The State of Domestic Commerce in Pakistan Study 8 - Storage

THE STATE OF DOMESTIC COMMERCE IN
PAKISTAN
STUDY 8
STORAGE
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

Table of Contents
List of Abbreviations .................................................................................................... i
Acknowledgments ..................................................................................................... iv
Executive Summary .................................................................................................. 3
Section 1: Introduction ......................................................................................... 5
1.1. Agricultural Storage – Grains........................................................................... 5
1.2. Cold Storage of Agricultural Goods ................................................................. 6
1.3. Non-Agricultural Storage and Warehousing .................................................... 8
Section 2: Domestic Commerce Survey – The Storage Sector ...................... 10
2.1 Storage Facilities – Questions for Wholesalers and Retailers ....................... 10
2.2 Types of Facilities .......................................................................................... 11
2.3 Infrastructure and Facilities ........................................................................... 12
2.4 Operations ..................................................................................................... 15
2.5 Seasonality of Operations ............................................................................. 16
2.6 Losses, Risk and Insurance .......................................................................... 17
2.7 Viability of Commercial Storage ..................................................................... 18
2.8 Contracts ....................................................................................................... 19
Section 3: Domestic Commerce Survey – Business Issues in Storage ......... 20
3.1 Market Competition ....................................................................................... 20
3.2 Constraints .................................................................................................... 20
3.3 Financing ....................................................................................................... 22
3.4 Employment................................................................................................... 22
3.5 Governance Issues ........................................................................................ 22
Section 4: Key Issues in the Storage Sector .................................................... 24
4.1 Business Volumes ......................................................................................... 24
4.2 Governance Issues ........................................................................................ 24
4.3 Conclusions and Policy Recommendations ................................................... 24

List of Tables
Table 2.1: Types of Storages ........................................................................................ 12
Table 2.2: Land or Building Acquisition for Storage ...................................................... 13
Table 2.3: Condition of the Access Road ...................................................................... 14
Table 2.4: Access for Trucks/Large Vans ..................................................................... 14
Table 2.5: Marketing Methods ...................................................................................... 16
Table 2.6: Seasonality in Storage Operations ............................................................... 17
Table 2.7: Main Cause of Loss ..................................................................................... 17
Table 3.1: Similar Enterprises within a Radius of 1 km ................................................. 20

List of Figures
Figure 1: Is the storage run commercially (goods are stored against payment)or for won use (Cold storage)? ....................................................................................... 8
Figure 2: Cold Storage .................................................................................................. 8
Figure 3: Is the storage run commercially (goods are stored against payment) or for own use (Retail)? ......................................................................................... 11
Figure 4: Is the storage run commercially (goods are stored against payment) or for own use (Wholesale)? ................................................................................. 11
Figure 5: Land or Building Acquisition for Storage ...................................................... 13
Figure 6: Condition of the Access Road ...................................................................... 14
Figure7: Access for Trucks/Large Vans ..................................................................... 15
Figure 8: Marketing Methods ...................................................................................... 16
Figure 9: Main Cause of Loss ..................................................................................... 18
Figure 10: Most important constraint to growth ............................................................. 21
Figure 11: Second most important constraints to growth ............................................... 21
Figure 12: What is your sense of the market trend? ...................................................... 23

Innovative Development Strategies (Pvt) i
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

Survey Report on Domestic Commerce
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

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

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. Ministry of Food, Agriculture and Livestock, Government of Pakistan, Islamabad.
16. Pakistan Hortriculture Development and Export Board, Lahore.
17. Agriculture Department, Government of Punjab, Lahore.
18. Statistics Division, Government of Pakistan, Islamabad.

1
STORAGE*
by
SAFIYA AFTAB
DR. SOHAIL J. MALIK
* For detailed survey results, please see separate volume entitled “Basic Statistics of the Sample Survey Data”.

