This synthesis report attempts at taking a holistic picture of the survey conducted across five areas of domestic commerce, i.e. retail, wholesale, transport, storage warehousing and real estate.
The State of Domestic Commerce in Pakistan Study 10- Synthesis Report
1. THE STATE OF DOMESTIC COMMERCE IN
PAKISTAN
STUDY 10
SYNTHESIS REPORT
For
The Ministry of Commerce
Government of Pakistan
November 2007
By
Innovative Development Strategies (Pvt.) Ltd.
House No. 2, Street 44, F-8/1, Islamabad
2.
3. Table of Contents
List of Abbreviations ............................................................................................................. i
Acknowledgments .............................................................................................................. iv
Executive Summary ............................................................................................................ 3
Introduction …………………………………………. ............................................................... 7
Section 1: Sample Size, Data Collection Methodology and Sector Characteristics .. 8
1.1: Survey ...................................................................................................................... 8
1.2: Areas of Inquiry ......................................................................................................... 9
1.3: Sampling Technique by Sector .................................................................................. 9
1.3.1 Retail and Wholesale Markets...................................................................... 10
1.3.2. Storage and Warehousing .......................................................................... 11
1.3.3 Real Estate ................................................................................................. 13
1.3.4 Transport .................................................................................................... 13
Section 2: Firm Level Characteristics ........................................................................ 16
2.1 Firm Size ................................................................................................................. 16
2.2 Registration Status .................................................................................................. 17
2.3 Employment Patterns .............................................................................................. 18
2.4 Human Capital ......................................................................................................... 19
2.5 Access to Financial Services ................................................................................... 20
2.6 Use of Other market Services .................................................................................. 23
Section 3: Competitiveness and Efficiency of the Domestic Commerce Sector ..... 24
3.1. Market Competition ................................................................................................. 24
3.2. Barriers to Entry ...................................................................................................... 25
3.3. Value Addition and Profitability ................................................................................ 26
3.4 Infrastructure: Bottlenecks ....................................................................................... 29
3.5 Constraints to Growth .............................................................................................. 29
Section 4: Governance ................................................................................................ 31
4.1. Contract Enforcement .............................................................................................. 31
4.2. Corruption & Law and Order .................................................................................... 32
4.3. Regulation ............................................................................................................... 32
4.4. Taxation .................................................................................................................. 35
4.5. Associations and Collective Action .......................................................................... 35
Section 5: Conclusion and Areas of Policy Focus .................................................... 36
Appendix 1 .............................................................................................................. 39
Appendix 2 .............................................................................................................. 42
Appendix 3 .............................................................................................................. 44
Appendix 4 .............................................................................................................. 46
Bibliography ............................................................................................................ 48
4. List of Tables
Table 1.1: Sector-wise break up of the sample ............................................................... 8
Table 1.2: Representativeness: Error Margins at the 90% Confidence Level* ................ 8
Table 1.3: Areas of Inquiry .............................................................................................. 9
Table 1.4: The distribution of the samples within cities ................................................... 9
Table 1.5: The retail markets covered in each city ........................................................ 10
Table 1.6: Province- and city-wise division of wholesale establishments covered by the survey .......................................................................................................... 11
Table 1.7: Types of Storages ........................................................................................ 12
Table 1.8: Province- and city-wise break-up of the sample ........................................... 12
Table 1.9: Province- and city-wise division of the sample ............................................. 13
Table 1.10: Province- and city-wise division of the sample ............................................. 14
Table 1.11: Details of interviews conducted for each sub-sector ..................................... 15
Table 2.1: Quantum of Start up Capital (Rs.) ................................................................ 16
Table 2.2: Registration Levels ...................................................................................... 18
Table 2.3: Employment Levels ...................................................................................... 18
Table 2.5: Employee’s Education Levels ...................................................................... 20
Table 2.6: Details the sources of loans taken across sector......................................... 21
Table 3.1: Competition Within a Given Radius .............................................................. 24
Table 3.2: Relative weights to compute output index .................................................... 26
Table 3.3: Total, Freight and passenger indices ........................................................... 27
Table 3.4: Relative weights for value added index ........................................................ 27
Table 3.5: Cost of Infrastructure as a Proportion of Total Cost (%). .............................. 29
Appendixes
Table 1.1: Retail Sample (divided across four provinces) and margin for error (e) ........ 39
Table 1.2: Wholesale sample (divided across four provinces) and margin for error (e) . 40
Table 1.3: Storage Sample (divided across four provinces) and margin for error (e) ..... 40
Table 1.4: Real Estate Sample (divided across four provinces) and margin for error (e)40
Table 1.5: Transport sample (divided across four provinces) and margin for error (e) .. 41
Table 1.7: Annual growth rates of transport output index and national GDP ................. 43
Table 1.8: Retail: Average Monthly Revenue ................................................................ 43
Table 1.9: Wholesale: Average Monthly Revenue ........................................................ 43
Table 1.10: Business Services ........................................................................................ 44
5. List of Figures
Figure 1: Firm Age/Start-up Capital Groups .................................................................... 17
Figure 2: Loans from Commercial Banks in Retail and Wholesale. ................................. 21
Figure 3: Loans from Commercial Banks in Storage and Transport. ............................... 22
6.
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List of Abbreviations
ABAD Association of Builders and Developers
ADB Asian Development Bank
ADBI Asian Development Bank Institute
APCA All Pakistan Contractors Association
ATT Afghan Trade Transit
BAF Bank AlFalah
BCI Business Competitiveness Index
BOR Board of Revenue
CAA Civil Aviation Authority
CBM Cubic meter
CBR Central Board of Revenue
CDA Capital Development Authority
CIB Credit information bureau
CMR Contract for the International Carriage of Goods by Road
CPI Corruption Perceptions Index
CPIA Country Policy and Institutional Assessment
DFID Department for International Development
DHA Defense Housing authority
EDF Export Development Fund
EIU Economist Intelligence Unit
EOS Executive Opinion Survey
EPB Export Promotion Bureau
ESCAP Economic and Social Development in Asia and the Pacific
FBS Federal Bureau of Statistics
FCL Full Container Load
FDI Foreign Direct Investment
FIAS Foreign Investment Advisory Service
Ft Foot
FY Fiscal Year
GCI Global Competitiveness Index
GCR Global Competitiveness Report
GD Goods Declaration
GDP Gross Domestic Product
GoP Government of Pakistan
GOR Government Officials Residences
GRT Gross Register Tonnage
GST General Sales Tax
HBFC Housing Building Finance Corporation
HBL Habib Bank Limited
HDR Human Development Report
HFIs Housing Finance Institutions
IFC International Finance Corporation
IFS International Financial Statistics
IMF International Monetary Fund
ISAL Informal Subdivision of Agricultural Land
ISO International Standards Organization
IT Information Technology
ITU International Telecommunications Union
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Innovative Development Strategies (Pvt) ii
KBCA Karachi Building Control Authority
KDA Karachi Development Authority
KESC Karachi Electric Supply Corporation
KM(s) Kilometer(s)
KPT Karachi Port Trust
KSE Karachi Stock Exchange
LCL Less Than Container Load
LOA Length Overall
MCB Muslim Commercial Bank
MENA Middle East and North Africa
MOC Ministry of Commerce
MOD Ministry of Defense
MTDF Medium Term Development Framework
NBP National Bank of Pakistan
NCS National Conservation Strategy
NER Net Primary School Enrollment Rate
NHA National Highway Authority
NIE Newly industrialized economy
NIT National Institute of Transport
NLC National Logistics Cell
NTN National Tax Number
NTRC National Transportation Research Center
NTTFC National Trade and Transport Facilitation Committee
NWFP North West Frontier Province
PASSCO Pakistan Agricultural Storage and Services Corporation
PEC Pakistan Engineering Council
PHDEB Pakistan Horticulture Development and Export Board
PIAC Pakistan International Airlines Corporation
PIDE Pakistan Institute Of Development Economists
PIHS Pakistan Integrated Household Survey
PKR Pakistani Rupee
PQA Port Qasim Authority
PR Pakistan Railways
PREF Pakistan Real Estate Federation
PSDP Public Sector Development Program
R&D Research and Development
REER Real Effective Exchange Rate
REITs Real Estate Investment Trusts
RICS Royal Institute of Chartered Surveyors
SAI Social Accountability International
SBP State Bank of Pakistan
SKAA Sindh Katchi Abadis Authority
SME Small and Medium Enterprises
SPS Sanitary and Phytosanitary
SRO Statutory Regulation Order
Std Standard
TEP Total Factor Productivity
TEU Twenty-Foot Equivalent Units
TI Transparency International
TOR Terms of Reference
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Innovative Development Strategies (Pvt) iii
TSDI Transport Sector Development Initiative
TTFP Trade and Transportation Facilitation Program
UK United Kingdom
UNDP United Nations Development Program
US United States
USA United States of America
USC Utility Stores Corporation
USD United States Dollars
WAPDA Water and Power Development Authority
WDI World Development Indicators
WEF World Economic Forum
WGI Worldwide Governance Indicators
WTO World Trade Organization
10. Innovative Development Strategies (Pvt) iv
Acknowledgment
The IDS team owes a debt of gratitude to the officers of the Ministry of Commerce for their guidance, assistance and feedback during the course of this study. Our special thanks go out, in particular, to Syed Asif Ali Shah, Secretary; Mr. Naseem Qureshi and Mr. Ashraf Khan, Additional Secretaries; Mr. Abrar Hussian, Joint Secretary; Syed Irtiqa Zaidi, Consultant and Mr. Qaseem Subhani, Section Officer, for sparing their precious time and efforts for the study.
