Please contact fp@technomics-international.com.com for more information.

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3. Table of Contents
1 – Executive Summary…………………………………………………………………………..............5
2 – Introduction……………………………………………………………………………………………….8
3 – Background……………………………………………………………………………………………….9
4 – Research Design and Study Objectives……………………………………………………………14
5 – Understanding and Mapping of Revenue Recognition and Reporting Systems..………..16
6 – Pakistan’s IT Market and Revenue Estimates…………………………………………………….35
7 – Conclusions and Policy Recommendations ……………………………………………………....45
8. Appendices
A – LIST of Interviewees: PSEB MEMBER COs CEOs and Executives…………………………..48
B – LIST of Interviewees: IT USER COs / CIOs and IT Directors…………………………………..49
C – LIST of Interviewees: MNC Country Heads……………………………………………..............50
D – LIST of Interviewees: IT Policy Makers and Decision Leaders……………………………….50
E – PSEB IT Market and Revenue Estimation Study – PSEB Member Survey………………..51
F – PSEB IT Market and Revenue Estimation Study – CIO Survey……………………………….52
G – RBI’s Software and Information Technology (IT) Services Exports: Survey……………..53
H – Note on Reconciliation of RBI Survey Data with SOFTEX & NASSCOM DATA…………58
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4. List of Figures and Tables
1. Table 1.1: Software export / BPO estimates by various sources (and studies)
2. Table 1.2: “In sample” estimates and population corrections for industry software / BPO revenues
3. Figure 3.1: The data needs of a three-tiered evidence-based policy-making process
4. Table 3.1: Proportion of India’s IT exports using WTO Modes 1 to 4 for Trade in Services
5. Figure 3.2: Differences in the BPM5 and BPM6 (2008) or MSITS (2002) Definitions of Software
6. Table 3.2: Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in Services
7. Figure 4.1: A graphical representation of the work plan
8. Table 5.1: A Glossary of Different Software / IT Market Estimates
9. Table 5.2: State Bank’s trade in services BPM5 figures for ICT related categories
10. Figure 5.1: Graphical extract from Bearing Point Report
11. Table 5.3: Pakistan IT export earnings FY05
12. Table 5.4: Estimated domestic IT revenue, FY05
13. Table 5.5: Comparison of IT revenue, personnel & bandwidth – Pakistan, India
14. Figure 5.2: Pakistan’s IT Spend and Global Revenue Impact
15. Figure 5:3: Flow chart representing revenue recognition process
16. Figure 5:4: Graphical representation of the “R” form
17. Figure 5:5: Graphical representation of RBI’s “SOFTEX” form
18. Figure 5.6: Survey on Computer Software and Information Technology Services Exports 2007-9
19. Figure 5:7: Enterprise Ireland’s estimates of Irish software industry
20. Figure 5.8: Forfás Annual Survey 2008
21. Figure 5.9: Forfás Annual Business Survey Table B1–Total sales of Irish companies 2000-8
22. Figure 5.10: Forfás Annual Business Survey Table B3–Total exports of Irish companies 2000-8
23. Figure 5.11: Forfás Annual Business Survey Table D12–Direct expenditure in Irish Economy 2000-8
24. Figure 5.12: Forfás Annual Business Survey Table D1 – Total sales from all companies 2000-8
25. Figure 6.1: Sectoral classification of Pakistan’s IT (software / BPO) market
26. Figure 6.2: Pakistan’s IT (software / BPO) market – IT / Software classification
27. Figure 6.3: Pakistan’s IT (software / BPO) market – IT-enabled services classification
28. Figure 6.4: Impact of the 2007 recession on total revenue and spend of Pakistan’s IT industry
29. Figure 6.5: Total full-time employment in Pakistan’s IT industry
30. Figure 6.6: Product – service profile of Pakistan’s industry
31. Figure 6.7: Sectoral breakdown of total global revenues of Pakistan’s IT industry (2008)
32. Figure 6.8: Sectoral breakdown of export and domestic revenues and spend of Pakistani IT Cos.
33. Figure 6.9: Sectoral breakdown of global revenue growth of Pakistani IT Cos. (FY 06 & 08)
34. Figure 6.9: Sector-wise breakdown of global revenue growth of Pakistani IT Cos. (FY 06 & 08)
35. Figure: 6.10: Global revenue of Pakistan’s IT industry by product-service category, platform, tool
36. Table 6.1: “In Sample” estimates of Global Revenues and Domestic Revenue and Spend
37. Table 6.2: Proportion of companies of various sizes within the sample and their median revenues
38. Table 6.3: Corrected global and domestic revenues and spend of Pakistan’s IT industry
39. Table 6.4: “In Sample” and population estimates of global revenue and domestic revenue-spend
40. Table 6.5: “In sample” estimates and population corrections for industry software / BPO revenues
41. Table: 6.6: Estimated size of domestic and export revenues for 2008, 2009, and 2010
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5. List of Abbreviations
ABSEI Annual Business Survey of Economic Impact
AD Authorised Dealers
BOP Balance of Payment
BPM Balance of Payments Manual
BPM5 Balance of Payments Manual version 5
BPM6 Balance of Payments Manual version 6
BPO Business Process Outsourcing
CEO Chief Executive Officer
CIO Chief Information Officer
CSO Central Statistics Organisation (of Ireland)
DOE Department of Electronics (India)
DRS Domestic Revenue and Spend
ERP Enterprise Resource Planning
FBR Federal Bureau of Revenue
FBS Federal Bureau of Statistics
FEMA Foreign Exchange Management Act
FTE Full Time Equivalent
GAO Government Accounting Office
GATS General Agreement on Trade in Services
ICT Information and Communications Technology
IMF International Monetary Fund
IS Information Systems
ISA Irish Software Association
ITRS International Transactions Reporting System
ITES IT Enabled Services
MOITT Ministry of IT and Telecom
MSITS Manual on Statistics of International Trade in Services
NASSCOM National Association of Software and Services Companies
NSC National Statistics Commission (of India)
PRAL Pakistan Revenue Automation Ltd.
PSEB Pakistan Software Export Board
PTA Pakistan Telecommunications Authority
P@SHA Pakistan Software Houses Association for IT and IT Enabled Services
RBI Reserve Bank of India
SBP State Bank of Pakistan
SEI Services Exports and Imports
SME Small and Medium Enterprises
STPI Software Technology Parks of India
USD United States Dollar
WTO World Trade Organisation
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6. 1 – Executive Summary
While Pakistan’s software and IT Industry is now more than a decade and a half old, it has so far lacked
authentic and credible data necessary to evaluate its performance of the industry and benchmark it
against similar industries around the world. This data deficit constrains our ability to design policies and
initiatives necessary to help the industry move forward. In particular, the issue of arriving at the overall
size and revenues of the industry has long been mired in some controversy.
The primary reason for the ambiguity is that several sources that seek to calculate these data use
different definitions of what is being measured, how it is being measured, and what the relevant
population is. In addition, they adopt different methodologies for measuring these data.
Thus far, the government has used State of Bank of Pakistan’s (SBP) balance of payment (BOP) figures
on trade-in-services compiled through its authorised agents (ADs) against the foreign exchange receipts
as the only “official” estimate of the country’s software / BPO exports. Other sources, such as Pakistan
Software Export Board (PSEB), Pakistan Software Houses Association (P@SHA), among others, have also
put forward other estimates based on a variety of methodologies, namely, “rules of thumb”, multiples,
and survey-based extrapolation etc. The figure below presents the variety of sources and estimates for
software / BPO exports:
Revenue Estimate Source Software / BPO Export Estimate and Year Methodology
State Bank of Pakistan 2009 – Software: $115.95m, Call Centre: $17.52m Compilation of BOP data
PSEB 2005 2004 – Software: $81.5m (SBP for 2004 = $32m) Survey based extrapolation
Bearing Point 2005 2005 – IT/BPO Export: $100m (Total: $700m) Multiples and Rules of Thumb
1
PSEB 2006 2006 –Export Earnings: $150m (Global: $600m) Rules of Thumb
2
P@SHA 2008 2007 – Export Earn/Spend: $269m (Global: $640m) Survey based extrapolation
Gartner 2008 No independent estimate N/A
Source: Technomics Compilation
Table 1.1: Software export / BPO estimates by various sources (and studies)
The difficulty in accurately assessing software / BPO exports comes from the unique nature of the
service being exported. Software, unlike other goods and services, does not require an entity to navigate
national borders. A mere click of a keyboard can transfer a software service to another country without
the knowledge of relevant authorities. These challenges have recently been the subject of several
regulatory changes championed by multilateral institutions like the WTO (through guidelines on Mode 3
and 4 trade-in-services) and IMF (through its Balance of Payment Manual – ver. 6).
In order to resolve this quagmire, this study looked at a set of peer countries with similar aspirations for
software / BPO exports, namely, India and Ireland, to assess how other countries deal with the challenge
of creating reliable and consistent software / BPO export figures. Several important themes emerge
from this analysis:
First, in both India and Ireland, the primary source of software export data used for policy-making
purposes comes from self-reported survey data collected by an independent public, semi-public, or
private entity with credibility and integrity. In the case of India, an attempt to use Reserve Bank of
1
PSEB 2006 estimated the overall Pakistani IT Market to be at $2 billion.
2
P@SHA 2008 estimated the overall Pakistan IT Market (Hardware & Software) to be between $1.7 – 2.25 billion.
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7. India’s (RBI) BOP figures, initially, ultimately gave way to the institution of an independent survey now
being carried out by RBI.
Second, in both India and Ireland, the data collected through the surveys is then corrected for non-
response biases before being presented to an outside audience. The response rate for Indian RBI
survey is about 16% (993 of 6140 firms responding) while that of the Irish Forfás Survey is much higher
(around 50%). This is broadly in line with the practice deployed in PSEB 2005 and P@SHA 2008 surveys.
Regardless of which way to minimize and correct for the non-respondent bias, however, the analysis
of peer countries suggests that direct survey of software / BPO companies is the only credible way to
capture software / BPO export data.
In order to develop and test a similar measure for software / BPO export revenues, Technomics carried
out a new survey of PSEB Member Companies involved in export of software and BPO products and
services. We applied three different approaches for correcting for non-response bias to the survey data
to arrive at overall figure for the entire industry. Results are compiled below:
Global Population Correction Domestic Population
Revenue for Global Revenue Revenue Correction for
[Sample] [Sample] Domestic Spend
Stratified Medians Correction $332.0m $429.93m $129.31m $263.99m
Modified “80:20” Method $332.om $157.00m $129.31m $96.51m
India (RBI) Model $332.om $137.19m $129.31m $119.97m
Stratified Medians Correction $761.93m $393.30m
Modified “80:20” Method $489.83m $226.57m
India (RBI) Model $469.19m $249.28m
Source: Technomics Estimates [2010]
Table 1.2: “In sample” estimates and population corrections for industry software / BPO revenues
Clearly, these figures are based on the assumptions that are made about the characteristics of the non-
respondents. On the whole, though, the estimates suggest upper and lower limits on Pakistan’s
software / BPO global exports revenues to be between $761.93 million and $469.19m respectively and
domestic revenue and spend to be between $393.3million and $249.81million respectively.
Technomics recommends the constitution and deployment of such a population census on a regular
basis to provide better and more refined approaches to correct for non-response biases within limited
sample surveys.
The importance of quality and reliable data on Pakistan’s software / BPO industry, in particular, and the
overall IT market, in general, is well-established. Several important policy conclusions and
recommendations result from the above analysis:
Technomics believes that the Government of Pakistan’s practice of using SBP’s Balance of Payments
data as the official figure for the country’s software / BPO exports is seriously flawed and has no
serious parallels in other countries around the world.
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8. To that effect, Technomics recommends:
Recommendation 1: PSEB undertake an educational and awareness building exercise through
meetings and briefings to government leaders, policy-makers, senior bureaucrats, as well as domestic
and external stakeholders to build support for the creation of an independent revenue capture and
reporting system.
Recommendation 2: PSEB, in consultations with MOITT and other agencies of the Government of
Pakistan (e.g. State Bank of Pakistan, Statistics Division, Ministry of Finance, Ministry of Planning etc.)
formulate a Task Force to study and deliberate upon the challenges of setting up a broader and more
comprehensive survey-based system for capturing and reporting software / BPO industry export
revenue.
Recommendation 3: PSEB must follow the examples of India and Ireland to develop an independent
capability to capture primary data from software / BPO companies through an annual census of
software / BPO companies within Pakistan.
Recommendation 4: As an interim measure, PSEB may use its annual membership application form to
collect limited population information that may be used for error correction in subsequent sample
surveys. It is also recommended that the Government make it mandatory for software / BPO
companies seeking to avail the tax holiday to register as a PSEB member.
Recommendation 5: PSEB must work with relevant government entities (such as MOITT and Ministry
of Finance etc.) to institute policies that would encourage software / BPO companies to declare
truthfully and bring a greater share of their revenues within the country.
Pakistan Software Export Board (PSEB), as the key beneficiary of the process, has a critical role to play in
convening this coalition of partners from across the public, non-profit, and private sector divide.
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9. 2 – Introduction
While Pakistan’s software and IT Industry is now more than a decade and a half old, it has thus far
lacked authentic and credible data necessary to not only evaluate the performance of the industry and
benchmark it against similar industries around the world but also design policies and initiatives
necessary to help the industry move forward.
There have only been a few attempts to systematically study the state and evolution of the Industry so