Innovative Development Strategies (Pvt) 3
Executive Summary
Introduction
1. Storage issues have been classified by sector in this report, with the two broad categories being agricultural storage (storage of grains as well as of fruits and vegetables for distribution to markets) and storage of manufactured products for distribution to retailers.
2. Grain storage in Pakistan is primarily in the public sector, and is the responsibility of the Pakistan Agricultural Storage and Services Corporation (PASSCO), a department of the Ministry of Food, Agriculture and Livestock; as well as of the four provincial Food Departments. Storage practices at this level are very basic, and can range from storage in a heap within the home compound, to storage in specially constructed mud bins or in bags. Data on agricultural storage capacity in the country is sketchy, but total wheat storage capacity in the public sector is estimated at about 5.2 million tons, of which 1.3 million tons is with PASSCO, while the remaining is with provincial agriculture departments.
3. Cold storage facilities of agricultural goods are essential to promote trade, both international and domestic, of perishable commodities. Unlike the developed world where cold storage facilities are a link in a larger chain of logistics, a cold storage business in Pakistan is often a stand-alone concern. Cold storage facilities in the country generally consist of godown style facilities, which can accommodate 30,000 to 100,000 crates of produce. In an effort to promote the provision of storage facilities in the private sector, the Government announced a number of measures in the trade policy for FY2007, most to be implemented through the Pakistan Horticulture Development and Export Board (PHDEB) which provides cold storage facilities as part of its drive to promote export of horticulture products.
4. Storage and warehousing of non-agricultural goods consists primarily of services to production houses, with some storage and warehousing activity taking place for the household sector also (primarily for diplomats). Producers of manufactured goods generally use the services of distributors to supply goods to retail outlets all over the country. Distributors generally use their own warehousing facilities, which differ depending on the product being marketed and the spread of the business.
Domestic Commerce Survey – The Storage Sector
5. A total of 200 storages were sampled in the domestic commerce survey, of which 101 were in Punjab, 66 in Sindh, 22 in NWFP and 7 in Balochistan. The storage sector revolves mainly around agricultural storage – either for grain (primarily wheat) or cold storage for fruits and vegetables (primarily apples and potatoes). Of the total storages surveyed, 7.1 percent dealt only in wheat, 4.6 percent dealt only in other grain, 6.1 percent dealt only in apples, and 6.6 percent only in potatoes. For non agricultural items, key items stored include fertilizer, cement, petroleum products, pharmaceuticals, cloth and items of household use.
6. A substantial number of wholesalers and retailers (67 percent of the total interviewed) had storage space within their wholesale or retail premises, while a further 9.8 percent owned storage space in another building. Commercial storage (or a space where retailers or wholesalers could place their stocks against payment) was not available according to almost 84 percent of respondents.
7. Zoning regulations in major cities do not delineate land specifically for warehousing purposes, but industrial plots may be used to build warehouses, if city authorities are notified of the altered use of the plot. A breakdown of data on how the land or building of the storage facility was acquired shows that cold storages tend to be located on designated land, or in industrial areas, whether they are owned or rented.

8. Enumerators were asked to document the condition of access roads. For godowns (used primarily for grain storage), a little over half of access roads were classified as “average,” but for open storages which tend to be located in fields, access was largely poor, often with no metaled roads. Cold storages, which tend to be located near wholesale markets also, have average to poor access facilities with potholed roads and poor drainage.
9. Storage and warehousing do not function as part of an integrated system of logistics services in Pakistan, but largely as self-contained inventory holding for individual businesses, or in the case of agricultural storage, as a primarily public sector managed system for holding strategic reserves.
10. Storage of grain and other agricultural commodities as well as cold storage can be a highly seasonal business, which has implications for the feasibility of dedicated storages and for the use of storage facilities during periods when the facility is not being used as a storage facility. The data from the questionnaire showed that only cold storages had a high degree of seasonality, depending on the fruits they stored.
11. Storage owners were asked to assess whether commercial storage was a viable business, or whether traders were increasingly inclined towards creating and managing their own storage spaces. About 55 percent of respondents felt that wholesalers and retailers were likely to continue with the trend of managing their own storages, while almost 45 percent thought that demand for commercial storage would increase in the future as business volumes grow.
12. Domestic Commerce Survey – Business Issues in Storage
13. Market competition was intense in the storage sector also with about 51 percent of storage owners saying that up to 5 similar enterprises existed in that location, within a radius of 1 km. Almost 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. Access to finance was also seen as the most important constraint to growth for retail enterprises, with 35 percent of respondents citing this as the most important factor restricting expansion. Of the total storage owners, 78 percent had established their businesses, and the overwhelming majority had funded the establishment of the business primarily through own or family savings – on an average, 76 percent of the paid up capital had come through own or family savings. Over 72 percent of storage establishments were registered with city authorities.
14. Key Issues in the Storage Sector
15. The small scale of the commercial storage sector is linked with the preponderance of small, single owner retail businesses in the country. Small businesses tend to prefer to keep their inventories under their own control, and do not require sophisticated logistics systems for the most part. In a business atmosphere where dealings are based largely on personal contacts and word of mouth, with little reliance of insurance services or legal contracts, the development of logistics services is clearly difficult. The institution of contracts is essential for third party management of inventory.
16. Based on the key issues identified in the survey, it is recommended that the government focus on the development of agricultural and cold storage as it can have implications for value addition in the export of fruits and vegetables.