We feel a deep sense of gratitude for the Minister for Commerce. Mr. Humayun Akhtar Khan, who took out considerable time from his busy schedule to guide us. It was his sincere and deep conviction which enabled us to conduct and compile this detailed and comprehensive study on Domestic Commerce of our country. His apt guidance and keen analytical oversight were extremely helpful in finalizing the study and formulating the policy recommendations.
This study has benefited from comments received from the following:
1. State Bank of Pakistan, Karachi.
2. Federal Board of Revenue, Government of Pakistan, Islamabad.
3. Planning and Development Division, Government of Pakistan, Islamabad.
4. Trade Development Authority, Government of Pakistan, Karachi.
5. (Management Consultants) Establishment Division, Government of Pakistan, Islamabad.
6. Finance Division, Government of Pakistan, Islamabad.
7. Pakistan Institute of Development Economics, Islamabad.
8. NTTFC, Karachi.
9. FPCCI, Karachi.
10. Planning and Development Board, Government of Punjab, Lahore.
11. Planning and Development Board, Government of NWFP, Peshawar.
12. Planning and Development Board, Government of Sindh, Karachi.
13. Planning and Development Board, Government of Balochistan, Quetta.
14. Investment and Commerce Department, Government of Punjab, Lahore.
15. Industries, Production & Supplies Initiatives, Government of Pakistan, Islamabad.
16. SMEDA, Lahore.
17. Statistics Division, Government of Pakistan, Islamabad.
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Executive Summary
Introduction
1. The Domestic Commerce Survey was commissioned by the Federal Ministry of Commerce to reduce a research gap that exists in the sector. Policy planning in this sector has taken place without adequate economic research backup and consideration of the critical linkages across sectors. The survey, conducted across five areas of domestic commerce, i.e. retail, wholesale, transport, storage and real estate, aims to provide the necessary backup for explicit, integrated policy planning and this synthesis report attempts to present a holistic picture of the key results from the studies.
2. The survey was carried out in a selected number of large, medium and small cities. Markets in small towns were used as proxies for rural markets since organized markets generally do not exist in rural areas and small/medium towns are considered feeding areas to the rural markets. In all, 2000 establishments in retail and wholesale markets, transport, real estate and storage and warehousing were surveyed. The main areas of inquiry in the studies related to firm level characteristics, competitiveness, protection, subsidies and incentive schemes and regulation.
Firm Level Characteristics
3. The survey finds that capital invested in the firm at the time of its initiation is an important indicator of firm size. The level of start up capital appears generally low for all sectors (median start up capital is reported to be Rs. 200,000), indicating that the size of firms across all sectors is small. Disaggregating firms according to their age indicates a discernable difference in start up capital between firms established more than 10 years ago and those established in the last five years. However, the difference between firms established in the last 5 years and between 5-10 years is not substantial. In the retail and wholesale sectors we see that roughly 55-60% of the firms consistently start their businesses with less than Rs. 200,000. In real terms, one can conjecture that firm size at the time of initiation of business has declined in the last ten years. The only sector where firm size appears to have increased over time is storage; however, the increase does not seem significant once real prices are used.
4. Registration is a proxy for the ‘formal’ nature of the enterprise. Roughly half of the establishments surveyed across the sectors were registered. Registration, it appears, is closely correlated to firm size. As such, the lowest level of registration is found amongst retail outlets. In all other sectors, the level of registration is over 50%, with the highest share in the storage sector.
5. Employment level at the firm is low in all the sectors surveyed with the mean full time employment levels in establishments across all sectors of about 3 persons. No sector has mean level of employment higher than 9. Part time employment appears fairly low across all sectors as well (less than one in the retail and storage sectors). Despite all this, given the relatively labour intensive nature of this segment of the economy, it is nonetheless a potential employment generator for low skilled segment of the population.
6. With regards to human capital, only 10.7% of owners in the storage sector (and 1% in transport) had been to a technical college or university. 27% owners in storage and 34.4% in transport had gone through on-the-job training, working as employees elsewhere. The remaining, more than half of the owners said they had learnt their vocation either from friends and relatives or were self taught. This is an impediment for firm growth. In wholesale and retail trade more than half of full time employees and 96% of part time employees had
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Innovative Development Strategies (Pvt) 4
not finished primary schooling. The nature of work as its is done today does not require high level of skills and literacy making these sectors an important absorber of low skill workers.
7. Access to formal sector financial services is an important area of concern. More than 91% of the sources of startup capital were family savings and sale of assets. Only in the transport sector is the share of those who used formal bank credit as part of the startup capital relatively high. Use of loans from informal money markets is also low at less than 2% of the aggregate sample. The aggregate level of borrowing from all sources in the last five years was a mere 8.75% of the surveyed firms with commercial banks and family and friends the most common sources of loans. Additionally, larger firms (those with start up capital in excess of Rs. 500, 000) have a greater propensity to borrow from banks but the difference is not large. The data implies that the threshold at which bank borrowing becomes feasible in Pakistan is perhaps higher than that at which sectors in domestic commerce surveyed here operate.
Competitiveness and Efficiency of the Domestic Commerce Sector
8. Efficient use of resources is an important prerequisite for sustained growth and conventional economic wisdom is that a competitive environment is an important condition for efficiency. Market competition is intense in all sectors. In the retail sector 52 percent of firms said that up to 11 similar enterprises existed within a radius of 1 kilometer. A third of wholesalers reported more than 25 similar outlets in the vicinity. And 51 percent of storage owners had up to 5 similar enterprises within a radius of 1 kilometer.
9. The trucking industry faces minimal entry barriers, as is evident from the extremely large number of existing operators and frequent new entrants. More than 25 percent of the companies surveyed were established in the last five years and an additional 25 percent were less than ten years old. In the retail sector, however, almost 58 percent of firms interviewed reported that they had faced barriers to entry of which 68 percent ranked capital requirements as the most important barrier. Need to have personal contacts and government regulations and tariffs were other important barriers. Wholesale firms and storage owners reported similar barriers.
10. With regards to infrastructure, 23% of the reported total cost of the enterprises goes towards electricity, water and telephone charges in the retail, wholesale and storage sectors. For the storage sector, the infrastructure cost is significantly higher at 34.39% of total expenditure. The cost of electricity generally dominates. One reason for this high cost of electricity is that the commercial and industrial sectors cross-subsidize the consumer and agricultural sectors. Further, roughly half of the respondents claimed that on average they lost 2 to 6 hours in a day due to poor road infrastructure.
11. Among constraints to growth, limited access to finance figures prominently with 50% of retail respondents, 40% of wholesale respondents and 35% of storage respondents citing this as a primary constraint. Absence of collateral and unavailability of credit history cause small establishments to be left out of formal credit markets. Taxation and regulation are seen to pose a constraint as well especially in the transport sector. Sales tax is an active disincentive to growth where remaining small allows retailers to avoid taxes.
12. Quality of public services is cited in many cases as a primary or secondary constraint to growth. Poor condition of roads leading to the establishments, inadequate parking space and no additional space on which to expand, are cited frequently. The transport sector faces problems due to inadequate attention to the maintenance of highways and roads. Corruption and law and order are largely cited as third ranked constraints to growth in most cases.
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Innovative Development Strategies (Pvt) 5
Governance
13. The survey concentrated on contract enforcement, law and order, taxation, regulation and collective action with regards to governance.
14. More than 90% of the sample agreed on having to rely on the reputation of those they enter into contracts with. However, more than 80% of the respondents in each of these sectors agreed that a contract would protect them from being cheated while over 60% agreed that the legal system would uphold their contracts and property rights in business disputes. Furthermore, almost 40% of the respondents agree with the suggestion that people from other baraderies/communities are more likely to cheat them and over half of the respondents agree with the suggestion that people from another city are likely to cheat them. These inconsistencies suggest that perception based data may not be a good guide for analysing contract enforcement, as factual data (that is the incidence of resorting to police intervention in dispute resolution) depicts a low degree of confidence in the formal justice system.
15. Corruption and law and order have been frequently reported in the surveys as the third ranked constraints to growth. In the road transport sub-sector, it is the second most important constraint. In rail transport, there is a high incidence of pilferage and switching of items such as live animals and rigid rules make it difficult to obtain compensation. In the storage and wholesale sectors the large majority of disputes appears to be over late payments and is resolved through negotiation. Formal justice is not sought. In the wholesale sector, a common contravention of the law is illegal encroachments which are ignored by corrupt officials in Market Committees. The incidence of serious crimes was higher in wholesale with 27 respondents reporting murder and 121 mentioning serious theft. However, only 37-39% of the total number of any type of crime cases were reported to the police and dispute resolution was generally sought through negotiation.
16. All five sectors cite regulation systems as one of the main constraints to growth, where zoning regulations are the most frequently cited constraint though the lack of clear regulation on property rights is not seen as an impediment. Regulation regarding access to finance is reported to be unfriendly towards small enterprises in all sectors. Another important aspect of regulation is reported to be the tough import tariff regime in the past, which has resulted in underdevelopment in all four sectors. Lastly, registration is an aspect of regulation that is not adhered to in a large number of enterprises in the sample.
17. Taxation is considered one of the key constraints to growth by 16-25 percent of respondents. Given the low level of registration, it may seem as though tax liability is assumed by few establishments. However, in the retail and wholesale sectors where registration is as low as 38 percent and 42 percent respectively, 50 percent of retail establishments and 72 percent of wholesale establishments provide a receipt to customers, indicating that they bear some form of tax liability.
