is no small matter. In 2016, AkzoNobel estimates the total value of paint sold in Pakistan was just over Rs 30 billion (net sales). AkzoNobel and Berger Paints, both Pakistani subsidiaries of European companies and amongst the only three publicly listed paint companies on the Pakistan Stock Exchange, account for less than a fifth of that number.
The two companies spent Rs 1.4 billion and Rs 1.3 billion respectively on tokens and other discounts. Given the relatively similar or even higher levels of token redemption values used by most companies in the industry, it seems safe to assume that other companies in the industry spend at least a similar amount on their token marketing strategy. That would imply that Pakistan’s paint industry spent approximately Rs 7.3 billion in 2016 on tokens and other discounts.
Defrauding the government
Tokens are not the only questionable practice used by some of the local paint manufacturers in the country. Another common practice involves taking advantage of poorly written and poorly enforced tax rebate laws with respect to import of raw materials and export of paints to Afghanistan.
In a bid to promote Pakistani exports of value-added industries, the Musharraf Administration introduced a policy measure called the Duty and Tax Remission (DTRE) scheme in June 2001. Using a statutory regulatory order (SRO) to amend customs regulations, the government decided to allow the exporters to claim tax rebates on the value of customs duties and taxes paid on any imported raw materials used to manufacture goods for export.
The DTRE tax fraud occurs in two separate ways. The first is the more commonly known practice of over-invoicing of exports: companies claim they have exported far more paint to Afghanistan than they actually have so that they can claim a rebate on the taxes paid on a larger share of their imported raw materials.
In the second scenario, companies claim a high proportion of their most expensive imports are used to manufacture their exported products. Specifically, some companies, according to Sufi, claim that as much as 60% of the cost of the exported paint consists of the cost of titanium dioxide, a very expensive metallic ore. In reality, less than 20% of the cost of high-end paints consists of the cost of titanium dioxide.
“They then use some of that duty-free imported product in their locally sold paints as well and also sell some of it as a raw material to other local manufacturers,” said Umar Malik, CEO of Gobi Paints. “This has two effects. Firstly, it allows these paint manufacturers to produce their products at a lower cost as compared to other paint manufacturers who are importing titanium dioxide the proper way and at a higher cost due to import duties. Secondly, it also yields revenues for them as they sell it at a higher price in the local market than the cost they had to incur in purchasing it. Since many companies already understate their sales in the local market, it is not very difficult for them to brush the effect of Titanium dioxide sales under the carpet and put the revenues under export revenue category.”
Malik says that this added advantage allows such companies to fight competition more aggressively at the expense of paint companies like Gobi Paints who do not defraud the DTRE scheme by claiming a higher quantity of titanium dioxide is being used for products to be exported.
Not all players in the market agree that such a fraud is common practice, however. Commenting on the matter, an official from Berger Paints said, “That is not true. There is massive demand for Pakistan’s paint in Afghanistan.”
Diamond Paints takes pride in being fully compliant with regards to tax matters. It also claims to be the market leader with highest sales. However according to Profit’s own market research, Brighto Paints has become a clear market leader over the past few years. Diamond Paints draws its claim on the basis of sales figure reported to the Securities and Exchange Commission of Pakistan (SECP) by almost all big players in the industry.
However, CEO of Diamond Paints, Mir Shoaib, conceded that there could be at least one other company with higher sales, but it cannot claim so because its books submitted to SECP will disagree. He attributes this to tax evasion because if all the paint companies report their original figures they will have to pay a higher sales tax and then a higher income tax on the net profit.
The CEO of another paint company (speaking on condition of anonymity) said that Brighto Paints also has the largest export volume to Afghanistan and is also the most notorious for exploiting the loopholes in the DTRE scheme. “How can we compete with Brighto if it gains an unfair advantage by cheating the government,” he said.
According to him, it takes years of keeping straight books and abiding by rules if one has to move towards an IPO, which is almost impossible to find in any of the local players in the paint industry. “This business is so severely marred with unethical and illegal practices that other than AkzoNobel and two other multinational companies, none of the local players can afford to open their books to scrutiny and auditing.” He said the continuous practices of paint companies are also convoluted enough to make them unfriendly for any of the rules and regulations binding publicly listed companies.
Despite an overall unconcerned attitude of FBR, the government did take notice of one, Sika paint industry (manufacturers of Sparco Paints) around two years ago. The FBR raided the offices of the paint company and confiscated computer system and manual records of sales etc. They found discrepancies worth Rs 429.15 million in sales tax alone. According to official documents, Sika Paints Company had 15 accounts in various banks but had revealed only one account to the FBR. On top of this, the company’s director had 31 accounts in various banks with a total amount of Rs 0.7 billion, kept in different timings. However, as per reports, the matter was settled after the company quite conveniently paid only a small part of the amount the FBR had demanded.
The broader malaise
Regardless of the specifics of how precisely some paint manufacturers are defrauding consumers and tax authorities, the more depressing reality is the fact that, when faced with stiff competition, rather than investing in research and development, and seeking to innovate their way into making a higher quality product at a lower cost, too many companies in Pakistan look to deceptive market practices as a means to gaining a competitive edge.
For much of the past year, the country has been enthralled by the Panama Papers case, where documents uncovered by the International Consortium of Investigative Journalists (ICIJ) revealed the existence of offshore companies owned by the families of powerful Pakistani politicians, including the Prime Minister, as well as powerful businesspersons.
The entire media was whipped into a frenzy about corruption at the highest levels of Pakistan’s government and economy. Yet as the example of the paint industry suggests, at some level, we are all complicit in the system of questionable business tactics and transactions, from the daily wage labourer all the way through to the Prime Minister’s office.
The rot, in other words, goes far deeper than one court case, and will probably take far more to fix than one guilty verdict.
Editor’s note: Ejaz Ahmad Sikka, Chairman Brighto Paints was unavailable for comment.