Section 1
Introduction
1. There is very little information from secondary sources on storage and warehousing in Pakistan, although some studies mention the need for better and improved storage facilities for perishable agricultural products, and upgradation of warehousing facilities at major ports. Storage issues can be classified by sector, with the two broad categories being agricultural storage (storage of grains as well as of fruits and vegetables for distribution to markets) and storage of manufactured products for distribution to retailers. The market structure and issues in these categories are discussed as follows.
1.1. Agricultural Storage – Grains
2. The first level of storage is at the farm level, where grains are stored primarily for own consumption. Storage practices at this level are very basic, and can range from storage in a heap within the home compound, to storage in specially constructed mud bins or in bags. Storage related losses are postulated to be high at the farm level, although estimates are hard to come by. For the purposes of this study though, storage beyond the farm gate, at the stage when food grains enter the market, is the focus of attention.
3. Grain storage in Pakistan is primarily in the public sector, and is the responsibility of the Pakistan Agricultural Storage and Services Corporation (PASSCO), a department of the Ministry of Food, Agriculture and Livestock; as well as of the four provincial Food Departments. PASSCO and the provincial departments are also responsible for regulation of agricultural commodity markets, and for the activities of provincial seed and fertilizer storage agencies. Data on agricultural storage capacity in the country is sketchy, but total wheat storage capacity in the public sector is estimated at about 5.2 million tons, of which 1.3 million tons is with PASSCO, while the remaining is with provincial agriculture departments.1
4. Public sector storage capacity is often in jute bags in shed style godowns, the specifications of which differ by region, in accordance with weather conditions, capacity required etc. For example, storage depots in Karachi, one of the bigger grain markets, measure on average 51.21m x 12.19m with a storage capacity for about 1,500 tons of wheat.2 The godowns do not provide significant protection against insect infestation, and cannot be made gas impermeable to facilitate fumigation. Concrete or metal silos, which can store up to 5000 tons of wheat, and which can be effectively fumigated and provide protection against
1 Asian Development Bank. 2001. Report and Recommendation of the President to the Board of Directors on Proposed Loans to Pakistan for the Agriculture Sector Program II. November. Page 10. Para 32. Of the storage capacity with provincial Food departments, 2.45 million tons is with the Punjab Food Department, 0.71 million tons with Sindh, 0.16 million tons with the NWFP and the remaining is with the Balochistan Food Department.
2 See Khushk, Ali Muhammad and Bhugro Mal. www.pakissan.com/english/ advisory/storage.of.grain.shtml