18. Collective action through industry associations is highest in the transport sector with 75.5 percent of the sample being members of transport associations. 45.8 percent of real estate establishments are members of associations, 47.3 percent and 26.2 percent of storage establishments are members of market based associations and city wide associations respectively and 58.7 percent and 18.8 percent of wholesale establishments are members of market based associations and city wide associations respectively. Data are not available for the retail sector. Transport unions, while active, are not effective. There is a tendency to observe strikes which results in temporary compromises, but at an immense cost to the economy. Prevalent opinion is that the country’s trade associations have failed to develop successful institutional relations with the government.
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Innovative Development Strategies (Pvt) 6
Conclusion and Areas of Policy Focus
19. The retailing and wholesaling business is the front end of commerce and the main finding of the survey is the small size of enterprises implying that value-addition and profit margins are low. The smallness in size and the lack of collateral create problems of moral hazard and high transaction cost so far as conventional banking practices are concerned. In the regard the newly introduced SME and micro credit banks that do practice unconventional banking should be encouraged.
20. Urban land use policy and recently high land prices also create a serious disincentive for growth. Direct interest by the MOC in matters of land use policy and zoning laws as part of an over-arching commerce policy can potentially create the requisite clout on the provincial and local governments to develop capacity and prioritize this critically important growth impediment.
21. Contract enforcement and dispute resolution requires that the capacity of small claims courts and business tribunals be enhanced.
22. Development of the storage and warehousing sector, being endogenous to the wholesale, retail and international trade development, will take place once these chains develop. However, urban zoning and planned linkages with the transport infrastructure are critical. Also, appropriate regulation and licensing of insurance companies that are certified can help in creating a pool of reputable insurers in the market.
23. For the transport industry as a whole, a supply chain management approach should be adopted with an inter-modal transport system where the different modes of transport adapt their operations to one another. The new road transport legislation seeks to address many of the bottlenecks highlighted: its implementation should be strengthened with utmost urgency. Furthermore, the shear volume of road freight traffic carried by trucks warrants that trucking be recognized as an industry by itself. A revision of the current restrictive industrial and import policies for vehicles and auto parts is also in order but the domestic truck assembly plants also need to be modernized. One way of bringing the industry into the formal economy is by mandating a carrier registration policy.
24. The change in the structure of the industry from a large number of small-scale enterprises to well organized large entities competing against one another requires attention to ‘soft’ management issues such as automation, marketing, and availability of a well trained labor force. The government could follow up the registration drive by creating a nation wide database of freight and passenger services. The relatively high level of education of transport owners should make such a transition simple on the technical front. Meanwhile, the non- government sector could take the lead in setting up driver training centers, where customer relations trainings are accorded at affordable costs. With regards to access to formal credit in the transport sector, a World Bank report has outlined concrete steps: (i) developing a Truck Leasing Concept with banks; (ii) establishing a revolving National Guarantee Fund in order to give incentives to decrease interest to banks; and (iii) developing a fund to buy and scrap old but operational two-axle trucks in order to provide truckers with down payments for newer vehicles. These options need to be evaluated in greater detail.
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Introduction
1. The domestic commerce sector has been termed as the ‘front end’ of the economy (Haque, 2006). It is through this vital link that production of goods and services as well as the gains from international trade reach th e consumer.
2. In spite of the fact that the ‘domestic commerce’ sector contributes roughly one third to national GDP and 10% of aggregate employment, it has not been the subject of research and explicit policy planning. Perhaps this is because it is assumed that the development and proliferation of domestic commerce is endogenous to expansion in the commodity producing sectors and international trade. As such, policy planning on this sector has first of all taken place without much economic research backup, but also without keeping in view the critical linkages across sectors that constitute the domestic commerce economy and the commodity producing sectors. For instance, explicit cognizance is not taken of how, for instance, the road and rail infrastructure links up with the wholesale and retail markets or planning for storage and warehousing within the ambit of urban zoning. The same can be said about regulatory policies as well as the incentives and subsidies regime.
3. The Domestic Commerce Survey, commissioned by the Federal Ministry of Commerce, seeks to reduce this research gap in the hope that it will provide the necessary backup for explicit and integrated policy planning for this sector. This synthesis report attempts at taking a holistic picture of the survey conducted across five areas of domestic commerce, i.e. retail, wholesale, transport, storage warehousing and real estate.
4. The report is divided in five sections. Section 1 explains in detail the sample across which the survey was undertaken, its representativeness and the methodology of data collection in each sector. Section 2 looks at firm level characteristics for the sample as a whole and for each sector. Firm size, employment levels, human capital levels and access to financial and other auxiliary markets provide a description of the nature of establishments in the sector. Section 3 then delves into the structure of the markets that prevail, i.e. the level of competition in the sectors and the entry barriers they face. It also makes some preliminary forays into levels of profitability and value addition in the domestic commerce area. Finally in this section we also look into the infrastructure side of ‘cost of doing business’ that can have an impact on future growth prospects of this sector. In section 4, we delve into governance issues of contract enforcement, the regulatory environment, issues of law and order and the nature of collective action. Section 5 concludes.
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Section 1
Sample Size, Data Collection Methodology and Sector Characteristics1
1.1: Survey
5. The Domestic Commerce Survey was conducted across four sectors: retail and wholesale markets, storage and warehousing, transport and real estate. The survey was carried out in a selected number of cities (including large, medium and small cities). As organized markets generally do not exist in rural areas and small/medium towns are considered feeding areas to the rural markets, markets in small towns were used as proxies for rural markets. The survey was integrated at city level for the four sectors. Below is a sector-wise break up of the sample (which comprised in all 2000 establishments).
Table 1.1: Sector-wise break up of the sample
Sector
Sample
Retail
1000
Wholesale
500
Real Estate
200
Storage and warehouses
200
Transport
100
6. With respect to the representativeness of the data, the margin of error at the 90% confidence level is given in Table 1.2.
Table 1.2: Representativeness: Error Margins at the 90% Confidence Level*
Sector
Error Margin (%)
Retail
2.71
Wholesale
3.72
Storage
0.35
Real Estate
5.82
Transport
8.23
Note: * Refer to Appendix 1 for details on sampling, the raising factor used and error margin calculations.
1 Tables in this section draw upon Innovative Development Strategies, "Basic Statistical Analyses of the Sample Survey Data on Domestic Commerce"(2007).
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1.2: Areas of Inquiry
7. The Domestic Commerce Survey was conducted across four sectors namely: retail and wholesale markets, storage and warehousing, transport and real estate. Within the sectors the main areas of inquiry were regarding competitiveness, protection, subsidies and incentive schemes and regulation. More specifically the areas of inquiry are given in Table 1.3.
Table 1.3: Areas of Inquiry
1. Firm Characteristics
- Registration Status
- Size (paid up capital, employment levels).
- Employment (part time, full time, family, wages)
- Human capital
- Sources of Finance
- Business services used
2. Competitiveness and Efficiency
- Level of Competition (firms within a distance)
- Barriers to Entry
- value addition and proftiability
- Cost and access to infrastructure
- Constraints to Growth
3. Governance
- contract enforcement
- law and order
- taxation
- regulation (zoning, other issues)
- collective action (association, etc).
1.3: Sampling Technique by Sector
8. The sample sizes for the different sectors within domestic commerce had a minimum value of 100. For this sample size, a population proportion can be estimated by the sample proportion within about eight percent with probability of at least 0.90. The sample sizes for the surveys of the other sectors of domestic commerce were
multiples of that for transport, as indicated in Table 1.4.
9. The distribution of the samples within cities is given in the following table.
Table 1.4: The distribution of the samples within cities
City
Retail
Wholesale
RealEstate
Storage
Transport
Faisalabad
Gujranwala
Lahore
Rawalpindi
Multan
Okara
Hyderabad
Nawabshah
Karachi
Sukkar
Peshawar
Abbotabad
Quetta
Islamabad
90
60
140
60
60
40
60
40
180
50
60
40
60
60
45
30
70
70
30
20
30
20
90
25
30
20
30
30
15
10
30
10
10
10
10
10
40
10
10
10
10
15
15
15
25
10
15
15
15
5
35
10
10
5
15
10
10
5
15
5
5
5
5
5
20
5
5
5
5
5
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Innovative Development Strategies (Pvt) 10
10. Details of the total sample, the cities and localities in which each survey was conducted and the selection methodology adopted within these cities for each sector are discussed below.
1.3.1 Retail and Wholesale Markets
1.3.1.1 Total Sample
11. Literature suggests that the retail sector is dominated by small, sole proprietorships with a predominance of all-purpose grocery stores; therefore these categories have formed the bulk of the retail sample. The retail sample consisted of 1000 establishments of which 138 were grocery stores (83 of which were medium-sized establishments), 105 clothing stores (46 of which were medium sized), 78 were electronics stores, 49 were bookshops, 47 were medical stores while the remaining stores dealt with jewelry, computer hardware and software, fruits and vegetables, baked items, toys, etc. 92% of the establishments in the sample were sole proprietorships and only 20% of the establishments were classified as large.
12. Within the wholesale sector, the only clearly defined market is for agricultural produce, particularly fruit and vegetables. Out of the 543 establishments comprising the sample, a fifth traded in groceries, while the rest dealt in commodities including clothing, books and medical supplies.
1.3.1.2 Cities and Localities
13. The survey was carried out in a selected number of cities (including large, medium and small cities). As organized markets generally do not exist in rural areas and small/medium towns are considered feeding areas to the rural markets, markets in small towns were used as proxies for rural markets.