far. Studies that have sought to document the industry with varying degrees of accuracy and
comprehensiveness include, among others:
• 2003-4 PSEB Best Practices Study of Pakistan’s Software Industry;
• BearingPoint ITES-BPO Study of 2006;
• 2007-8 P@SHA’s Annual Review of Pakistan’s Software Industry; and
• 2009 Gartner Study of IT Industry in Pakistan.
These studies vary in their coverage of industry’s various segments and sectors and the type of data
they collect. In addition to these more systematic efforts, a number of other “informal” approaches
have also been made to try to size the software / BPO exports from Pakistan.
Collectively, through these efforts, there is now a growing volume of credible baseline data on certain
aspects of the industry’s performance and structure. However, estimates of the overall size and
revenues of the industry is still mired in some controversy. The primary reason for this ambiguity is
that several sources that seek to calculate these data use different definitions of what is being
measured, what the relevant population is, and also adopt different methodologies for measurement.
For instance, State Bank of Pakistan is able to ascertain – with fair degree of accuracy – the imports of
software by major government departments and large public and private organizations across the
country as well as the IT/ITES export revenue earned and repatriated back to Pakistan by the IT
companies. These statistics are published in SBP’s quarterly and annual balance of payment figures.
PSEB has, in the past, used a “rules of thumb” approach to calculate industry revenues that put the
overall size of the software industry in the $2.2 billion ballpark. P@SHA, on the other hand, has carried
out an extensive data collection exercise of its membership and arrived at a revenue estimate of $1.0
(plus) billion in domestic IT expenditures and sales and another $1 billion (plus) in global revenue impact
of its member countries.
This lack of credible and consistent data on the software and ITES industry in Pakistan not only
hampers the policy making process but also affects the industry’s own ability to market itself
competitively against other similar industries around the world and the firms’ ability to plan product
development decisions well in advance based on realistic and actionable market estimates.
A Better understanding of Pakistan’s IT Market – export and domestic – will require the creation of an IT
market revenue classification system that may be used to accurately estimate the size and nature of the
demand and supply of IT products within and from Pakistan. This analysis must then become the
backbone for a nation-wide policy-making process that would use real and credible data for developing
a refined case for public policy support for IT and software industry in Pakistan. It will also provide useful
and credible “market signals” to new start-ups seeking to enter the market and the more established
ones in planning new product and service rolls-outs. This study takes a deeper look at the problems
and challenges of calculating industry revenues and seeks to make recommendations to develop
better estimates.
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10. 3 – Background
One of the primary challenges of policy-making for the IT Industry in Pakistan is the absence of credible
and reliable industry data across the entire software industry value chain including inputs (e.g. human
resources, employment etc.), outputs (revenues distributions by sectoral and technology categories
etc.), and outcomes etc. The absence of credible data on the industry outcomes of interest results in a
critical weakness in the policy-making processes thus hampering the use of evidence-based policy
practices in the first place and limiting the ability to improve upon the policy and programme design
once a policy regime has been put into place.
Another critical gap that may result from lack of credible data is the inability to clearly define a
coherent, cogent, and defendable case for public policy support of the software industry. This becomes
particularly important in times of economic recessions when government revenues are already declining
and all public expenditures are under increased scrutiny for effectiveness and ability to deliver public (or
private) returns. Under these circumstances, credible data on industry inputs, outputs, and outcomes
can provide the necessary basis to develop a case for public support for the industry.
3.1 – The need for credible data for evidence based policy
Well designed and executed policy programmes are developed on the basis of due and appropriate care
in carrying out upfront analysis and assessment, evidence-based policy design, and seamless
implementation with key stakeholders on board. Policies and programmes designed with detailed
planning, analytical rigor, and a high implementation focus are most likely to deliver best results.
A well crafted evidence-based policy is often a result of an iterative process that begins with a detailed
situational assessment that collects data, from both a market and a policy standpoint; develops a broad
national policy outline that draws from or builds upon the support of key stakeholders; and then
formulates specific detailed policy packages within key focus areas leading to implementation. The
following figure provides a graphical depiction of the three-step evidence-based policy-making process:
Detailed Dubai Framework
Broad National Specific Detailed
Situational Policy Outline Policy Packages
Assessment (Case for Public Support)
Market Side: -Stakeholder exercise to ascertain -Detailed analysis of individual
objectives and thrusts policy instruments and packages
-Revenue Assessment (e.g. HR, Certifications, Marketing
-International policy benchmarking and Branding, IT Parks,
-Strategic Market Analysis and
Opportunity Assessment -Preliminary review of policy costs Procurement, etc.)
and benefits -Detailed cost and benefit and
-Opportunities and Trends Analysis
-Creation of an Evidence-based impact analysis of individual policy
policy package / regime instruments
Policy Side: -Broad National Policy Outline - Detailed design of policies and
-Policy and Programme programmes
-Stakeholder buy-in and
Effectiveness Assessment implementation plan -Detailed implementation plans for
- Cost and Benefit Analysis policies and programmes
Figure 3.1: The data needs of a three-tiered evidence-based policy-making process
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11. The critical issue of collecting accurate and credible data is thus central to creating a case for public
support for IT industry and the aspiration of developing evidence-based policy in Pakistan. This critical
issue suffers from lack of coherence and coordination between various agencies that collect data for a
variety of reasons.
As things currently stand, the primary responsibility of collecting accurate IT / ITeS export data in
Pakistan seems to be that of the State Bank of Pakistan (SBP) which compiles this balance of payment
(BOP) data from the banks under a policy framework that requires IT / software companies to register
with the State Bank for the purpose of retaining part of the foreign exchange that they bring within the
country. In the past, State Bank has, on the request of MOITT / PSEB, shared the export revenues of the
top-10 companies in the country for the purpose of distributing export awards and trophies to the same.
However, SBP’s mandate for collection and dissemination of this data is limited.
SBP is facilitated – to varying degrees – by other entities such as Federal Bureau of Statistics (FBS),
Federal Board of Revenue (FBR), Pakistan Revenue Automation Ltd (PRAL), Ministry of IT and Telecom
(MOITT) etc. These entities, especially the SBP, have continually recorded revenues that are much less
than the estimates put forth by PSEB and P@SHA. There have been instances in the past where
discrepancies have been identified in the classification systems and processes that are used by these
entities and were ultimately corrected. However, considerable gap remains between what these official
entities – most notably SBP – report and what is put forth by PSEB and P@SHA.
Further confusion is added to the mix by a number of figures floating around the media that are
produced and used by leading private data collection entities such as Gartner, IDC, CIO etc. These figures
use formula-based approaches and hence may be even less accurate. Finally, countries like India that
may use indigenous, sometimes controversial, methodologies to report industry revenues further
distort the already complex picture and create an incentive to over report.
The lack of credible revenue data on the overall industry as well as various sub-classifications and
categories and a method to produce figures that are comparable with other similar industries around
the world is a major hindrance to strategic planning and policy-making, on the one hand, and public
relations, marketing, and branding of the industry, on the other hand.
3.2 – Challenges in IT market and revenue classification and estimation
Calculating software / BPO revenues is an accounting challenge, Trade-in-services is much harder to
monitor than trade in physical goods. Physical goods pass through air, sea or land ports, and are
accompanied by detailed financial and other documentation. Services trade, on the other hand, can be
transacted over the Internet, through post, or through travel of personnel, with revenue flowing into
company or personal accounts, which can exist anywhere in the world. The problem is even starker
when we consider software services as these are even harder to track and account for.
The World Trade Organisation (WTO) through its General Agreement on Trade in Services (GATS) seeks
to mitigate this problem by prescribing four-mode model aimed at capturing trade in services. In
addition to the two usual modes of trade employed by physical goods, the World Trade Organization
(WTO) lists Mode 3, revenue generated by commercial offices overseas, and Mode 4, compensation
received by temporary workers who have travelled abroad, as export revenue streams which must be
included in trade revenue calculation. There is also strong evidence to suggest that other countries, such
as India, in fact employ global services export figures when reporting or estimating revenue. The four
modes of trade are summarised in the figure below:
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12. India’s IT Exports using WTO Modes 1 to 4 of Trade in Services
WTO-Mode Description Indian Share of Software for FY2007
Mode 1 Cross Border Supply 60.4%
Mode 2 Consumption Abroad 0.6%
Mode 3 Commercial Presence 13.9%
Mode 4 Presence of Natural Persons 25.1%
Source: RBI - Survey on Computer Software and Information Technology Services Exports 2007-08
Table 3.1: Proportion of India’s IT exports using WTO Modes 1 to 4 for Trade in Services
Clearly, including Mode-3 and 4 within the software / BPO revenue estimation makes considerable
difference to the final figure.
An additional twist to the story comes through the introduction of several versions of the Balance of
Payment (BOP) Manual (BPM) of the International Monetary Fund (IMF) and the calculation of
computer services revenues according to the activities allowed with these two different versions,
namely, BPM5 and BPM6 (also known as MSITS). The BPM6 / MSITS allows the inclusion of hardware,
computer facilities management, and a range of consultancy services (including disaster recovery
services and consulting) within the activities allowed over and above those allowed by BPM5. The
definitional differences are produced below:
Figure 3.2: Differences in the BPM5 and BPM6 (2008) or MSITS (2002) Definitions of Software
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13. State Bank of Pakistan (SBP) currently calculates its balance of payments (BOP) figures on the basis of
BPM5. The Reserve Bank of India (RBI), on the other hand, uses BPM6 / MSITS for its BOP calculations.
This, according to PSEB, creates a major discrepancy in the figures of SBP and RBI:
“The State Bank of Pakistan in its statement for the year 2008-09 reports the export figures of
software and IT-enabled services to be US$ 201 million which shows a consistent annual
growth. State Bank of Pakistan adopted BPM 5 reporting system to report the IT exports
revenue, which restricted the export figures to US$ 201 million only in 2008-09. In India, the
Reserve Bank of India follows the BPM 6 (also called MSITS) Reporting System, which raises
its exports to billions of US dollars. BPM 6 includes sales to multinationals, earning of overseas
offices & salaries of non-immigrant overseas workers to export revenue. Using the MSITS
Reporting System, Pakistan IT Industry exports are estimated at US$ 1.4billion while the
industry size is estimated at US$ 2.8 billion.”[Source: PSEB Website]
The essence of PSEB’s claim is that the use of BPM5 vs. BPM6 reporting system creates a discrepancy of
about 7 times in the software export revenues reported by State Bank of Pakistan. This is an
unsubstantiated claim and the mistake here, we believe, is to confuse the BPM6 with the WTO Mode 3
and 4 mechanisms which are two entirely different constructs put forth by two different entities.
PSEB goes further to claim that using the WTO Mode 3 and 4 mechanisms for trade-in-services will
result in the country’s exports to $1.483 billion:
Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in Services
Mode Description IT Exports ($)
1 Represents services that are sold by the exporting country 242m (16.3%)
to the importing country, with only the service crossing
Cross Border the border e.g. architectural drawings sent by courier,
consultant report sent by email, call centre support
provided over the Internet, or software programs sent
over the Internet.
2 Represents services sold in the exporting country to 300m (20.2%)
foreigners or foreign-owned entities in the exporting
Consumption country itself e.g. IT services sold to the World Bank, the (Average USD 250,000
expenditure by over 800
Abroad USA embassy or to one of the 700 multinational
companies operating in Pakistan. entities)
3 675m (45.5%)
Represents the revenue of national firms established
Commercial
abroad, selling services in a foreign market.
Presence
4 Represents services that are sold or delivered through the 266m (17.9%)
presence of the service provider temporarily in the foreign
Temporary market e.g. the annual salaries of all H-1, L-1 and B-1 (At least 5000 workers
earning at least USD
Movement Pakistani IT workers in the USA.
40,000 per year on
average)
Source: PSEB Website, 2010
Table 3.2: Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in Services
These figures are clearly “guesstimates” rather than actual estimates of balance of payments or trade-
in-services for Pakistan’s IT industry. The corresponding figures for India, as per RBI’s latest
12