insect infestation, are little used in Pakistan in the public sector, primarily for cost considerations. The most common form of storage for wheat is actually open air storage, with wheat being stored in bags on raised platforms. Although such storage is classified as “temporary” in PASSCO records for example, PASSCO officials confirm that the grain has sometimes been stored in this fashion for up to 36 months.
5. Storage losses for wheat in particular are estimated to be significant, where loss is defined as a measurable decrease in quantity and quality, as opposed to superficial damage. Loss assessment surveys dating from the late 1980s show that storage losses for wheat can vary considerably depending on the type of storage container, and whether the area surveyed supported irrigated or rain-fed agriculture. Storage losses can range from 6.6 percent for jute bag storage in irrigated areas, to 2 percent for metal bin storage.3
6. Multilateral financing agencies such as the Asian Development Bank (ADB) have emphasized the “privatization,” rental or leasing of agricultural storage facilities, and policy loans such as the $350 million Agriculture Sector Program Loan II, approved in November 2001, included conditionalities on the role of PASSCO (restricting its role largely to the management of a strategic reserve of wheat, and restructuring it to compete with the private sector), and stipulated that the provincial food departments be phased out. These conditionalities, have, however, not been complied with to any significant degree, and PASSCO continues its operations as before. The private sector has, however, entered into wheat procurement since 2000 and in 2005-06; the private sector is estimated to have picked up 1.3 million tons of wheat.
7. In August 2006, a UK based firm entered into a joint venture with a Pakistani partner to set up a bulk storage facility for grains. This will be an integrated logistics facility, providing storage as well as transport services. The company has yet to set up a fully functional office in Islamabad, so more information on the venture will be forthcoming in another two to three months.4
1.2. Cold Storage of Agricultural Goods
8. Cold storage facilities are essential to promote trade, both international and domestic, of perishable commodities. The availability of cold storage facilities for rent can facilitate marketing and distribution of agricultural commodities, and help to stabilize prices. Using common facilities can be particularly cost effective, given the proliferation of small trading establishments in Pakistan who can reap economies of scale with the outsourcing of storage facilities, costs of refrigeration (given power costs that are high and increasing) and lack of space in wholesale and retail markets. International best practice models indicate that cold storage facilities offer a range of cooling techniques (freezer, cooler and dry storage, blast and room freezing), as well as product handling, shipment and distribution services. Ideally, the storage facility should also have a data logging and documentation system to certify the freshness of the produce. This is particularly true to satisfy export requirements in some countries.
9. Unlike the developed world where cold storage facilities are a link in a larger chain of logistics, a cold storage business in Pakistan is often a stand-alone concern. Cold storage facilities in the country generally consist of godown style facilities, which can accommodate 30,000 to 100,000 crates of produce. The storages generally use industrial refrigeration equipment with ammonia compressors. Rates charged can vary by location and facilities provided, but on the average are Rs. 10 – 12 per month per crate. The storages provide some
3 See Baloch, U. K. et. al. 1994, Loss Assessment and Loss Prevention in Wheat Storage ... in Pakistan. In Stored Product Protection ed. Ed Highley, CAB. International. Pp 906-10
4 See http://www.pakissan.com/english/news/newsDetail.php?newsid=10932

Storage
labor for handling services, but in general, transport and handling of goods is the responsibility of the arti or trader who wishes to use the storage facilities. Most storages employ at least one or two mechanics or machine operators to service the equipment, watchmen or security guards, and an accountant who maintains an inventory, in addition to one or two staff for handling. These are thus stand-alone operations, which function on a seasonal basis and market their services with wholesalers and retailers of agricultural products.
10. City administrations in Pakistan provide space for cold storage construction in areas near wholesale fruit and vegetable markets. However, space for storage and warehousing operations is typically designated as “industrial” space, which means that such facilities are liable to pay industrial rates for basic infrastructure, particularly power. Land near wholesale markets, which is designated specifically for cold storages is generally leased from the city authorities, generally on 33 year leases.5 However, for cold storages that are not located on designated land, land can be purchased in industrial areas. In all cities except Karachi, when land for storage is purchased in an industrial area, the city authorities have to be paid a conversion fee to have the land re-designated as a storage facility.6 Karachi is the only city, which has land designated for construction of warehouses and storages.
11. In an effort to promote the provision of storage facilities in the private sector, the Government announced a number of measures in the trade policy for FY2007, most of them to be implemented through the Pakistan Horticulture Development and Export Board (PHDEB) which provides cold storage facilities (two each in NWFP and Balochistan) as part of its effort to promote the export of horticultural projects. The policy also specified that any company setting up a cold storage can avail a facility whereby the first 6 percent of credit obtained for the purpose is picked up by the Export Development Fund (EDF). This scheme is being developed and a PC-1 has been submitted to the Ministry of Commerce for review. The proposed project will be known as the Establishment of Cool Chain System under National Trade Corridor Improvement Project. This facility will be open to everyone, and not just to exporters. However, cold storage owners interviewed in focus group discussions in the course of research for this study maintained that recourse to bank financing was not feasible for them given that interest rates charged are too high to justify investment in a commercial activity which has highly variable returns.
12. An increasing number of wholesalers of agricultural produce are now building their own cold storages in their outlets. It is not clear whether this trend has picked up due to lack of commercial cold storages, or whether this is happening because of lack of trust, and lack of confidence in the services provided by cold storage owners.
5 The lease for an industrial plot is 99 years, but for commercial plots it is 33 years in general.
6 The conversion charge in Islamabad for commercial plots is currently Rs. 3000 per square yard.

