Hypothetically, we may ignore ‘leakages’ such as rescheduling and duplicate leasing. The aggregate figure for ‘Investment in Leasing’ for the leasing sector in Pakistan has been ranging between PKR18bn to PKR25bn over the past three years. We do not have statistics regarding the exact percentage of new investment in plant and machinery or other income generating assets. I think I can safely estimate about 90% of the AIL is plant and machinery.

Of-course, the AIL is only indicative of new capital investment if compared with the same over the previous year. A fairly rough estimate of incremental capital investment would therefore be an average of Rs3billion per year. This does not mean all new investment in a year. That would be much higher since part of the AIL would be paid back, depending on the life of the lease contract.

The cost of leasing for a Pakistani lessee averages around 20-25% per annum. The effective cost for a tax-paying lessee may be 16-20%. Assuming an 18% cost of capital (weighted average) for the lessee, the asset can only generate a net income for the lessee, if the lessee in turn earns at least 19-21% per annum from the asset. This would only be possible in high growth sectors of the economy. In my experience, it is rare to see a gross profit margin of 20%, especially in the manufacturing sectors who are the prime clients for leasing Plant and Machinery. The obvious and glaring fact seems to be that the biggest market of leasing cannot afford the product. The question then remains, “who is able to buy?” The other target markets of leasing are commercial-trade/service enterprises and small pockets of manufacturers. Commercial-trade/service enterprises for obvious reasons do not invest in capital machinery. Small pockets of manufacturers boil down to the ubiquitous multinational or the established Pakistani Group who invests in a new project or modernizes existing operations. The reason why this market may find leasing cost effective is because their overall cost of capital is effectively low enough to absorb the cost of leasing; in effect they use an already cash rich company/division to finance a new venture. The other possibility is that the new project has foreign equity interest, which acts as a source of comfort for the Pakistani lessor and provides support for import costs. A third reason for choosing leasing is as hedge against investing equity. In a macro-economic scenario where debt is the lynchpin of most investment, an investor would like to reduce the risk of investing equity.