14. reconciliation attempt, are: Mode 1 (60.4%), Mode 2 (0.6%), Mode 3 (13.9%), and Mode 4 (25.1%). It is
worth noting here the wide discrepancies in at least two of the four Modes, namely, Mode 2 and 3. The
respective percentages for Modes 2 and 3 for Pakistan and India are 20.2% and 0.6% (Mode 2) and
45.5% and 13.9% (Mode 3) respectively. The differences are unexplainable even if one takes into
account the differences in the structure of the Pakistani and Indian software industry. There is clearly
something amiss here.
Although these multiple frameworks and revenue recording and assessment approaches are partly
introduced to adapt to the changing nature of the software / BPO work and trade in services around the
world and to make the reporting of data more harmonised and consistent, they clearly introduce a lot of
complexity and confusion within the debate.
Rectifying these discrepancies in the accounting of the software / BPO export revenues would lead to
better information that may be fed into evidence-based policies focussed at these sectors.
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15. 4 – Study Objectives and Design
The objectives of the study, as defined in the Terms of Reference document, are as follows:
• To better understand the prevalent practices, methodologies, and processes of recognizing
revenues from export of IT/ITeS industry – especially software services industries – from
multilateral institutions (such as WTO and IMF) and countries (such as India, Ireland etc.);
• To map the process of recognising revenue by the State Bank of Pakistan through its official
“balance of payment” figures for trade-in-services and speculate on the causes for discrepancy
between PSEB estimates and SBP official figures; and
• To make recommendations to improve the accuracy of software services export revenue
recognition and recording through modifications in existing data collection systems in
Pakistan.
In line with the above objectives, a three pronged strategy was adopted:
Task 1: Understanding and Mapping of Revenue Collection and Reporting Systems
In the first phase, Technomics sought to better understand, map, and benchmark IT revenue recording
and data collection in Pakistan including IT revenue collection mechanism currently used by the SBP and
elsewhere. This analysis focussed on identifying the sources of discrepancy in the figures put forward by
different entities and explaining the reasons for the same. In addition, a benchmarking exercise was
carried out for peer group of countries, namely, India and Ireland to better understand how these
systems function in these countries and to draw lessons for Pakistan.
The key methodological approaches used in this analysis were data collection, analysis, and synthesis
through desk research, literature review, and policy benchmarking analysis.
Task 2: IT Market Revenue Classification and Estimation
In the second phase, Technomics sought to collect IT market revenue data – including domestic and
export revenues – on Pakistani software, IT, and IT-user companies and public sector organizations to
create a comprehensive and credible picture of the country’s total IT spend and revenue across various
categories. These data were then extrapolated to account for non-response bias to arrive at an estimate
for the overall IT market.
The key methodological approaches used for the above analysis was survey research followed by
qualitative interviews with CEOs and CIOs of the development and user communities respectively.
Task 3: Recommendations for Public Policy
In the third phase of the study, Technomics made recommendations to improve the quality and
coverage of the data collected to enable relevant government departments and ministries to
make policies that informed and driven by accurate data on the industry.
14