Figure 1: Is the storage run commercially (goods are stored against payment)or for won
use (Cold storage)?
Commercial Non-commercial
Is the storage run commercially (goods are stored against
payment) or for own use_Cold storage?
0
20
40
60
80
100
Percent
Figure 2: Cold Storage
Number of crates Dimensions Other
Cold storage
0
10
20
30
40
50
60
Percent
1.3. Non-Agricultural Storage and Warehousing
13. Storage and warehousing of non-agricultural goods consists primarily of services to
production houses, with some storage and warehousing activity taking place for the
household sector also (primarily for diplomats). Producers of manufactured goods generally

Storage
use the services of distributors to supply goods to retail outlets all over the country. Distributors generally use their own warehousing facilities, which differ depending on the product being marketed and the spread of the business. In general, most distributors use field warehousing and satellite warehousing models, with field warehouses servicing main consumption areas at the district level, and satellite warehouses then servicing smaller towns and villages. Satellite warehouses are in the most close proximity to retail outlets. For some commodities which require significant storage space, field warehouses are normally constructed by private owners against a letter of intent from the marketing companies, saying that they will rent the premises for a specified period. Once the construction is complete, warehouses are rented legally.
14. In general though, distributors simply rely on retailers to provide storage space, often in or close to retail outlets, and simply deliver goods to retailers. Karachi is the only city in Pakistan where warehousing is provided on a commercial basis for domestic distributors, with distributors being able to rent space in warehouses. Retailers prefer to have their own storage space primarily because of lack of confidence in the business environment, and the perception that the inventory is best kept close at hand, with retailers themselves taking full responsibility for security.

Section 2
Domestic Commerce Survey – The Storage Sector
15. A total of 200 storages were sampled in the domestic commerce survey, of which 101 were in Punjab, 66 in Sindh, 22 in NWFP and 7 in Balochistan. Identifying storages for the survey was not straightforward, given that commercial storage facilities, other than cold storages which typically are located near fruit and vegetable wholesale markets, are often not advertised as such. Many storages are not run commercially, but are maintained by distributors or wholesalers and sometimes also by retailers. The key findings of the survey on storage and warehousing are discussed in this section.
16. 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 included in this report as follows.
2.1 Storage Facilities – Questions for Wholesalers and Retailers
17. A substantial number of wholesalers and retailers (67 percent of the total interviewed) had storage space within their wholesale or retail premises, while a further 9.8 percent owned storage space in another building. Almost 86 percent felt that the space was adequate for their needs. Those (270 in total) who needed more storage space were constrained by cost of additional space and the fact that additional space was generally not available close by. Traders were asked if they had looked for premises with storage space when they were looking for a space for their shop, and the response was evenly split, with half of respondents saying that storage space was not a consideration in their choice of location.
18. Commercial storage (or a space where retailers or wholesalers could place their stocks against payment) was not available according to almost 84 percent of respondents. For those to whom the option of using commercial storage was available, almost 80 percent said that they would not be interested in using the option. When asked why commercial storage was not used, almost 70 percent of respondents felt that commercial storage was either too expensive, or not secure enough (35 percent of respondents each, out of a total of about 1300). Location was also an issue – about 22 percent of respondents said that commercial storages were not conveniently located near their places of business. Although only one respondent specifically mentioned that the small size of his business was a reason for not using commercial storage facilities, a number of respondents mentioned that they had no need for additional storage facilities. As mentioned earlier, a significant number of respondents had said that storage located within their premises was adequate. It would appear that

Storage
business volumes in general do not support the development of large scale commercially
viable storages.
19. For the small number (56 respondents) who had used commercial storage, the
majority had rented space per square foot, or had rented a room in a commercial building for
storage purposes. The median annual cost of storage was Rs. 30,000 while the maximum
paid (by one respondent) was Rs. 180,000.
Figure 3: Is the storage run commercially (goods are stored against payment) or for own
use (Retail)?
payment) or for own use_Retail?
0
10
20
30
40
50
60
70
Percent
Figure 4: Is the storage run commercially (goods are stored against payment) or for own
use (Wholesale)?
payment) or for own use_Wholesale?
0
10
20
30
40
50
60
Percent
2.2 Types of Facilities
20. 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 also included 65 cold storages, 24 storages belonging