14. The retail markets covered in each city are given in the following table.
Table 1.5: The retail markets covered in each city
City
Market
Faisalabad
Ghanta Ghar, Satyana Road and Ghulam M.Abad
Gujranwala
Gujranwala City
Lahore
Anarkali, Shah Alam, Ichra, Baghanpura, Gulberg
Rawalpindi
Saddar Market, Satellite Town, Muslim Town
Multan
Bohar Gate, Haram Gate ,Cantt
Okara
Okara City
Hyderabad
Shahi Bazar, Latifabad No. 7, Phuleli
Nawabshah
Shahi Bazar
Karachi
Saddar, Landhi, Liaquatabad, Shah Faisal,
Sukkar
New Sukkar, Old Sukkar
Peshawar
Cantt, City, University Town
Abbotabad
Main Saddar
Quetta
City, Satellite Town
Islamabad
Aabpara Market, Karachi Company, Super Market
15. The following table gives a province- and city-wise division of wholesale establishments covered by the survey.
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Table 1.6: Province- and city-wise division of wholesale establishments covered by the survey
Provinces/Cities
Number of establishments surveyed
Punjab
275
Faisalabad
45
Gujranwala
30
Lahore
70
Rawalpindi
30
Multan
30
Okara
20
Federal
30
Islamabad
30
NWFP
50
Peshawar
30
Abbotabad
20
Sindh
165
Hyderabad
30
Nawabshah
20
Karachi
90
Sukkur
25
Balochistan
30
Quetta
30
Pakistan
520
1.3.1.3 Selection Methodology
16. In the retail and wholesale sector, if there was more than one sample market in a city, then an equal number of sample establishments were selected from each market, depending on the required sample size. The center of the market was taken as the starting point for the sample and every tenth establishment from thereon was selected until the required sample size was achieved.
1.3.2. Storage and Warehousing
1.3.2.1 Total Sample
17. There are few sources of secondary information on storage and warehousing in Pakistan. Storage issues may be divided into two major categories: those to do with agricultural storage (storage of grains as well as of fruits and vegetables) and storage of manufactured products for distribution to retailers.
18. A total of 200 storages were sampled in the survey. Of the total storages sampled, 39 were in the form of godowns, used mainly for agricultural storage. Ten of the storages were open stores, used again primarily for grain, but also, in one case, for wood. The sample included 65 cold storages, 24 storages belonging to distributors as well as storages affiliated with wholesale and retail outlets. The table below gives the complete breakdown.
22. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 12
Table 1.7: Types of Storages
Type of Storage
Number
Grain Storage
Godown
39
Open storage
10
General Storage
Cold storage
65
Distributor's storage
24
Storage for retail outlet
15
Storage for wholesale outlet
47
Total
200
1.3.2.2 Cities and Localities
19. The storage and warehousing survey was conducted across 14 cities. Below is given a province- and city-wise break-up of the sample.
Table 1.8: Province- and city-wise break-up of the sample
Provinces/Cities
Numbers of establishments surveyed
Punjab
105
Faisalabad
15
Gujranwala
15
Lahore
25
Rawalpindi
10
Multan
15
Okara
15
Federal Area
10
Islamabad
10
NWFP
15
Peshawar
10
Abbotabad
5
Sindh
65
Hyderabad
15
Nawabshah
5
Karachi
35
Sukkur
10
Balochistan
15
Quetta
15
Pakistan
200
1.3.2.3 Selection Methodology
20. Identifying storages for the survey was not a straightforward exercise as commercial storage facilities, other than cold storages, which typically are located near fruit and vegetable wholesale markets, are often not advertised as such. In many cases storages are not run commercially, but are maintained by distributors or wholesalers and sometimes also by retailers.
21. The eventual method of selection was thus: in each city, areas where storages are located were identified and the requisite sample was randomly selected by sampling every second or third establishment (as the case and need may be). Other than the questionnaires specifically designed for storage outlets, a brief section on storage modalities was also included in the questionnaire on wholesale and retail trade, as it was surmised that many wholesalers and retailers might not be using dedicated storages for their goods. The findings of that section are also helpful for the purposes of analysis of the storage and warehousing sector.
23. Synthesis Report
Innovative Development Strategies (Pvt) 13
1.3.3 Real Estate
1.3.3.1 Total Sample
22. Real estate markets, as opposed to the foundation stages of real estate issues (such as land rights, etc), have received little attention from researchers and therefore there is a lack of reliable information on real estate values, yields and returns. Nevertheless the available literature, including Housing Census Reports and various other government publications, has been studied. Furthermore a country-wide survey has been conducted, covering 200 establishments. Various stakeholders have been covered in this survey including real estate agents and key property developers.
1.3.3.2 Cities and Localities.
23. The survey was conducted in 14 cities. The table below gives a province- and city-wise division of the sample.
Table 1.9: Province- and city-wise division of the sample
Provinces/Cities
Number of establishments surveyed
Punjab
100
Faisalabad
15
Gujranwala
10
Lahore
30
Rawalpindi
10
Multan
10
Okara
10
Federal Area
15
Islamabad
15
NWFP
20
Peshawar
10
Abbotabad
10
Sindh
70
Hyderabad
10
Nawabshah
10
Karachi
40
Sukkur
10
Balochistan
10
Quetta
10
Pakistan
200
1.3.3.3 Selection Methodology
24. While selecting the sample, real estate agents were randomly selected from within markets, while key property developers in a city were identified, and a sample was selected from amongst the known group. Focus group discussions form the basis for a great part of the analysis of real estate markets.
1.3.4 Transport
1.3.4.1 Total Sample
25. The four sub-sectors within transport discussed herein are road, rail, aviation and ports. There was some existing literature on this sector; qualitative data was readily available on the road (freight) and rail (passengers and freight) sub-sectors, but was scant on aviation and ports. On the other hand, sufficient quantitative data to conduct the required statistical analysis was
24. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 14
only available for rail. Virtually no detailed data sets existed for road transport, a fact that necessitated undertaking an extensive survey exercise. A sample of 100 establishments was determined upon and was divided among freight (68 surveys; receiving greater weight, due to its higher commercial significance) and passenger services (44 surveys). The sample size was determined with the help of national level industry data acquired from the Federal Bureau of Statistics.
1.3.4.2 Cities/Localities
26. The survey was conducted in 14 cities. The table below gives a province- and city- wise division of the sample.
Table 1.10: Province- and city-wise division of the sample
Location
Number of structured questionnaires
Freight services
Passenger services
Punjab
Faisalabad
8
5
Lahore
15
Multan
3
2
Okara
4
3
Rawalpindi
4
5
Gujrawala
2
4
Sindh
Karachi
5
10
Hyderabad
4
2
Nawabshah
3
2
Sukkur
4
2
NWFP
Peshawar
4
3
Abbotabad
4
2
Balochistan
Quetta
4
3
Federal Area
Islamabad
4
1
Total
68
44
Total
1122
1.3.4.3 Selection Methodology
27. The sampling technique employed in the transport sector presents a deviation from the other sectors. Samples were selected as before in the same 14 cities and were divided among freight (receiving greater weight due to its higher commercial significance) and passenger services. Within each identified location, respondents were selected using the snowballing technique, keeping in mind the need to conduct the exercise in multiple markets within a selected city as well as to ensure variation among the size of the firms interviewed. A random sampling technique was not feasible, as no ‘universe’ for the transport sector exists for any of these locations. Moreover, the diversity of the selected locations and the transient nature of most transporters (especially those without any physical hub) would have made mapping a cost-prohibitive exercise. However, the data obtained from the survey, while useful for topics including governance and institutions, was fairly weak in the areas of revenue, profit margins, volumes and costs. This is often the case in the transport sector in Pakistan due to the
2 The sigma total is higher than the sample size since 12 respondents dealt both with passenger and freight services.
25. Synthesis Report
Innovative Development Strategies (Pvt) 15
informal nature of the sector and agents’ unwillingness to reveal information on revenues and costs.
28. Thus for the road sector, instead of the domestic commerce survey, an existing primary data set collected from transporters of coniferous timber for 2004-05 and 2005-06 was used. The data contains variables dealing with price, costs, and profit margins for the major timber routes in the country. The sample size for the data set was 62, which was representative of the timber industry in Pakistan. A total of 5 hubs of timber trade in the country were surveyed. As with the data set collected specifically for the domestic commerce exercise, respondents for the timber survey were selected through snowballing.
29. Analysis of the rail, aviation and ports sub-sectors primarily draws on secondary literature. Key informant interviews were only utilized to substantiate existing information and fill gaps. Due to the small number of interview respondents, information from secondary literature was treated as sacrosanct wherever the two sources of information differed. Interview respondents were selected purposively, the selection criterion being relevance of respondents to the required information. The table below gives details of interviews conducted for each sub-sector.
Table 1.11: Details of interviews conducted for each sub-sector
Number of interviews
Location
Rail
8
Lahore, Islamabad
Aviation
3
Karachi
Ports
11
Karachi, Lahore
26. Innovative Development Strategies (Pvt) 16
Section 2
Firm Level Characteristics
30. Firm level characteristics provide the micro view of the structure of the market for domestic commerce in Pakistan. For this purpose, capital invested in the firm at the time of its initiation provides an important indicator of firm size. Given that firms in the wholesale and retail sectors are largely owner driven, experience in the business is an important indicator of human capital development through learning by doing. This is also an indirect indicator of productivity improvements. Different avenues through which capital was acquired throws light on the extent to which formal and informal capital markets are accessed by entrepreneurs in and across these sectors. Moreover, it also provides an important indication of the importance of own or family savings are brought to bear in starting a business. Finally, in this section we also look at the level of access to other business services for the sectors that were surveyed.
Table 2.1: Quantum of Start up Capital (Rs.)
Mean (Rs.)