16. The figure (below) presents a diagrammatic representation of the work plan carried out to achieve the
above objectives along with aims, key activities and deliverables for each phase of work:
Task 1 Task 2 Task 3
Understanding and Pakistan IT market Recommendations
Mapping of Revenue Revenue Classification for Public Policy
Reporting Systems and Estimation
Aim: To better understand Software Aim: to create a IT Market Revenue Aim: To make recommendations for
/ IT revenue recording and Classification and Estimation System public policy to enhance the accuracy
estimation systems in Pakistan (e.g. and create estimates of domestic IT of recording software / BPO / IT
by SBP, PSEB, and others) and spend and export revenues for revenue for evidence-based public
comparable peer countries Pakistan policy design and execution
1A: Understand Pakistan’s 2A: Developing a revenue 3A: Develop estimates of
Software / BPO / IT revenue classification system to record Pakistan’s Software / BPO / IT
recognition system(s) Software / BPO / IT revenue Market using most appropriate
• Understand and Map SBP’s • Develop a revenue classification mechanisms
recognition of BOP (BPM5) model drawing upon industry • Develop an estimate of Pakistan’s
software exports figure sectors, platforms-tools, developer software / BPO market (domestic
• Understand alternate revenue vs. user distinctions and foreign) using different
figures put forth by other entities • Incorporate WTO / BPM5 or BPM6 approaches
including NASSCOM, BPM6 considerations in the revenue
approaches classification scheme
• Identify possible problems and • Pilot test the system
bottlenecks with each.
2B: Surveys and Interviews with 3B: Recommendations for Public
1B: Understand Software / BPO
leading Pakistani Software / Policy to enhance the accuracy
/ IT revenue recognition in a
BPO / IT companies to of recording software / BPO /
peer group of countries
estimate current market and IT revenue
• Understand the Software / BPO future direction • Make recommendations for public
revenue recognition approaches
• Surveys and interviews of 50-70 policy to help improve the software
used by peer countries
largest software / BPO companies / BPO revenue recognition system
• Identify possible options for in Pakistan in Pakistan
Pakistan for improving its software
• Surveys and interviews of top-50 • Make policy recommendations for
/ BPO revenue recognition
leading IT users in Pakistan Encouraging software / BPO
process.
companies to bring money into
Pakistan.
Deliverables and Outcomes: A Deliverables and Outcomes: A Deliverables and Outcomes:
clearer understanding of Pakistan’s new revenue classification and A set of policy recommendations to
Software / BPO revenue recognition estimation approach along with first allow PSEB to improve the quality and
system. set of data to populate it. coverage of software / BPO revenue
data available to it.
Figure 4.1: A graphical representation of the work plan
The following chapter presents the findings.
15

17. 5 – Understanding and Mapping of Software / BPO Revenue
Reporting Systems
This chapter looks at various software / BPO export revenue reporting systems and mechanisms being
used within and outside Pakistan. In section 2.2, we looked at the challenges of recording software /
BPO revenues and the confusion and complexity created by various schemes and mechanisms, namely,
BPM5 and BPM6 of the IMF and Modes 3 and 4 of Trade-in-Services of the WTO.
In the sections that follow, we will look at various other estimates of Pakistan’s software / BPO export
figures that have been put forward and discuss the relative merits and demerits of each. We will then
seek to carefully understand and map the software / BPO revenue recognition system used in Pakistan
and compare this with two comparable peer countries, namely, India and Ireland.
5.1 – Past Efforts at Estimating Pakistan’s IT market and Software Export Revenue
Primarily because of the relatively nascent software / BPO industry but also owing to the challenges of
estimating the software / BPO services revenues outlined above, the estimates of the overall size of
Pakistan’s IT and BPO industry vary considerably. In addition to the current PSEB position 3 that uses
BPM6 (MSITS) method for calculation of industry revenues, a number of studies have attempted to
develop estimates of the software / BPO revenues using a number of different methods, namely, “rules
of thumb” to estimate various components of the overall revenues, multiples from comparable
countries to estimate demand, and systematic data collection at the company level to create an
estimate of market size.
In this section, we will review and illustrate five of these approaches and evaluate the relative merits
and de-merits of each. The following chart provides some key characteristics of these estimates:
Estimate / Entity Estimates Mechanisms Used
State Bank of Pakistan Trade in Services – 5 classes of IT BOP estimates under BPM5 reported by
[SBP, 2010] products services Authorised Agents (Banks) on Form “R”
Software Best Practices Software Export Revenues of 60 Survey Questionnaire – Self reported
Study [Technomics, 2005] firms surveyed categorical data
Bearing Point Study Domestic and Export Revenues of “Bearing Point Analysis”, Rules of Thumb,
[Bearing Point Inc., 2006) IT/BPO and PSEB/P@SHA data
PSEB Concept Note Domestic IT market and Software Rules of Thumb and Multiples of
Export Revenues Comparables Analysis
[PSEB, 2006]
P@SHA Annual Review Global Revenue Estimates and Survey Questionnaire – Self reported
2008 [Technomics, 2008] Domestic IT Spend of 85 cos. categorical data, some estimates
Source: Technomics Compilation
Table 5.1: A glossary of different software / IT market estimates
3
http://www.pseb.org.pk/item/industry_overview available on PSEB Website (accessed: June 21, 2010)
16

18. Each of these five estimates is being described below in some detail.
5.1.1 – State Bank of Pakistan (SBP)
The State Bank of Pakistan collects data on Pakistan’s trade in services under different trade accounts
using the Balance of Payment Manual 5 (BPM5) classification methodology. Under this, two heads are
particularly relevant, namely, communication services which includes, among others,
telecommunication services and call centres (since FY07) and computing and information services which
includes, among others, hardware consultancy services, software consultancy services, repair and
maintenance of computers, export of computer software, and other computer services. The following
table describes the position under each of these heads for the last 5 years (FY05 to FY09).
Trade in Services Account / Exports $m FY05 FY06 FY07 FY08 FY09
Communications Services 333.85 197.87 122.89 117.02 195.57
9101-Telecommunications Services 330.85 195.96 110.94 99.79 117.04
9102-Call Centres - - 10.242 14.097 17.52
Computing and information Services 47.35 72.24 104.09 154.02 183.82
9181-Hardware Consultancy Services 0.407 1.20 1.44 0.89 2.09
9182-Software Consultancy Services 10.16 18.14 20.56 28.14 25.09
9183-Repair & Maintenance of Computers 0.187 0.11 0.039 0.15 0.41
9184-Export of Computer Software 32.13 46.39 73.02 100.69 119.95
9185-Other Computer Services 4.08 5.93 8.63 21.76 34.93
Total Exports within Select Categories 46.97 71.79 103.71 151.65 182.49
Table 5.2: State Bank’s trade in services BPM5 figures for ICT related categories [Source: SBP, 2010]
These figures are taken as the most authentic ones on exports of software and consultancy services that
are collected by any public agency in Pakistan. They have integrity by virtue of their accuracy as they are
backed by actual flows of revenues. However, there have been questions about whether or not these
numbers actually capture the construct of interest (namely, software exports) and to what extent do
these capture the export earnings of the industry.
5.1.2 – Software Best Practices Study (PSEB 2005)
The Software Best Practices Study commissioned by Pakistan Software Export Board (PSEB) was
published in Feb 2005 and, for the first time, collected revenue data from 60 of the country’s leading
software and services companies. It estimated the combined software exports of these 60 companies at
$81.15 million. The State Bank figure for the preceding year was $32 million. The obvious shortcoming
of this estimate is its limited sample size. The study tried to correct for this by adopting the 80:20 rule
(i.e. assuming that 20% of the industry’s largest companies will contribute to 80% of its revenues) which
is a defendable estimation.
17