to distributors, and storages affiliated with wholesale and retail outlets. Table 2.1 below gives the complete breakdown.
Table 2.1: 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
21. Of the total godowns, 14 (or about 36 percent) were run commercially meaning that goods were stored at these facilities against payment. The same was true for 8 open storages and 59 of the 65 cold storages. Storages run by distributors and wholesalers, were for the most part not run commercially.
22. The storage sector revolves mainly around agricultural storage – either for grain (primarily wheat) or cold storage for fruits and vegetables (primarily apples and potatoes). Of the total storages surveyed, 7.1 percent dealt only in wheat, 4.6 percent dealt only in other grain, 6.1 percent dealt only in apples, and 6.6 percent only in potatoes. For non agricultural items, key items stored include fertilizer, cement, petroleum products, pharmaceuticals, cloth and items of household use.
2.3 Infrastructure and Facilities
23. Zoning regulations in major cities do not delineate land specifically for warehousing purposes, but industrial plots may be used to build warehouses, if city authorities are notified of the altered use of the plot. In Islamabad and Karachi, if a warehouse is built on an industrial plot, a conversion fee has to be paid to the city authorities, but zoning regulations of other cities are not explicit about such rules.7 As such, storages and warehouses that are not located in port areas tend to be located in rented accommodation – rooms or shops in commercial locations, and often even in houses. City authorities also provide land for cold storages near fruit and vegetable markets.
24. A breakdown of data on how the land or building of the storage facility was acquired shows that cold storages tend to be located on designated land, or in industrial areas, whether they are owned or rented. The same is largely true for grain storage, which is primarily in the public sector, in designated godowns. Distributor’s storages and storages for retail and wholesale outlets are generally placed in rented accommodation in market places or commercial areas. In some cases, storage facilities located in commercial areas were classified as existing on “plot for storage” when owners claimed that the commercial space was primarily for storage purposes based on its proximity to retail or wholesale space. Overall, other than agricultural storages and cold storage, space for storage and warehousing is generally not designated as such by city authorities, and warehousing facilities are either developed on industrial plots or in non-designated commercial or residential areas.
7 Only 24 respondents reported having to pay a conversion fee for use of an industrial plot for storage and warehousing. 16 of these respondents were based in Sindh.

Storage
Table 2.2: Land or Building Acquisition for Storage
Industrial
plot
Plot for
storage
Lease of
industrial
plot
Lease of
plot for
warehouse
Other
(mainly rent
of non-designated
space)
Total
Godown 5 12 1 2 18 41
Open storage 1 2 2 1 8
Cold storage 21 19 3 20 64
Distributor's storage 5 2 2 4 10 24
Storage for retail
outlet 5 5 10
Storage for
wholesale outlet 7 13 5 15 41
Total 39 54 5 14 69 189
Figure 5: Land or Building Acquisition for Storage
0
5
10
15
20
25
Godown Open storage Other Cold storge Distributor's
storage
Storage for
retail outlet
Storage for
wholesale
outlet
Outright purchase of
industrial
plot/building
Outright purchase of
plot/building for
warehouse
Lease of industrial
plot/building
Lease of
plot/building for
ware
Other
25. For those respondents (about 100) who acquired land and set up storage facilities
from scratch, acquiring utility connections could potentially be very difficult. There appeared
to be little standardization in time taken to get the requisite services – the median time taken
to get an electricity connection was 3 weeks, but the mean was almost 90 weeks! Natural gas
and water connections generally took less time (from a mean of 9 weeks and median of 3
weeks for gas and a mean of 6.2 weeks and median of 2 weeks for water).
26. Enumerators were asked to document the condition of access roads and the results of
their observations are documented in Table 2.3. It should be kept in mind that an “average”
classification here is entirely relative, and by no means implies “average” by international
standards. As one enumerator pointed out, in many cases (in rural areas where agricultural
storages are located, or in the vicinity of wholesale markets) the presence of a rudimentary
metaled road, even if in bad condition, would be considered a blessing, and enumerators
would classify access as “average.”
27. For godowns (used primarily for grain storage), a little over half of access roads were
classified as “average,” but for open storages which tend to be located in fields, access was
largely poor, often with no metaled roads. Cold storages, which tend to be located near
wholesale markets also have average to poor access facilities with potholed roads and poor
drainage. Distributor’s storages and storages maintained by wholesalers for own use, many