Median
Minimum
Maximum
Number of firms
Retail
610, 039
150, 000
500
70, 000, 000
972
Wholesale
776, 603
200, 000
1, 000
30, 000, 000
493
Storage
5, 757, 154
1, 000, 000
1, 000
300, 000, 000
175
Transport
2, 403, 444
575, 000
10, 000
35, 000, 000
90
Total
1, 232, 979
200, 000
0
3.0E + 08
1995
2.1 Firm Size
31. The median start up capital of firms is reported to be Rs. 200, 000. As expected, the highest median start up capital is in the transport sector at Rs. 575,000. Because of the higher level of capital investment in the transport sector, i.e. investment in a vehicle makes the sector more ‘capital intensive’ than the other sectors surveyed. However, the level of start up capital appears generally low for all sectors. For sectors other than transport, capital requirement will be concentrated around renting or purchasing the premises and furnishing it. Although it is expected that at the time of the initiation of the business inventory cost will be minimal, the amount of start up capital is low for all the sectors. Once we discount the possibility of underreporting, this data indicates that the size of firms across all sectors is small.3 Smallness of firm size is further corroborated by low levels of full time employment also (see section 2.3.). The following table provides statistics on levels of start up capital across sectors.
32. For the retail and wholesale sector the cut off is taken to be firms with start-up capital of Rs.200, 000 or less. Since firm size is larger in transport and storage – primarily because of
3 Since firm age is low, it is not the case that in terms of real prices there will be much difference either.
27. Synthesis Report
Innovative Development Strategies (Pvt) 17
greater capital outlays– the cut off is taken to be firms with start-up capital of Rs.1 million or
less.
Figure 1: Firm Age/Start-up Capital Groups
0
10
20
30
40
50
60
70
80
90
%age of Firms
Retail Wholesale Storage Transport
Sectors (Start-up capital for retail and wholesale: < Rs.200,
000; for Storage and Transport: < Rs.1 million.)
Upto 5 years
6-10 years
10 + years
33. We further disaggregated firms according to their age to check if there is a pattern
over time with regard to the size of firms. In Figure 1 we present data of firms in four sectors
according to the age of firm and startup capital less than Rs.200, 000 in the retail and
wholesale sectors and less than Rs.1, 000, 000 in the storage and transport sectors. While the
real value of startup capital in today’s prices will be somewhat higher for older firms, there is
a discernable difference across all sectors between firms established more than 10 years ago
and those established in the last five years. However, difference in the number of firms
established in the last 5 years and between 5-10 years is not substantial in the aggregate. This
is particularly pronounced in the retail and wholesale sectors where we see that roughly 55-
60% of the firms consistently start their businesses with less than Rs. 200,000 at their
disposal. In real terms, therefore, one can safely conjecture that on the whole firm size at the
time of initiation of business has declined in the last ten years. Similarly, in the transport
sector our data shows that firm size has actually declined. The only sector where firm size
appears to have increased over time is storage where a natural progression over time appears
to have occurred. Even in this sector, however, the increase in size of firms does not seem
significant once real prices are used.
34. The data thus does not paint a promising picture so far as firm size is concerned. Over
time, as incomes have increased, firm size at the time of initiating the business has remained
at best stagnant.
2.2 Registration Status
35. Registration is a proxy for the ‘formal’ nature of the enterprise. Roughly half of the
establishments surveyed across the sectors were registered. Registration, it appears, is closely
correlated to firm size. As such, the lowest level of registration is found amongst retail
outlets. Amongst all other sectors, the level of registration is over 50%, with the highest share
in the storage sector. Perhaps because of the high share of capital intensive nature of
activities such as cold storages and those operated by large distributors in urban centres,
28. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 18
levels of registration were high in this sector. Given a higher proportion of smaller firms in the wholesale and transport sector, the level of formalization through registration is low. The following table depicts the level of registration across sectors.
Table 2.2: Registration Levels
Number of firms
Percentage of total sample
Retail
394
39.4
Wholesale
258
51.6
Storage
142
72.8
Transport
58
59.2
Total
852
47.5
36. Those who had not registered were asked about reasons for not registering. More than two thirds (76%) responded that there was no requirement for registration. The next largest category (15%) was those who said that since there was no penalty for non-registration, they did not register. The number of procedures for registration (4%) and high tax rates (3%) also featured in descending order.
2.3 Employment Patterns
37. Table 2.3 provides descriptive data on employment. Mean full time employment levels across all sectors is 3. While there is a large variation in employment levels across sectors, as mentioned above, given the overall smallness in the size of firms in no sector is the level of mean employment higher than 9. As expected, the mean level of full time employment is 3 times higher in the transport and storage sector compared to that in wholesale and retail. Not only are transport and storage facilities larger in size, the nature of the vocation is such that a higher number of full time employees is required in both sectors. Drivers and cleaners are required to operate a transport business while watchmen, book keepers and loaders are a necessary component of the storage business.
Table 2.3: Employment Levels
Mean full time employees (number)
Mean part time employees
(number)
Retail
2
0
Wholesale
2
0
Storage
9
2
Transport
8
1
Total
3
0
38. The average retail and wholesale outlet in Pakistan, on the other hand, is a family run affair, perhaps with some part time help. This is borne out by the data also. Roughly 37% of retail and 18% of wholesale outlets have no permanent employee.4
39. Part time employment, contrary to expectations, appears fairly low across all sectors. Mean part time employment is less than one in the retail and storage sectors but somewhat higher in the transport and wholesale sectors.
40. The data above indicates that those domestic commerce sectors surveyed have overall low employment generation capacity at present. However, given the relatively labour intensive nature of this segment of the economy, it is a potential employment generator at the lower end of the skill segment of the population.
4 It is expected that in retail there is unpaid family help but there is no data available on this.
29. Synthesis Report
Innovative Development Strategies (Pvt) 19
2.4 Human Capital
41. Information on human capital endowments is available, albeit partially, for both owners as well as workers. Detailed information on education and training for owners is available for the storage and transport sectors. Only 10.7% of owners in the storage sector (and one in transport) had been to a technical college or university. Bulk of the owners in both sectors (27% for storage and 34.4% in transport) had gone through on the job training, working as employees elsewhere. The remaining, more than half of the owners said they had learnt their vocation either from friends and relatives or were self taught. While the requirement for higher endowments of human capital in these sectors is not very stringent, it appears that the low level of education and formal training will pose an impediment for firm growth. Given the lack of skill specificity required in wholesale and retail trade, it is expected that educational attainments will be even lower in these sectors. The following table describes education attained by mangers/owners in the storage and transport sectors.
30. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 20
Information for educational attainment of employees was obtained for the retail, wholesale and storage sectors. In aggregate, more than half of the full time employees and 96% of part time employees had not finished primary schooling. Table 2.5 provides the number of permanent employees across sectors who have not finished primary schooling.
Table 2.5: Employee’s Education Levels
Percentage of sample that have not finished primary school
Retail
62.2
Wholesale
42.8
Storage
16.3
Total
51.2
42. Low levels of education attainment is to be expected amongst employees from both supply and demand sides. On the demand side, the nature of work does not require high level of skills and literacy, whereas the supply of individuals with low levels of literacy and educational attainment is large. The domestic commerce sector is an important absorber of this segment of the workforce.
2.5 Access to Financial Services
43. Access to formal sector financial services is perhaps one of the most important prerequisites for the growth and efficiency of an enterprise. Data collected on this important area of concern was on sources of finance used for starting the business and subsequently those who sought access to financing in the last five years for purposes of either initiating a business, further investment or working capital. We also explore data for reasons that entrepreneurs could not access the financial sector.
44. The predominant form of startup capital has been family savings and sale of assets. More than 91% of the resources raised in the sample across all sectors were from these sources. There was little variation across the sectors. Use of formal sector bank credit in startup capital was very low in the aggregate. Across different sectors also, resort to formal sector credit for business startup was low across all sectors. Only in the transport sector is the share of those who used bank credit as part of the startup capital relatively high. Loans from the informal money markets are also miniscule at less than 2% of the aggregate sample. Interestingly the only sector where the role of informal credit is high at 17.2% is real estate. Perhaps the use of ‘black money’ in real estate trading is reflective of this relatively high share of informal financial markets in this sector.
45. Data was collected on borrowing from different sources in the last five years from the retail, wholesale, transport and storage sectors. The aggregate level of borrowing from all sources in the last five years was a mere 8.75% of the surveyed firms. No major variation was found across sectors, only a slightly higher than average trend of borrowing in the transport and storage sectors is observed. Higher capital requirements have necessitated this relatively higher level of borrowing in these sectors.
46. As to the source of borrowing, roughly half borrowed from the commercial banks. The next most prevalent source of borrowing was from the family and friends and not from the informal financial market. In fact, borrowing from the informal money market was miniscule with only 2 retail and wholesale establishments and 3 storage firms borrowing from this source.
31. Synthesis Report
Innovative Development Strategies (Pvt) 21
Table 2.6: Details the sources of loans taken across sector.
Retail Wholesale Storage Transport Total
Source
Count
(% of sample)
Count
(% of sample)
Count
(% of sample)
Count
(% of sample)
Count
(% of sample)
Commercial bank
49
(4.9)
17
(3.40)
10
(5.10)
10
(10.10)
86
(4.79)
Money lender
2
(0.2)
2
(0.40)
3
(1.53)
0
(0)
7
(0.39)
Friends/relatives
38
(3.8)
13
(2.60)
10
(5.10)
0
(0)
61
(3.39)
Other
3
(0.3)
0
(0)
0
(0)
0
(0)
3
(0.17)
Total
92
(9.2)
32
(6.40)
23
(11.74)
10
(10.10)
157
(8.75)
Sources of Loans Taken in the Last Five Years
47. From this data, we can tentatively conclude that in an overall context of low levels of
borrowing, access to the formal financial sector was not uncommon. More important is the
observation of extremely low levels of access to the informal financial market.