19. 5.1.3 – Bearing Point Study (Bearing Point 2005)
Figure 5.1: Graphical extract from Bearing Point Report (Source: Bearing Point, 2005)
The Bearing Point Study estimated the size of Pakistan’s IT market and software export as follows:
• The size of Pakistan’s IT industry is about US $ 700 million with annual software turnover of
about US $ 70-80 million.
• The total value of some of the ongoing large IT projects of the public and private sector
organizations exceeds US $ 100 million.
However, in putting forth these figures, Bearing Point cites P@SHA and PSEB sources for the data. These
can, therefore, not be considered independent estimates. In addition, the report estimates that the
global revenue of Pakistani software companies is considerably larger than what is brought in Pakistan.
For instance, it says:
“… the global revenues of Pakistani IT companies is estimated at US $ 200 million at the
minimum, since they are bringing into the country US $ 50 million to cover their costs,
and typically the company earns four times that amount globally...”
5.1.4 – PSEB Estimates 4 (PSEB 2006)
In March 2006, PSEB put forward a concept paper titled “Pakistan’s IT Revenue May be Grossly
Underestimated” in which it claimed:
“A recent BearingPoint study1 places Pakistan’s Global IT Export Revenues in FY04 at around USD
400 million. The basis of the figure was State Bank of Pakistan IT export revenue figures of just
under USD 50 million. BP multiplied this figure by two to account for IT export revenue brought
into the country but not registered as such with the State Bank. BP further estimated that for
each dollar brought into the country three dollars is retained by Pakistani IT companies overseas.
Therefore global IT revenue of Pakistani companies added up last year to USD 400 million”
4
Hussain, Y., Pakistan’s IT Revenue Maybe Grossly Underestimated, dated August 2006, available at:
http://www.pseb.org.pk/UserFiles/documents/IT_Revenue_Understated_V1.4.pdf
18

20. Using the latest State Bank of Pakistan’s projection of 50% growth rate in software export earnings,
PSEB arrived at the figure of $600 million for the country exports in FY05:
Forecast State Bank Estimated Total Domestic Estimated Global Export
Reporting Earnings Export Earnings Earnings
USD 75 USD 150 USD 600
Table 5.3: Pakistan IT exports earnings FY05 (Source: PSEB 2006)
The concept note then goes on to ask:
“Should global IT export revenue – rather than export earnings – be used as the key
measure for exports? It should – if that is the international norm. The World Trade
Organization (WTO) lists Mode 3, revenue generated by commercial offices overseas,
and Mode 4, compensation received by temporary workers who have travelled
abroad, as export revenue streams which must be included in trade revenue
calculation.1 Further there is strong evidence, discussed latter, to suggest that other
countries such as India in fact employ global services export figures when reporting or
estimating revenue.”
The concept note goes ahead to use certain anecdotal estimates and rules of thumbs to arrive at the
total size of Pakistan’s domestic IT market. The figures are reproduced in the table below:
Estimates of Domestic IT Market of Pakistan Using “Rules of Thumbs” Approach
Spend / Market Category Revenue / Spend
PC/Laptop/Servers USD 700 million
1,000,000 new and used CPU @ USD 700 per CPU
Peripherals USD 200 million
30 % of computer sales
International Software Vendors USD 150 million
IT Services USD 350 million
Software and services, IT enabled services, ISP
Total Domestic IT Revenue USD 1,400 million
Table 5.4: Estimated domestic IT revenue, FY05 (Source: PSEB 2006)
Therefore Pakistan’s Global IT Revenue for FY05 will probably be around two billion dollars – USD 2
billion.
The concept note then suggests the comparison of key IT personnel and internet bandwidth usage
parameters as a means to validate the above hypothesis. The analysis is reproduced below:
19

21. Country Estimated Global IT IT Personnel Internet Bandwidth
Revenue Usage
Pakistan USD 2 billion 75,000 5 600 MBS 6
India USD 36 billion 7 965,250 8 6.21 GBS 9
Ratio 1: 18 1: 12.87 1: 10.35
Table 5.5: Comparison of IT revenue, personnel and bandwidth – Pakistan, India (Source: PSEB, 2005)
This kind of analysis must satisfy several critical assumptions for it to be valid. However, even if not an
accurate estimate of the size of IT industry in Pakistan, it sets a formidable challenge to the SBP figures.
5.1.5 – P@SHA Annual Review (P@SHA 2008)
Figure 5.2: Pakistan’s IT Spend and Global Revenue Impact (Source: P@SHA 2008)
P@SHA Annual Review of 2008 carried on from where PSEB 2005 left by trying to introduce greater rigor
in the estimation of Pakistan’s overall IT market. In particular, instead of using estimates and rules of
5
PSEB conducted an internal study entitled “Assessment of IT Professionals in Pakistan” in 2005 which reported
the figure at 75,000. An “IT HR Needs Assessment Study” conducted by BCCI FAST and sponsored by PSEB in
2005, that excluded large Government Research and Defense Organizations, reported the figure at approximately
54,000.
6
PSEB, Domestic Business Department, 2005
7
“Indian IT-ITES Sector to Exceed USD Billion in FY 2006,” February 2006. (www.nasscom.org)
8
“Indian IT-ITES Sector to Exceed USD Billion in FY 2006,” February 2006. (www.nasscom.org) FY 06 estimate of
1,287,000 for FY 06 was reduced by growth rate of 30% to arrive on figure for FY 05.
9
NASSCOM Strategic Review, 2004, p 207
20

22. thumbs, the P@SHA Annual Review returned back to the tradition of PSEB 2005 by asking companies to
disclose their revenue and basing its estimation of the size of the software industry on those disclosures.
One of the major contributions of the P@SHA Annual Review 2008 Study was to introduce, for the first
time, in any rigorous way the idea of Global Revenue Impact of Pakistani IT companies. This new metric
took into account the challenge of attributing the portion of the global revenue of a Pakistani company
even though it may have never brought into the country. Bearing Point Study of 2006 had estimated the
global revenue of Pakistani companies to be four times what was brought within Pakistan. The Global
Revenue Impact metric went a step further by attributing to the Pakistani company a share of the
overall revenue of its foreign parent based on its contribution to the creation of those revenues.
The report estimated the domestic IT revenue and spend of the 85 software / IT companies surveyed
for 2007 at around $269 million (estimate) and their overall global revenue impact at around $909
million (estimate).
5.1.6 – Gartner IT Strategic Review (Gartner 2009)
Gartner Inc’s Strategic Review, while reviewing Pakistan’s Software / IT industry and making some
strategic recommendations, did not delve into the task of sizing Pakistan’s Software or IT industry.
* * *
Taken together, these figures collectively present a somewhat confusing picture. On the one hand, it is
quite clear that most credible (i.e. transactions backed) data is being collected by the State Bank of
Pakistan, it is also true that State Bank figures do not represent the complete picture of software
exports from Pakistan. There is a growing – almost overwhelming – body of evidence to suggest that the
State Bank’s estimates seriously under-estimate the size of Pakistan’s software / BPO exports. On the
other hand, are the numerous other estimates that use either survey-based self-disclosure or rules-of-
thumb-based estimation approaches to calculating the country’s software export revenues may not be
as accurate as the SBP’s balance of payment figures but provide a much better coverage of the type of
transactions that make up the overall software exports.
Abstracting from Pakistan’s specific situation, however, there are a number of other aspects of this
problem that make it particularly complex and challenging. First, there are legitimate needs of software
exporters to keep at least a portion (sometimes a major portion) of their export earnings abroad which
must be accounted for in any calculation of software and IT-enabled exports. Second, further
complicating the picture is the expanding definition of software and IT-enabled services. This is clearly
evident from the definitional changes between IMF’s Balance of Payments Manual version 5 and 6
(BPM5 and BPM6) whereby the latter quite legitimately takes a much more expansive view of software
and IT-enabled services.
The challenge for the IT industry policy-makers, corporate leaders and marketers, and interested
international stakeholders such as investors, analysts, and ranking entities, therefore, is to identify
the most reliable estimate of the size of country’s IT market and its software / BPO revenues.
21