of which were located in commercial areas in relatively up-market localities tended to fare
better, with average to superior access facilities.
Table 2.3: Condition of the Access Road
Superior Average Poor Total %
Average
Godown 9 21 8 41 51%
Open storage 2 6 8 0%
Cold storage 14 25 25 64 39%
Distributor's storage 6 15 3 24 63%
Storage for retail outlet 5 2 3 10 20%
Storage for wholesale outlet 10 23 8 41 56%
Total 46 86 54 189
Figure 6: Condition of the Access Road
0
5
10
15
20
25
30
Godown Open storage Other Cold storge Dist ributor's
storage
Storage for
retail out let
Storage for
wholesale
out let
Superior
Average
Poor
28. Enumerators were also asked to record their impression of truck access, the results of
which are given in Table 2.4.
Table 2.4: Access for Trucks/Large Vans
With
difficulty
Not at all With
ease
Don’t need
truck
access
Total
Godown 12 25 1 41
Open storage 6 2 8
Distributor's storage 6 3 15 24
Storage for retail outlet 4 6 10
Storage for wholesale outlet 14 2 23 2 41
Total 63 7 107 9 189

Storage
Figure7: Access for Trucks/Large Vans
0
5
10
15
20
25
30
35
40
Godown Open storage Other Cold storge Dist ributor's
storage
Storage for
retail out let
Storage for
wholesale
out let
With difficulty
Not at all
Easily
Do not need
t ruck acces
29. Other than open storages, most facilities could be accessed with relative ease by
trucks or large vans. This was particularly true of urban based facilities not centered on
wholesale markets, which were presumably deliberately located in areas where access for
large vehicles would be possible.
2.4 Operations
30. As expected, storage and warehousing does not function as part of an integrated
system of logistics services in Pakistan, but largely as self-contained inventory holding for
individual businesses, or in the case of agricultural storage, as a primarily public sector
managed system for holding strategic reserves. Transportation services are de-linked from
the storage system, with 70 percent of storage companies not providing transport services.
Even loading and unloading services, which should be essential in storage facilities were
provided by only 52 percent of storage owners. About 12 percent of storage owners provided
distribution or shipment services. About 20 percent of storage owners provided data logging
services, although these were generally of a highly rudimentary nature, comprising for the
most part just inventory registers.
31. Storage owners did not, for the most part, use any marketing services for their
products, given that storages are generally not operated commercially. Even for those
facilities that were operated with some commercial intent, for example grain storages and
open storages, marketing primarily took the form of contacts with wholesale agents
(artis) and for distributors, contacts with manufacturing companies. For largely commercial
ventures like cold storages, contacts with artis was the paramount form of marketing. Thus,
as observed in the analysis of wholesale and retail trade in the country, storage owners also
rely primarily on reputation and personal contacts to drum up business. Only wholesale
storage depots seemed to practice some form of formal marketing with the use of
advertisements in addition to contacts. Interestingly only 2 companies each in Punjab and
Sindh mentioned the use of print advertisements, and these were primarily distributors
probably advertising their distribution capabilities with manufacturing firms, rather than their
storage expertise per se.

Table 2.5: Marketing Methods
Contacts
with artis
Contacts
with
companies
Print
advertisements
Other
(primarily
combinations
of 1, 2 and 3)
No
marketing
Total
Godown 8 7 6 21
Open storage 2 1 5 8
Distributor's
storage
1 12 2 1 5 21
Storage for
retail outlet
2 1 1 1 5
Storage for
wholesale
outlet
3 12 1 5 13 34
Total 40 53 4 9 45 151
Figure 8: Marketing Methods
0
5
10
15
20
25
Godown Open storage Cold storge Dist ributor's
storage
Storage for
retail out let
Storage for
wholesale out let
Insects/infest
at ion
Damp
Pilferage
Other
32. Storage owners were, however, more inclined to use the services of business support
companies than retail and wholesale traders. Almost a third of storage owners had used
engineering services (these were primarily cold storage owners who needed to use these
services for their air conditioning units); while a little above a quarter of respondents claimed
to have used advertising services and accounting services.
2.5 Seasonality of Operations
33. Storage of grain and other agricultural commodities as well as cold storage can be a
highly seasonal business, which has implications for the feasibility of dedicated storages, and
for the use of storage facilities during periods when the facility is not being used as a storage
facility. The data shows that only cold storages have a high degree of seasonality, depending
on the fruits they store.