Figure 2: Loans from Commercial Banks in Retail and Wholesale.
0
1
2
3
4
5
6
7
%age of firms taking loans from
commercial banks
500000 500001 +
Start-up Capital (Rs.)
Retail Wholesale
32. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 22
Figure 3: Loans from Commercial Banks in Storage and Transport.
0
2
4
6
8
10
12
14
%age of firms taking loans
1000000 1000001 +
Start-up Capital (Rs.)
Storage Transport
48. We further checked if firms that are larger in size tend to access the formal financial
sector compared to smaller firms. A priori we would expect this to be the case given the
greater ability of larger firms to provide for collateral and meet the criteria for accessing the
formal financial sector.
49. Using start up capital as a proxy for firm size, we see in Figure 2 that firms with a
startup capital of more than Rs. 500, 000 have a greater propensity to borrow from banks than
smaller firms in the wholesale and retail sector, but the difference is minimal. It is also
interesting to note that the wholesale sector (which, in principle should have a greater capital
outlay than the retailers) accesses the banks for financial services less than the retail sector. A
similar picture emerges for the storage and transport sectors (Figure 3), where the proxy for
startup capital has been taken to be Rs. 1 million and above for large firms. The ratio of firms
borrowing from banks improves but similar to the retail & wholesale sectors, the difference is
not significant. This data implies that the threshold at which bank borrowing becomes
feasible in Pakistan is perhaps higher than that at which sectors in domestic commerce
surveyed here operate.
50. Procedural problems of acquiring loans also kept away some 27 firms from acquiring
loans from the formal financial sector. More than half of this sample who were denied loans
after having applied for them were from the retail sector. In retail the most prevalent reason
for credit denied from the banks was the lack of collateral. If access to the formal financial
credit market is to be developed then policy will have to devise procedures to provide credit
to small businesses in general and retail outlets in particular.
51. Data on the purpose for which loans were acquired demonstrates that the bulk of the
borrowing took place for expansion of businesses rather than for working capital
requirements. Since working capital is an important requirement for the retail and wholesale
33. Synthesis Report
Innovative Development Strategies (Pvt) 23
sectors, we find that their mode of borrowing for this purpose is predominantly in the form of acquiring credit from suppliers.5
2.6 Use of Other market Services
52. An important indicator of a robust domestic commerce environment will be the use of support services. The need for and use of these services not only informs us about the level of awareness and scale of activity of the firms surveyed but also of the availability of such services in the market. Data for these variables was collected for the retail, wholesale, storage and transport sectors.6
53. Engineering services will be most relevant for the transport and storage sectors, with the use of trucks and lorries, etc. as necessary components of the business. Consequently the demand for engineering services was highest amongst the transport and storage sectors. However, given the engineering ‘intensive’ nature of these sectors – especially transport – the levels of demand is low. Since there is not much difference in the level of services, the market for engineering services appears well developed.
54. Demand for management consultants was low across all sectors. One fourth of the storage firms, however, demanded these services. It is most likely that those storage firms that demanded management services were the larger urban distributors. The demand for marketing services, on the other hand, is much more prevalent amongst all sectors; however, the supply of demand services, measured through their use, appears lower than that for other services. Demand for accounting services is significant only for storage, necessitated by requirements for inventory management. The use of legal services was most prevalent in the transport sector. Perhaps the interface with the police necessitates greater access to legal services. Demand for legal services in the storage sector is 28.1%. A priori one would expect this demand to be higher, since losses and damage is expected to be more frequent. The gap between the use of legal services by the storage sector is also larger than that for other sectors. Perhaps the cost of these services is too steep for storage enterprise owners to access them.
55. The demand for insurance services is again low, considering that it is an important service for all four sectors, both in terms of their fixed assets as well as inventory. Again demand for insurance is high for transport and storage. Because of the high capital cost involved in vehicles, use of insurance services is the highest in the transport sector. However, the gap between demand for and use of services varies a great deal. Perhaps the cost of insurance is inhibits higher levels of insurance in the transport sector. The use of information technology, as expected, is minimal. The only sector which expresses demand for it is storage, though usage in this sector is also fairly low.
5 Although supplier-buyer credit was strictly speaking ‘borrowing’, it was not included in the ‘loans acquired’ question in the survey.
6 For detailed data description, refer to Appendix 3.1.
34. Innovative Development Strategies (Pvt) 24
Section 3
Competitiveness and Efficiency of the Domestic Commerce Sector
56. Efficient use of resources in domestic commerce is an important prerequisite for sustained growth in the sector. Based on conventional economic wisdom, a competitive environment is an important condition for efficiency. Linked to the level of competitiveness is that of barriers to entry which is an important indicator of market competition. Levels of profitability and value addition provides us with information on efficiency at the firm and sector level. Based on survey data as well as secondary information, this section will analyse these conditions. Both the cost of and access to infrastructure is an important cost of doing business. The survey provides some information on this important aspect of competitiveness and efficiency also which is analysed in section 3.4. Section 3.5 provides survey results on perceptions of constraints to growth that the respondents provided.
3.1. Market Competition
Table 3.1 presents results of the level of competition for firms in the retail, wholesale and storage sectorys based on survey data. Competition is measured on the basis of similar enterprises with a certain radius of the firm that was surveyed. Information on the transport sector presented in Table 3.1 is culled from the background paper on the transport sector.
Table 3.1: Competition Within a Given Radius
Retail
Wholesale
Storage
Transport
Number of similar enterprises within a radius of 1 km
1 to 5
297
115
96
On average enterprises transporting goods have to deal with more than 25 competitors in their area of operation. Competition for inter-city passenger services is less severe. Pakistan Railways is a monopoly
6 to 11
198
77
33
12 to 25
168
85
16
More than 25
259
141
14
Don’t Know
24
18
29
Total
946
436
188
35. Synthesis Report
Innovative Development Strategies (Pvt) 25
57. As we see in the above table, market competition was intense in the retail sector with 52 percent of firms saying that up to 11 similar enterprises existed within a radius of 1 kilometer. The responses were roughly similar across revenue categories, indicating that both large and small enterprises faced similar competition. Wholesale markets are generally clustered by nature of goods, so market competition was fairly intense with a third of respondents saying that there were more than 25 similar outlets in the vicinity.
58. Market competition was intense in the storage sector also with about 51 percent of storage owners saying that up to 5 similar enterprises existed within a radius of 1 kilometer. The responses were roughly similar across revenue categories, indicating that both large and small enterprises faced similar competition.
59. Competition in the trucking sector is also intense.7 The trucking industry faces minimal entry barriers, as is evident from the extremely large number of existing operators and frequent new entrants. More than 25 percent of the companies surveyed were established in the last five years. The age of an additional 25 percent of the firms was less than ten years. The vast majority of businesses have been established from scratch, with only a minor proportion either being inherited or bought as a running business.
60. Majority of the competition for transport enterprises comes from both small and large private-owned transport companies. On average, enterprises transporting goods have to deal with more than 25 competitors in their area of operation. Competition for inter-city passenger services of comparable quality is less severe. Competition levels are reportedly greater in Punjab as compared to Sindh. The National Logistics Cell (NLC) is the only public sector company in the road transport sub-sector and enjoys preferential treatment from the government, despite its poor services and relatively higher rates. Notwithstanding, it is a minor player in the market, accounting only for about 5 percent of the total intra-country freight volume.
3.2. Barriers to Entry
61. In the retail sector, almost 58 percent of firms interviewed reported that they had faced barriers to entry, and when asked to rank the most important barriers, in order of importance, a significant 68 percent ranked capital requirements as the most important barrier. The need to have personal contacts in the proposed business was cited as the most important barrier by 10 percent of respondents, while almost 33 percent of respondents cited it as the second key barrier to entry. Government regulations and tariffs were also cited as important barriers to entry, with 18 percent of respondents ranking this at no. 2, and 19 percent at no. 3.
62. In wholesale, about 65 percent of firms interviewed reported that they had faced barriers to entry, and 76 percent cited the need for finance as the most significant barrier. The need to have personal contacts in the proposed business was cited as the most important barrier by 7 percent of respondents, while almost a third of respondents cited it as the second key barrier to entry. Government regulations and tariffs were cited as the second and third ranked barriers by about 20 percent of respondents.
63. In the storage sector, roughly 77 percent of storage owners interviewed reported that they had faced barriers to entry, and when asked to rank the most important barriers, in order of importance, almost 60 percent ranked capital requirements as the most important barrier. The need to have personal contacts in the proposed business was cited as the most important barrier by 5.6 percent of respondents, while almost 24 percent of respondents cited it as the
7 This and the next paragraph draws mainly from the Transport Sector background Paper.
36. Survey Report on Domestic Commerce
Innovative Development Strategies (Pvt) 26
second key barrier to entry. Government regulations and tariffs were also cited as important barriers to entry, with 20 percent of respondents ranking this at no. 2.
64. In road transport, although barriers to entry are minimal in absolute terms, minor irritants include large capital requirements, corruption and government tariffs are the major ones. In Sindh, the level of required capital was reported to be an especially important concern, perhaps because an extremely high proportion of the province’s enterprises are ‘small’ and are thus capital constrained. A few companies surveyed stated that personal contacts in the industry were necessary to enter. Even fewer reported that the ‘transport mafia’ played a role in restricting new firms from joining the business. However, such seldom experiences are seldom8 and could be discounted in the macro picture.