23. 5.2 – IT Market Revenue Classification and Estimation - Comparison of Peer Countries
This section looks at a group of peer countries, namely, India and Ireland, to address the issue of validity
and authenticity of calculating software / IT revenues. The primary issue of concern in Pakistan’s context
is whether the software export revenue figures produced by the State Bank of Pakistan (SBP) could be
used as a reliable measure of the country’s software / BPO exports or must an alternate means of
generating this data be employed to arrive at more reliable estimates.
It has already been demonstrated above that a preponderance of evidence suggests that SBP figures for
Software / BPO exports grossly underestimate the software / BPO export revenues of Pakistan.
Nevertheless, in policy discussions within the government, the SBP figure has become as an anchor -
the “only” official estimate – for the country’s software / BPO exports.
In order to assess the appropriateness of SBP’s balance of payment numbers as a reliable top-line figure
for Pakistan’s software / BPO exports and to find an explanation of the discrepancy between the SBP
figure and other estimates, it might be useful to look at how other peer countries collect data on
software / BPO exports and what is the level of discrepancy between software / BPO export figures put
forth by central banks, national income accounting entities, statistical bodies, policy-making bodies, and
industry associations.
What follows below is an analysis of two peer countries, namely, Ireland and India, that are chosen for
the availability of relevant data as well as similarity in “aspirations” as software exporting nations.
Before we discuss how software / BPO export revenues in Ireland and India are calculated, we would
first look at how the process works in Pakistan.
5.2.1 – Software / BPO Revenue Recognition in Pakistan
In Pakistan the primary set of official software / BPO export revenue figures quoted come from the State
Bank of Pakistan. Pakistan Software Export Board (and its parent Ministry, The Ministry of Information
Technology and Telecom – MOITT) is one of the most important consumer of this information for policy
purposes. In particular, PSEB is charged with enhancing the country’s software / BPO export earnings
and justifies the existence and effectiveness of its programs on the basis of an increasing trend in the
software / BPO earnings. To that effect, PSEB is an interested – rather than independent – party to this
debate.
The figures that SBP is able to produce are, in essence, not really the software / BPO exports of the
country but the balance of payments arising due to trade in software and BPO services that are
registered at the foreign exchange desk of the SBP. In order to reconcile the difference between the IT
exports revenue estimated by PSEB and the external transactions data reported by SBP, it is important
to understand what SBP figures constitute of and the mechanism of compilation of this data.
The Statistics Department of the State Bank of Pakistan uses standard practices of data collection,
compilation, and dissemination to compile the balance of payments statistics, money and banking
statistics and corporate sector statistics. However, unlike an ordinary data collection operation, SBP
benefits from its unique position as the central bank regulator within the country. In connection with
the compilation of balance of payments statistics, for instance, the information is received from
Authorized Dealers (ADs) in Foreign Exchange.
22

24. State Bank of Pakistan, under authority of Foreign Exchange Act of Pakistan (1947), has made it
mandatory for the ADs to report all the transactions in foreign exchange described under Chapter XXII of
Foreign Exchange Policy Manual (2002). The data on these transactions are presently being collected
under International Transactions Reporting System (ITRS).
The ITRS is the most comprehensive system of data collection on foreign exchange transactions used by
the compilers of BOP worldwide. ITRS of banks is the major data source for the current account
transactions of the BOP. It is very helpful to counter check the flows in the financial account and provide
timely and most accurate data on the BOP.
The State Bank of Pakistan uses definitions of the fifth edition of the International Monetary Fund’s
(IMF) Balance of Payments Manual (BPM5). This is achieved through code guide that provide guidelines
to the banks and exchange companies authorized by the SBP to deal in foreign exchange business for
reporting data under ITRS. The “Code Guide” is aimed to give ADs all the relevant code lists that would
facilitate the accurate classification of foreign exchange transactions.
The authorised dealers are Process of ‘R’ form reporting against export proceeds
required to report all
transactions to the State Bank
of Pakistan using the code SWIFT Message
is received
guide. Code list 5 is used for
capturing invisible receipts
and payments on account of Field 70 is
purchase and sale of foreign checked for
commercial Payable in FCY
currencies by authorised purpose of funds account – No ‘R’
form required
dealers relating to invisible
items like services.
Payment for No
commercial
In addition, the State Bank of purposes
Pakistan also requires Payable in LCY
authorised dealers to provide Yes
account – ‘R’ form
required if other than
supporting documentation Customer is
approached for
family remittance
containing details of declaring purpose
of funds
transactions reported by
them. This supporting
A monthly return is
documentation includes, Remittance
No sent to the State
Bank of Pakistan
among others, Forms R and > US $ 10,000
for providing them
IRV which are relevant for with the data
reporting receipts on account Yes
of transaction with purposes ‘R’ form submitted
other than exports and family
to the State Bank
of Pakistan – on a
maintenance. monthly basis
Form R is declaration in respect Figure 5:3: Flow chart representing revenue recognition process
of receipts above US $ 10,000
for purposes other than export
and family maintenance. Form IRV is a voucher that captures details of all inward remittances for family
maintenance and other receipts up to US $ 10,000 for the purposes other than exports.
23

25. As soon as the authorised dealer (Bank) receives a foreign exchange remittance in the account of a
client, he or she will ask the client (the software company) to declare the source of the funds by filling
out the Form R. In particular, the ADs are required to get the client to fill out a code (as per BPM5) that
will classify the activity for which the remittance is received. Relevant codes for software / BPO are:
Communications Services
• 9101-
Telecommunications
Services
• 9102-Call Centres
Computing and information
Services
• 9181-
HardwareConsultancy
Services
• 9182-Software
Consultancy Services
• 9183-Repair &
Maintenance of
Computers
• 9184-Export of Computer
Software
• 9185-Other Computer
Services
Generally, ADs will advise the
software / BPO companies to
code the foreign exchange
receipts of software / BPO service
contracts as either 9102 (call
centre) or 9184 (Export of
Computer Software). Figure 5:4: Graphical representation of the “R” form (Source: SBP)
Clearly, the use of the balance of payment figures from Form R as nothing more than a rough proxy for
software / BPO revenues is fraught with possibilities of potential biases and errors.
First, and foremost, the number on Form “R” that is being used as software / BPO export earnings is
not that. It is merely the record of payment rendered from non-residents of a country to its residents 10.
To that effect, a country’s balance of payment figures will capture receipts on account of sales from
software / BPO sales between residents and non-residents that are was voluntarily disclosed by the
account holder as such. Clearly, this leaves ample room for potential mis-coding and biases. For
example:
• Scenario 1: It could be, as is often claimed, that the company that exported software or BPO
services from Pakistan did not bring the revenue back into the country. This could be true for a
number of valid and legal reasons other than tax evasion. Given that there is no corporate tax
on software / BPO earnings in Pakistan there is very little incentive for companies to avoid
bringing money to Pakistan due to tax avoidance.
10
As per BPM, Balance of Payments is defined as is a statistical statement that systematically summarizes, for a
specific time period, the economic transactions of an economy with the rest of the world.
24

26. • Scenario 2: The company (or its leadership) may want to retain a certain portion (or all) of their
earnings abroad. These reasons may include, but are not limited to, the desire to maintain
flexibility of foreign funds transfer, to fund international operations of the company, or to avoid
“forced” devaluation due to changes in currency value etc. The validity and legality of these
reasons may also differ. Ascertaining the legality of companies’ motives is beyond the scope of
this report.
• Scenario 3: The company may have given extended payment terms to the customer or may
have agreed to deferred payments in which case although the incidence of the sale has
occurred, balance of payment figures will not record until the receipts and made and voluntarily
disclosed as such.
Second, filling out Form “R” is a manual process whose accuracy depends on the discretion,
knowledge, and diligence of the company and its bank (authorised agent). There could be several ways
in which this process might go wrong even though neither the company nor the bank intentionally
wanted it to go wrong the first place and thus end up under (or over) estimating the software / BPO
revenues.
Technomics interviewed relevant State Bank of Pakistan (SBP) officials within the Foreign Exchange and
Statistical Departments of the Central Bank. Our conversations suggest that SBP maintains that its
Balance of Payment (BOP) statistics are not designed to measure software / BPO export revenues. They
consistently deny having encouraged any department (or Ministry) of the government to measure
Pakistan’s software / BPO export earnings through the use of the BOP statistics. They claim having been
forced into providing these statistics for purposes other than the reporting of Country’s balance of
payments (e.g. for the purpose of identifying largest exporting companies) and have only hesitantly
done so.
If the balance of payment statistics are not a good way to measure the country’s software / BPO export
revenues, what would it be? Other than survey techniques that PSEB and P@SHA have employed in the
past – albeit with limited coverage of the population of interest – there are no other mechanisms
available to the policy-makers in Pakistan.
In order to seek an answer to this question and understand the statistical challenges involved, we
looked at two other peer countries – namely India and Ireland –that have made considerable
advances in IT (software / BPO) exports.
5.2.2 – Software / BPO Revenue Recognition in India
This section describes India’s approach to determining the size of its IT industry. The research below
brings forth some stark similarities and differences between the Pakistani and the Indian systems of
reporting.
In India, there are two sources that are normally quoted when defining the industry’s performance;
these are: NASSCOM and Dataquest. Neither of these is a public agency. Previous research has shown
that their estimates of IT industry revenues do not match but, of the two, NASSCOM figures have had
greater acceptance and longevity. The only “official” source that produces any figures on export of
software or computer services is the Reserve Bank of India (RBI) which, not unlike State Bank of
Pakistan, does so as part of the collection of external sector data.
25