3.3. Value Addition and Profitability
65. Due to an unavailability of comprehensive data across time on prices as well as operating revenues and expenditures, an analysis of value addition across all sectors was not possible. Thus our analysis has been restricted to retail, wholesale and transport sectors only. While figures for average monthly value added have been calculated for the retail and wholesale sectors, a longitudinal study and forecasting was not possible due to lack to time series data. Only in the transport sector, was a proper analysis on value addition possible. The importance of this sector for both domestic and international commerce is immense and hence its output and value addition indices are of significance across sectors and regions. Below is a sector wise analysis of different sectors.
3.3.1 Transport
66. Within the transport sector, it has been difficult to obtain data on prices, operating revenues and expenditures. However, output indices for the sector (excluding aviation, due to lack of the above mentioned data) have been calculated while weights for value added index have been calculated for the road sector only (owing to availability of data in this sub-sector).
Table 3.2: Relative weights to compute output index9
Road
Passenger 0.5101
Freight 0.4145
Rail
Passenger 0.0452
Freight 0.0301
Total 1.00
8 The proportion of respondents suggesting this was very small.
9 For details on calculation of weights refer to Appendix 2.1.
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Table 3.3: Total, Freight and passenger indices
Table 3.4: Relative weights for value added index
Road
Passenger 0.5284
Freight 0.4715
Total 1.00
67. Table 3.2 reflects the relatively higher weight of passenger services compared to freight in both road and rail sub-sectors.
68. A steadily growing transport index is depicted in Table 3.3, where the total, passenger and freight indices follow extremely similar trajectories. Growth rates in the late 1990s for the sector were high, however these declined dramatically in 2000-01; then, onward while the growth rate has picked up somewhat it is still not at the late 1990s’ level. An explanation for this may be discerned in the relationship between the transport output index and the national GDP growth rate10. The relation is inverse as observed in two cycles in the past two decades; in the late 1990s GDP growth rates plummeted while the transport output index was at its peak while in 2000-01, when GDP growth accelerates, the transport output index slumped. This relation may be observed earlier as well (in the 1980s) and suggests an average 3-5 year lag period between the movement in the transport index and GDP growth.
69. Forecasts for the transport output index up till 2009-10 suggest a significant upturn in the sector, given the high GDP growth rates since 2002-03 and the presence of a 3-5 year lag.11 Secondly, passenger services are likely to grow at a higher rate than freight; such a trend in fact is already under way as confirmed by survey results. As there is little difference in per unit prices between passenger and freight carriers, the divergence may be attributed to rising passenger volumes.
70. Table 3.4 gives relative weights for a value added index for the road sub-sector, revealing passenger services to be higher than freight.12 As the difference is minimal, the value added potential of the two services is likely to be comparable. Due to unavailability of data, weights could not be calculated for the rail sub-sector. A cursory examination of the sub-sector reveals that freight services cross-subsidize passenger services while the core commercial network cross-subsidizes the non-commercial network. Both passenger and freight cover their direct train-related operating costs and produce a surplus; core freight produces a surplus towards access and infrastructure costs; services on the non-core network operate at a loss, however and; overall both core and non-core networks operate at a loss if
10 GDP growth rates are given in Appendix 2.2.
11 For details of forecasting techniques, refer to Appendix 2.3.
12 The index cannot be calculated due to unavailability of time series data.
Years
Total
Output Index
Passenger
Output index
Freight
Output
Index
1995/96
67.28
66.67
68.77
1996/97
71.16
70.60
72.55
1997/98
75.49
74.90
76.97
1998/99
80.36
79.76
81.84
1999/00
85.30
84.64
86.98
2000/01
90.33
89.66
92.02
2001/02
91.10
90.14
93.51
2002/03
93.45
92.96
94.68
2003/04
96.59
95.94
98.20
2004/05
100.00
100.00
100.00
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train and track depreciation costs are added. As far as rail’s prospects go, the bulk of its operations constitute passenger traffic, though it is the most cost-effective in terms of containerized cargo (compared to road) however clients appear to prefer paying higher prices for more efficient container transport.
3.3.2 Retail
71. Value added in this sector is calculated through use of the data on revenues, expenditures and profits obtained from the survey. There was significant variation in reported revenues and profits. The median monthly revenue was approximately Rs.127, 750 while the mean was Rs.413, 610 and the maximum reported was over Rs.31 million. Furthermore, 70 percent of all establishments had average monthly revenues under Rs.250, 000.13Data on profits reflects a similarly skewed distribution; median monthly profit is recorded at approximately Rs.20, 000 while mean monthly profit is Rs.72, 000.14 The average computed profit figure (Rs.11, 000 was median profit and Rs.54, 000 was mean profit) was lower than the directly reported profit, reinforcing the view that respondents typically overstate expenditures and understate revenues. Due to this likely misreporting of profits, estimates of value added must be considered with caution. Average monthly value added was estimated at almost Rs.95, 000; however, the distribution was significantly skewed as reflected by median value added, estimated at Rs.20, 000. Average value added in Punjab (Rs.113, 000) and Sindh (Rs.111, 000) was higher than average while in NWFP (Rs.48, 000) it was lower than average, reflecting disparities in commercial activity.
3.3.3 Wholesale
72. Value added in this sector is calculated through use of the data on revenues, expenditures and profits gained from the survey. Significant variation was found in reported revenues and profits, much like the retail sector. The median monthly revenue was approximated at Rs.300, 000 while the mean was Rs.921, 048 and the maximum reported was over Rs.40 million. Furthermore, about 65 percent of the establishments had average monthly revenues up to Rs.500, 000.15 In general, wholesale and wholesale cum retail establishments exhibit higher revenue figures than retail.
73. Data on profits reflects a similarly skewed distribution; median monthly profit was recorded at approximately Rs.35, 000 while mean monthly profit was Rs.73, 000.16 One again the computed profits (median computed profit was Rs.16, 000) were lower than the directly reported figures. Due to this likely misreporting of profits, estimates of value added must be considered with caution. Average monthly value added was estimated at almost Rs.54, 000; however, the provincial disparity was again reflected by the higher than average value added in Punjab (Rs.124, 000).
74. The only conclusion that can be drawn for the wholesale and retail sectors on survey information is that profitability, on average, is low perhaps due to a highly competitive environment in which these establishments operate. Perhaps this is to be expected given the variety in firm size in this sector. If growth in this sector is to be promoted, it will have to be based on depth rather than breadth; i.e. it will require firms to increase their size rather than merely smaller firms entering the fray to meet existing demand. This is where linkages with
13 Refer to Appendix 2.4 for a detailed table on retail establishments’ revenues.
14 Profit was recorded in two ways; through a direct question as well as by computing the difference between the average monthly revenue and expenditure figures.
15 Refer to Appendix 2.5 for a detailed table on wholesale establishments’ revenues.
16 As in the case of the retail sector, profit was recorded by means of a direct question as well as through computing the difference between average monthly revenue and expenditure figures
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efficient and accessible infrastructure and other market services – most importantly the financial market – will be critical.
3.4 Infrastructure: Bottlenecks
75. One important component of the cost of doing business is the cost at which infrastructure is provided to the commercial sector. Added to this are issues of the cost of the time to access infrastructure as well as the losses incurred due to inadequate provisioning of infrastructure.
According to survey results, about 23% of the total cost in the aggregate foes towards electricity, water and telephone charges for the retail, wholesale and storage sectors. For the storage sector, the infrastructure cost is significantly higher at 34.39% of total expenditure.
Table 3.5: Cost of Infrastructure as a Proportion of Total Cost (%).
Retail
Wholesale
Storage
Total
Electricity
9.86
7.09
31.51
17.27
Water
0.56
0.22
0.60
0.50
Telephone mobile internet fax postal
4.81
10.84
2.27
5.22
Total
15.23
18.14
34.39
22.99
76. The cost of electricity dominates among the three infrastructure items, except of the wholesale sector where the cost of telephony is somewhat higher. Given the high electricity intensive nature of the storage sector, a part of the sample for which consists of cold storage, the cost of electricity as part of total expenditure is as high as roughly one third. The storage sector was also asked about the time it took to obtain an electricity connection. 29% responded that this connection was obtained within one week, whereas 60% said that it took between 2 to 4 weeks to get an electricity connection. For the rest of 11% it took more than 4 weeks.17
77. The cost of electricity in Pakistan, especially for commercial enterprises costs, is much higher than that in the region. Part of this high cost of electricity is that the commercial and industrial sectors cross-subsidize the consumer and agricultural sectors. While this may be due to large political economy considerations of the state, if growth in these sectors is a priority then the government will have to find a more rational approach to cross- subsidization.18
78. Infrastructure related losses due to the state of the road network are most constraining for the road transport sector. Roughly half of the respondents claimed that they lost 2 to 6 hours on average due to poor raid infrastructure in a day. This was further corroborated by their opinion where about 60% of the respondents in the road transport sector. Given the priority that is being given to road construction and road works in the last few years, it is hoped that the situation on this front will improve.
3.5 Constraints to Growth
79. Chief among constraints to growth is limited access to finance across all sectors. 50% of retail respondents, 40% of wholesale respondents and 35% of storage respondents consider limited access to finance to be a primary constraint. Only in the transport sector taxation and
17 Significantly for 10% of the respondents it took 20-30 weeks to get the electricity connection.
18 Increasing the cost of manufactures and the commercial sector eventually is passed on to the consumer in the form of higher prices. The net subsidy to the consumer is therefore likely to be minimal.
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regulation are seen to pose a greater constraint.19 Small establishments are left out of the loop of formal credit markets due to the absence of collateral and unavailability of credit history. Furthermore even in the informal credit market, the need for personal contacts or the lack of collateral disadvantages small establishments. Even government extended support for Small and Medium Enterprises (SMEs) often do not reach small establishments (in particular retail) due to the specification that SMEs must have at least 10 employees.