27. In India, the external sector data are received from the banking system as part of the Foreign Exchange
Management Act (FEMA), 1999. The data are received by the Reserve Bank of India mainly from the
banking system (authorized dealers) as part of the Foreign Exchange Management Act (FEMA), 1999.The
authorised dealers follow a process not unlike the Banks in Pakistan – albeit with some significant
differences – to compile figures on exports of computer services.
In India, Software Export Forms (SOFTEX forms) are used for declaring software exports. These forms are
obtained from the regional offices of the Reserve Bank of India. The valuation of software is certified by
designated officials of the Department of Electronics (DOE) at the Software Technology Parks of India
(STPI). The SOFTEX form is filled in triplicate, the original copy is sent by designated official of DOE to the
Exchange Control Department of the RBI. The duplicate is returned to the exporter and the triplicate is
retained by DOE for its own record.
Within 21 days, from
the date of
certification of the
SOFTEX form by DOE,
the exporter should
submit the duplicate
copy together with a
copy each of the
supporting
documents to the
authorised dealer.
The duplicate copy of
the form together
with documents are
retained by the
authorised dealer till
full export proceeds
have been realised
and repatriated and
thereafter submitted
to RBI, duly certified
under cover of an
appropriate R Return
along with a copy / Figure 5:5: Graphical representation of RBI’s “SOFTEX” form
copies of invoice/s.
After the documents have
been negotiated/sent for collection, authorised dealer report the transaction to RBI. This is done in a
fortnightly statement in form ENC under the cover of appropriate R Return.
For long duration contracts involving a series of transmissions, the exporter bills their overseas clients
periodically, i.e. at least once a month, or on reaching a “milestone” as provided in the contract entered
into with the overseas client and the last invoice/bill is required to be raised not later than 15 days from
the date of completion of the contract. The exporter then submits a combined SOFTEX form for all the
invoices raised in a month on a particular client, including advance remittances received. For contracts
26

28. involving only one shot operations, the invoice/bill should be raised within 15 days from the date of
transmission.
The exporter submits SOFTEX form to the concerned official of Government of India at STPI for valuation
/ certification not later than 30 days from the date of invoice or date of last invoice raised in a month, as
indicated above. The invoices raised on overseas clients are subject to valuation by the officials of
Government of India at STPI of the export value declared on the SOFTEX form and subsequent
amendments are made in the values, if necessary. The full value of the software exported as declared on
the SOFTEX form, or as certified by the officials concerned of Government of India, whichever is higher,
is realised on due date of payment or within 180 days from the date of invoice, whichever is earlier.
This rather tedious process is especially designed to ensure the accuracy of data received by the Reserve
Bank of India and its exact correspondence which the actual contract being signed and invoices raised by
the exporting company. The additional involvement of a “certifying authority” (i.e. STPI, which would be
the Indian counterpart of PSEB) in the process seeks to build checks and balances to ensure that proper
procedures are followed. The involvement of additional bureaucracy could also possibly introduce
elements of corruption and extortion in the process.
In India’s balance of payments (BoP), transactions are recorded in accordance with the guidelines given
in the fifth edition of IMF’s Balance of Payments Manual (1993), with minor modifications to adapt to
the specifics of the Indian situation. One such modifications relates to compilation of services related
receipts and payments and its reconciliation:
“Data on BoP are primarily compiled on the basis of International Transaction Reporting
system (ITRS) in the form of fortnightly R-Returns filed by ADs/banks dealing in forex
transactions. In accordance with the Foreign Exchange Management Act (FEMA), 1999,
all foreign exchange transactions must be channelled…the above information is further
supplemented by information available from…National Association of Software Service
Companies (NASSCOM)...[among others]”
The supplementing of receipts data on account of services with NASSCOM figures is a crucial rather
than a minor modification. It enables NASSCOM – an interested party – to bias the RBI figures.
The controversy around the strikingly close correspondence between figures put forth by NASSCOM and
Reserve Bank of India has been raging for quite a while in both Indian and International press. In
particular, a March 2008 article in the Daily Hindu Business Line written by journalists C.P.
Chandrashekhar and Jayati Ghosh titled “How Big is IT” 11 made the following headlines:
“Rapid growth of sales and export revenues are regularly quoted to establish India’s remarkable
information technology success. But though the IT phenomenon has been celebrated for close to
two decades now, data on industry performance is limited and inadequate. It is definitely time to
correct this”
11
Chandrashekhar C. P., Ghosh, Jayati, “How Big is IT”, Business Line, published on March 11, 2008 available at:
http://www.thehindubusinessline.com/2008/03/11/stories/2008031150170900.htm
27

29. The Hindu article was specifically written as a part of a debate on whether Indian software / BPO
industry which had been under a tax holiday should ultimately be taxed. Those against the imposition of
a tax had argued that the industry’s significant contribution to employment and GDP growth builds a
sufficient case for keeping it free from tax. The two journalists argued that:
“The argument of the industry is that, given the dramatic increases in output, exports and
employment it has delivered, this benefit should continue. While the rapid growth of the industry
cannot be denied, there is increasing evidence that the size of the industry’s revenues and
contribution to GDP is exaggerated, because there is no proper effort being made to
independently evaluate the industry’s performance.”
The article raised a number of concerns regarding the accuracy and authenticity of NASSCOM and RBI
data being quoted as India’s exports and surveys the many controversies that have arisen in their
calculation. In particular, the objections made to NASSCOM figures by World Trade Organisation (WTO)
that led to the acknowledgment by NASSCOM that they used the earnings of Indian workers abroad (i.e.
H1B temporary visa holders) to calculate Indian software export earnings was alleged to have
considerably biased the export numbers. NASSCOM defended their inclusion on the grounds that these
workers provided “onsite” software export services. However, this approach remains in violation of IMF
regulations that state that earnings of temporary workers can only be used for the first year in the
parent country’s GNP.
In 2005, a US Government Accounting Office (GAO) Study 12 also produced estimates that showed a
marked (more than 20 times) difference in the balance of payment figures produced by Reserve Bank of
India and those captured by GAO analysis. GAO calculated the US affiliated software imports from India
for years 2002 and 2003 to be $240 and $420 million respectively at a time when RBI was reporting
Indian companies exports to US at $6,464 and $9,725 million respectively. This discrepancy of more than
20-30 times, GAO ruled, could be attributed to at least 5 different factors, namely, (1) the treatment of
services provided by foreign temporary workers in the United States; (2) the definition of some services,
such as computer programs embedded in goods and certain information technology-enabled services;
(3) the treatment of transactions between firms in India and the overseas offices of U.S. firms; (4) the
reporting of country-specific data on trade in affiliated services; and (5) the sources of data and other
methodological differences in the collection of services trade data. GAO estimated that a major portion
of this discrepancy (about 40-45%) can be attributed to inclusion of salaries of Indian workers in the
export figures deemed it a violation of IMF BOP reporting regulations.
The Hindu article cited above closes by stating the following:
“The problem of a lack of robustness of the Indian figures remains. Given that the industry has been
celebrated and pampered for long, the least the Government could do is get down to measuring
how big Indian IT really is.”
In keeping with these objections and anticipating these, the National Statistical Commission (NSC) in its
2001 report made the following recommendation 13:
12
GAO (US Government Accounting Office), 2005, US and India Data on Offshoring Show Significant Differences,
Publication No. 06116, available at: http://www.gao.gov/new.items/d06116.pdf
13
This section draws heavily from RBI Bulletin of Sept 10, 2009.
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30. ‘Although the Reserve Bank of India collects the data on software exports through Software
Exports (SOFTEX) forms, it uses the National Association of Software & Services Companies
(NASSCOM) data as a controlling total for gross receipts from software exports. There is,
however, a need to re-examine the current methodology on collection of software exports
data. Reserve Bank of India should constitute a technical group consisting of members from
the Reserve Bank, Ministry of Commerce, Central Statistical Organisation (CSO), NASSCOM
and few major software companies to comprehensively examine the data reporting
mechanism for software exports’.
A Technical Group was also set up to resolve the issues regarding compilation of software exports data
as per Balance of Payments Manual, fifth edition (BPM5). The Group submitted its report to the Reserve
Bank in March 2003. The Group recommended, among others, to conduct a Comprehensive Survey (in
the nature of a Population Census) every three years followed by quarterly representative surveys to
collect data on software and IT exports. Based on the recommendations of the Technical Group, the first
comprehensive survey covering all companies engaged in information technology (IT) and computer
services exports activities was conducted for the period 2002-03 in December 2003. A second such
survey titled “Survey on Computer Software and Information Technology Services Exports” was carried
out during 2007-08 covering 6,140 companies for compiling data on computer services exports as well
as exports of Information Technology Enabled Services (ITES)/Business Process Outsourcing (BPO). The
survey also collected the software services trade data as per the mode of supply, introduced by General
Agreement on Trade in Services (GATS).
Figure 5.6: Survey on Computer Software and Information Technology Services Exports 2007-9 14
From a total of 6,140 firms approached by RBI, 993 companies (16.7%) responded to the survey. RBI
claims that the survey respondents included all major companies within the country thus making the
non-response bias skewed towards the smaller companies. Results of the survey were published in the
14
“Survey on Computer Software and Information Technology Services Exports 2007-08” published in RBI
Bulletin Sept 10, 2009 available at: http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10520#a1a1
29