80. Taxation and Regulation are also oft-cited primary constraints to growth. The sales tax is an impediment and in fact an active disincentive to growth in the retail sector where remaining small allows retailers to evade taxes. Furthermore a tough tariff regime has led to problems for all sectors, making machinery necessary for cold storage and distribution as well as vehicles very expensive. Also after sales care or maintenance has become a problem for all four sectors due to the lack of after sales service among local manufacturers of machinery.
81. Quality of public services is cited in many cases as a primary or secondary constraint to growth. In the retail, wholesale and storage sectors, the condition of road leading to the establishment was in poor condition in 16.8 percent of the sample, 18 percent of the sample and 28.57% of the sample respectively. In the retail sector, 65% of the sample did not have adequate parking apace, while in the wholesale this number rose to 71.6%. In 60-62% of the cases, in both retail and wholesale, encroachments were not observed. All three sectors face problems in terms of expansion; while 56-60% of the retail and wholesale establishments said there was no additional space on which to expand. The storage sector faces costs in terms of conversion fees when the decision to build a storage is made; as no land is assigned for storages, rather, industrial plots are converted into warehousing lots. The transport sector faces problems with respect to the maintenance of the highways and roads in general; while the road network is expanded by the government, inadequate attention is paid to maintenance.
82. Corruption and law and order are largely cited as third ranked constraints to growth in most cases. Lack of confidence in the formal justice system is betrayed by the fact that in both serious criminal and business disputes, the large majority are resolved through negotiation in all four sectors. Furthermore corruption leads to bribery costs, in particular for the transport sector.
83. Regulation on property rights ownership is the least frequently cited constraint to growth in all four sectors.
19 22.5% of respondents in transport considered taxation and regulation as constraints as opposed to 20% who considered access to finance the biggest constraint.
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Section 4
Governance
84. Governance, succinctly defined as the method and nature of the interface with the state or public agencies is now acknowledged as the critical ingredient in sustained growth and productivity improvements (Kauffman, et.al. 2002). Governance issues within the five sectors on which the survey concentrated were: contract enforcement, law and order, taxation, regulation and collective action. Unavailability of survey data for real estate restricted analysis; however the remaining four sectors are discussed at length below.
4.1. Contract Enforcement20
85. Details on the nature of the contract were only available for the transport and storage sectors. About 60 percent of the storage sample said that the only form of contracts in storage were simple receipts given by the storage owners to the customers; 20 percent said that records were computerized and electronic receipts were given out while 18 percent said they worked with more formal contracts. Similarly in the road transport sector the majority of respondents (almost 50%) said contracts were simple statements written on plain paper and signed by both parties. Other contract forms included receipts, arrangements written on stamp paper and signed by both parties. In a small minority of transport enterprises, no contracts are used at all. In such cases either the two parties enjoy an established professional relationship or the transaction is certified by a system of honour or by a payment in advance. In the retail and wholesale sectors, the only detail on contract forms is regarding the receipt that is given to customers in 50 percent and 72 percent of the cases.
86. Data on contract enforcement provides conflicting results. More than 90 percent of the sample in the retail, wholesale, storage and transport sectors agreed (or strongly agreed) upon having to rely on the reputation of those they enter into contracts with (Appendix 4.1); however, more than 80% of the respondents in each of these sectors agreed (or strongly agreed) that a contract would protect them from being cheated (Appendix 4.2) while over 60% agreed (or strongly agreed) that the legal system would uphold their contracts and property rights in business disputes (refer to Appendix 4.3).
87. The results depict contradiction in that if the contract provides protection than the reputation of those entered into contracts with should be immaterial. Furthermore almost 40% of the respondents in the aforementioned sectors agree (or strongly agree) with the suggestion that people from other baraderies/communities are more likely to cheat them (Appendix 4.4), while over 50 percent of the respondents agree (or strongly agree) with the suggestion that people from another city are likely to cheat them (Appendix 4.5). The lack of trust in people from different communities or cities for a substantial protion of the sample belies the data suggesting high incidence of faith in the legal system and contracts. Moreover, the
20 For details of survey responses on contract enforcement refer to Appendix 4.
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contradiction in data recurs when across the four sectors a very low incidence of seeking police intervention in disputes (whether of criminal or business nature) is observed.
88. These inconsistencies suggest that perception based data may not be a good guide for analysing contract enforcement, as factual data (that is the incidence of resorting to police intervention in dispute resolution) depicts a low degree of confidence in the formal justice system.
4.2. Corruption & Law and Order
89. In all four sectors, corruption and law and order have been strongly cited as third ranked constraints to growth. In fact in the road transport sub-sector it is the second most important constraint. The routine interface with the police – perhaps one of the more visibly corrupt and arbitrary state instruments – serves to create this constraint for transporters.
90. Inn rail transport, there is a high incidence of pilferage and switching of items such as live animals (whose description cannot be exact on paper). While there is a formal system of compensation if the loss can be proven, the complaint that rigid rules make it difficult to actually obtain compensation is common.
91. In the storage and wholesale sectors the large majority of disputes appear to be over late payments, with 53 percent of the respondents in both sectors reporting facing this issue in the last one year. Over 85% of the disputes were resolved through negotiation in both sectors and formal justice was not sought. The incidence of serious crimes was low in these two sectors though about 17 percent of the wholesale sample reported theft cases; 54 percent of these cases were dealt through negotiation, without police intervention.
92. Within the wholesale sector, another common contravention of the law is illegal encroachments which are ignored by corrupt officials in Market Committees. In the retail sector, the incidence of serious crimes was higher with 27 respondents reporting murder and 121 mentioning serious theft. However in both instances only 37-39% of the cases were reported to the police and dispute resolution was achieved largely through negotiation. While the law and order situation is of considerable concern for all four sectors (being one of the highest ranked constraints to growth), respondents displayed a lack of confidence in formal justice and a strong tendency to resort to negotiation.
4.3. Regulation
93. All five sectors cite regulation systems as one of the top ranked constraint to growth. Though the lack of clear regulation on property rights is not seen as an impediment to growth among the majority of the sample, zoning regulations are the most frequently cited constraint across sectors. Regulation regarding access to finance is unfriendly towards small enterprises in all sectors. Another important aspect of regulation is tough import tariff regime, which has resulted underdevelopment in all four sectors. Lastly registration is an aspect of regulation that is not adhered to in a large number of enterprises in the sample. Below we discuss regulation issues pertinent to the different sectors.
4.3.1 Retail
94. A tough import tariff regime has negatively impacted retail in both directions of the link in the supply chain. Cold storage machinery and refrigerated vehicles necessary for transporting goods from the wholesale market to retail outlets are subject to a 25 percent import duty and a 15 percent sales tax. While some locally manufactured substitute machinery does exist, in the absence of after sales service, maintenance costs are high.
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Secondly, machinery used at the retail outlet such as chillers and deep freezers is also subject to the tariff regime, again adding to costs.
95. Formal credit facilities are usually denied to retail establishments owing to their small size. Even informal sources require either a collateral or personal contacts. Government initiated financing schemes are one possible source for these establishments but the classification of Small and Medium Enterprises (SMEs) as establishments having at least ten employees has meant that several retail establishments have been left out of the loop even when financing options are made available for small enterprises.
96. Lastly, urban zoning is particularly unfriendly to small retailers. There is an excess of demand for retail space in market places and for the poor retailer, lacking capital, it is impossible to enter structured expensive retailing.
4.3.2 Wholesale
97. Wholesale markets are ill planned in Pakistan, whether they be privately owned or under the administrative control of Market Committees. Typically these markets are congested, lack well designed entry and exit points and other infrastructural facilities (such as roads, storage, etc). Overcrowding is one major problem which city administrators, in some areas, have tried to solve by locating wholesale markets out of cities. This has resulted in other problems such as an increase in distribution costs within the city.
4.3.3 Storage
98. Storage is in many cases a highly seasonal business yet 92 percent of those who reported seasonality said they did not convert their facility to any other use during the ‘off season’. While most of them cited a lack of need or the impossibility of conversion, 15 percent cited regulations as not permitting use of storage facility for any other purpose.
99. Zoning regulations do not specify land for warehousing purposes but industrial plots may be used for warehousing (in the case of Karachi and Islamabad, on the payment of a conversion fees). In these cases, when storage facilities are built from scratch, considerable delay can occur in acquiring utility connections21 City authorities do however provide land for cold storages near fruit and vegetable markets.
4.3.4 Transport22
100. A major concern with regard to the regulatory framework is the dated transport regulations. Regulations that are pertinent to transport carriers are the National Highway Safety Ordinance, the 2000 Road Safety Act, and till a few months back, the 1865 Carrier’s Act. Underlying most regulatory bottlenecks in the road transport sub-sector are dated legislations. The Carrier’s Act 1865, which governed the carriage of goods by roads in Pakistan till April 2006, was in dire need of reform. Liability ceilings had remained fixed at PKR 100 per item23, while the Act lacked any incentive structures designed to ensure conformance with laws and to enhance efficiency levels of carriers. A draft law, modeled on the CMR Convention 1956 is being considered since some time. The draft law attempts to introduce legislation that provides road carriers sufficient protection in terms of definite
21 Median time taken to get an electricity connection was 3 weeks but mean was 90 weeks. Median time taken to get a natural gas connection was 3 weeks and mean was 9 weeks. Median time taken to get a water connection was 2 weeks mean was 6.2 weeks.
22 This section draws on Domestic Commerce Survey: An Overview of the Transport Sector (2007).
23 Zahid Jamil and Shahid Jamil, “Modernizing Pakistan’s Carriage of Goods Legislation”, National Trade and Transport Facilitation Committee, 2003. <http:// www.nttfc.org/proceed03/proc03-jamil.htm>.