31. RBI Bulletin of Sept 2009 and are reproduced above. An analysis was also carried out to establish the
equivalence of the RBI Survey Data, SOFTEX forms, and NASSCOM data and the comparison is produced
in the Appendix G.
The above narrative about the evolution of Reserve Bank of India’s (RBI) policy towards reporting of
software export revenues clearly illustrates the inadequacy of SOFTEX forms in capturing credible and
adequate data on the country’s software exports. RBI, having used the data from SOFTEX forms for
several years, nevertheless had to rely upon NASSCOM figures as a controlling total to make its figure
look credible to an outside audience. Once RBI’s bluff was called by US GAO and WTO (among others),
it resorted to an entire revamp of its data collection approach and began undertaking direct surveys
of software exporting companies as the most reliable and only means of producing an “all-
encompassing” estimate of the country’s software / BPO export revenues.
5.2.3 – Ireland: Software / BPO Revenue Assessment
In Ireland, unlike Pakistan and India, the Central Bank is virtually silent on the issue of software / BPO
export earnings. In fact, the balance of payments or trade statistics published by the Central Bank and
Financial Services Authority of Ireland (CentralBank.ie) are not even at the level of granularity to allow
the analyst to differentiate between software services or BPO.
The Irish Central Statistics Organisation (CSO) produces a Services Exports and Imports (SEI) data
abstract that contains a line item called “Computer Services”. The corresponding figures for exports,
imports, and net trade in
computer services for 2007
and 2008 as quoted in the
December 11th 2009 SEI
Bulletin were €21,726 million,
€660 million, €21,066 million
and €23,284 million, €686
million, and €22,598 million.
A substantial portion of these
figures include earnings of
foreign software companies
doing business in Ireland.
While these figures are
useful, they are quite high
level and do not give
adequate insights into the Figure 5.7: Enterprise Ireland’s estimates of Irish software industry
structure of Irish software /
BPO industry or be useful for policy-making purposes.
Apart from the Central Bank and the Central Statistics Organisation, there are at least three other
entities that have a direct stake in accurately calculating Irish software / BPO export revenues. These are
Enterprise Ireland – the National Economic Development Agency of Ireland; Irish Software Association
(ISA) that represents companies engaged in software development activity in Ireland; and ICT Ireland – a
supra-organisational lobby group of which ISA is also a member. Neither of these bodies, however,
compiles their own statistics.
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32. Instead, the statistics on Irish software / BPO industry
are collected by Forfás – an entity established within
Department of Enterprise, Trade, and Employment that
functions as a high level policy advisory body on
enterprise and science but has its own analytical and
data collection arm that collects a range of national
statistics, including, an Annual Survey of
Unemployment, an Annual Survey of Business Impact,
and Innovation, and Gender Equality etc. Enterprise
Ireland’s National Software Strategy (2008-2013), for
instance, quotes figures from Forfás Annual Business
Survey 2008 to indicate the size of the ‘indigenous’
software industry in Ireland.
The Annual Business Survey of Economic Impact (ABSEI)
captures a fairly vast array of businesses and, in 2008,
included approximately 4000+ companies from a
population of firms with 10+ employees within the
manufacturing and internationally traded services
sectors. The 2008 Forfás Survey had a response rate of
around 50%. The survey results are “corrected” for the
Figure 5.8: Forfás Annual Survey 2008
non-response bias before publication. Once this data is
collected, Forfás then creates a number of highly
detailed statistical tables that produce data that is highly actionable and relevant to policy. The figures
(below) illustrate some of the data tables that are produced from the Annual Business Survey of
Economic Impact (ABSEI) data.
Figure 5.9: Forfás Annual Business Survey Table B1 – Total sales of Irish owned companies 2000-8
31

33. Figure 5.10: Forfás Annual Business Survey Table B3 – Total exports of Irish owned companies 2000-8
Figure 5.11: Forfás Annual Business Survey Table D12 – Direct expenditure in Irish Economy 2000-8
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34. Figure 5.12: Forfás Annual Business Survey Table D1 – Total sales from all companies 2000-8
In the table D12, for instance, direct expenditure in Irish economy for computer programming firms is
seen to decrease from 39.3% in 2000 to 23.8% in 2008. For the same period the direct expenditure in
Irish economy for publishing, broadcasting, and telecommunications sub-sector remained more or less
constant. This particular set of data could be invaluable in determining the relative microeconomics of
these two subsectors and could form a basis for important policy interventions.
These data provide tremendous amount of information and insight about the Irish IT industry. In
particular, data on items such as total sales, total exports, direct expenditures, payroll costs, materials
and direct purchases etc. can be calculated for each sub-sector (i.e. computer programming, computer
consultancy, computer facilities management, and other IT and computer services) and provide
important policy insights to Irish planners.
* * *
Several important themes emerge from the analysis of software / BPO services export recognition
systems in peer countries and may shed some light on the challenges being faced within Pakistan.
First, in both India and Ireland, the primary source of software export data used for policy-making
purposes comes from self-reported survey data collected by an independent public, semi-public, or
private entity with credibility and integrity. In the case of India, while an attempt was made to use RBI’s
BOP figures to bring credibility to this exercise, it was soon found that this did more harm than good to
the cause of collecting credible software / BPO export data. Subsequently, RBI began carrying out its
own survey to enhance the accuracy and credibility of the concerned statistic.
33

35. Second, in both India and Ireland, the data collected through the survey is corrected for non-response
biases. The response rate for Indian RBI survey is about 16% (993 of 6140 firms responding) while that
of the Irish Forfás Survey is much higher (around 50%). However, both represent a fraction of the overall
population and thus need to be corrected for non-response bias. This is broadly in line with the practice
deployed in PSEB 2005 and P@SHA 2008 surveys.
Third, the precise assumptions used to correct for non-response bias varies from country to country.
The Reserve Bank of India assumes that the respondents are slightly skewed towards larger firms and
reports correcting for non-response bias by attributing to the non-respondents similar characteristics as
the respondents. Specifically, RBI will classify the non-respondents by category (e.g. software export,
BPO, services etc.) and will assign the median revenue from within each category to the non-responding
firms. This will have the effect of increasing the revenue figure by several folds. Forfás, on the other
hand, claims to use additional information (from other sources) such as employment, output etc. to
assess and correct for non-response bias.
PSEB 2005 and P@SHA 2008 have employed “80:20 rule” 15 to correct for non-response bias and
extrapolate the figures to represent overall population. The correction would then be about 20% on top
of what is captured by the survey.
Regardless of the precise manner of correcting for the non-respondent bias, however, the analysis of
peer countries suggests that direct survey of software / BPO companies is the only credible way to
capture software / BPO export data.
15
This makes an assumption that 20% of the largest (and most important) firms within the industry produce
about 80% of the industry’s revenues.
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36. 6–Pakistan’s IT Market Revenue Classification & Assessment
6.1 – IT Market Revenue Classification Scheme
Building upon PSEB 2005 and P@SHA 2008, An IT Market Revenue Classification System to provide the
granularity and accuracy needed to be of use for policy decisions was developed. This additional
granularity across industry sectors as well as platforms, tools, and services will also provide important
market insights and future direction about the country’s software / BPO market.
A Sectoral Classification of Pakistan’s IT Market
1 Financials 12 Healthcare and Life Sciences
2 Computing and Electronics 13 Media, Entertainment, Advertising
3 Education 14 Real Estate
4 Government 15 Energy excluding Utilities (e.g. Petroleum)
5 Automotives 16 Hospitality (including Airlines)
6 Telecommunications 17 Shipping, Couriers, and Logistics
7 Retail Services 18 Professional and Business Services
8 Utilities 19 Fashion and Textiles
9 Manufacturing 20 High Technology (e.g. Ebay, Yahoo! Etc.)
10 Transportation 21 Others
11 Aerospace and Defence
Figure 6.1: Sectoral classification of Pakistan’s IT (software / BPO) market
A Classification Scheme for Pakistani IT Market by Product-Service offerings (i.e. Platforms, Tools, and
Service Offerings) was also developed. This is produced below:
A Product – Services Offerings Classification of Pakistan’s IT Market – Software & IT
1 IT Governance and Strategy 16 Network Consulting and Integration
2 IT Consulting 17 Animation and Graphics
3 ERP – General 18 Gaming
4 ERP – Specialised (Vertical Specific) 19 Mobile – Content and Applications
5 ERP – Middle Market (SMEs) 20 Virtualisation and Cloud Computing
6 Financial – Specialised (Core Banking) 21 Location-based Services
7 Financial – Specialised (Banking Apps) 22 e-Business (e.g. Web 2.0, Search etc.)
8 Financial – Specialised (Capital Market) 23 Information Security
9 Financial – Specialised (Non-Banking) 24 eGovernment
10 Document Management 25 Business Performance Management
11 Office Productivity 26 Data Warehousing – Business Intelligence
12 Billing and Payments 27 Embedded Systems Software
13 Customer Relationship Management 28 Product Development, Engg, and Design
14 Education and Training 29 Business Continuity and Recovery
15 Systems Integration 30 Software Testing and Assurance
Figure 6.2: Pakistan’s IT (software / BPO) market – IT / Software classification
35