Storage
Table 2.6: Seasonality in Storage Operations
Seasonality
Yes
No
Total
Godown
4
31
35
Open storage
3
5
8
Cold storage
38
24
62
6
16
22
2
7
9
11
28
39
Total
64
111
175
34. In spite of the high degree of seasonality, over 92 percent of respondents who had reported seasonality said that their facility was not converted to any other use when it was not in seasonal use. About 40 percent of these respondents said that the facility could not be used for any other purpose and therefore lay vacant when not used for storage. A further 40 percent said that they did not need to convert the space to any other use out of season, and therefore had not considered this option at all. Almost 15 percent of respondents said that regulations did not permit the use of the storage facility for any other purpose.
2.6 Losses, Risk and Insurance
35. On an average, information from 187 respondents indicated that 5 percent of items in storage ended up being wasted in a year. However, the standard error for this estimate was 46 percent, and the maximum reported as wasted was as high as 40 percent. Of a total of 137 respondents who reported reasons for loss, almost 44 percent said that losses occurred due to damp, while in 32 percent of cases, losses were due to insect infestation (mainly true for cold storages and godowns, but insect infestation also occurred in wholesale outlets). Other causes for loss included electricity loadshedding (particularly true for cold storages) and rains and dust storms (true for grain storage whether in godowns or open storage). Three respondents also mentioned faulty handling and loading and unloading procedures as reasons for loss. Interestingly, pilferage did not appear to be an issue. In about 61 percent of cases, the storage owner bore the loss, but the extent of the loss is determined by mutual consent in almost 60 percent of cases. In almost 19 percent of cases, the storage owner alone determined the extent of the loss.
Table 2.7: Main Cause of Loss
Insects/infestation
Damp
Pilferage
Other
Total
Godown
6
8
1
6
21
Open storage
1
1
Cold storage
22
20
3
11
56
7
9
5
21
1
6
7
6
18
1
6
31
Total
42
62
5
28
137

Figure 9: Main Cause of Loss
0
5
10
15
20
25
Godown Open storage Cold storge Dist ributor's
storage
Storage for
retail out let
Storage for
wholesale out let
Insects/infest
at ion
Damp
Pilferage
Other
36. Almost half of respondents (95 in number) said that goods were assessed before being
placed in storage, to check what was being placed in the facility, and to assess condition of
goods to protect storage owners against damage claims. In almost 80 percent of cases, this
assessment was carried out by storage owners themselves, while in the bulk of the remaining
cases, customers who were placing goods in storage provided declarations of the value of
goods. Almost 73 percent of respondents said that such assessments were done as a routine.
A further 18 percent said that assessments were only done when there was suspicion of
damage, while 7.6 percent claimed that assessments took place when losses were known to
have occurred due to natural or unnatural causes.
37. In spite of the fact that storage owners were generally held liable for losses, 90
percent of storage owners had no form of insurance against losses. According to storage
owners, customers also did not insure goods (storage owners claimed that over 90 percent of
goods were not insured by customers in any form). The insurance market thus simply has not
penetrated the storage sector – although in case of grain storage and storage of fruits and
vegetables, the need for protection seems apparent. Only 13 respondents claimed to have
used some form of insurance, and 10 of those said that insurance was available at viable rates.
2.7 Viability of Commercial Storage
38. Storage owners were asked to assess whether commercial storage was a viable
business, or whether traders were increasingly inclined towards creating and managing their
own storage spaces. About 55 percent of respondents felt that wholesalers and retailers were
likely to continue with the trend of managing their own storages, while almost 45 percent
thought that demand for commercial storage would increase in the future as business volumes
grow.
39. About 150 storage owners gave reasons why commercial storages were not widely
used as yet, and location and expense were cited as key reasons in this regard. 63 percent of
those who responded said that commercial storages are not conveniently located for most
wholesalers and retailers, and almost 84 percent felt that they were not cost effective.
Traders with small inventories would not like to use commercial storage when they can
accommodate their own storage needs. Over 60 percent of respondents did not think that
security and trustworthiness were issues in this regard.

Storage
2.8 Contracts
40. Almost 60 percent of the 165 respondents who answered queries on contract modalities said that the only form of contract in commercial storage was a simple receipt given by the storage owner to the consumer. About 20 percent of storage owners said that records were computerized, and that electronic receipts were given out, while 18 percent mentioned working with more formal contracts. Over 92 percent of contractual and other disputes were reportedly solved through negotiation, with courts being resorted to relatively seldom.

Section 3
Domestic Commerce Survey – Business Issues in Storage
41. The previous section detailed issues specific to the storage sector, and explained the nature of storage facilities in Pakistan. This section focuses on the economics of the storage business, how businesses are set up, and how day to day dealings occur.
3.1 Market Competition
42. Market competition was intense in the storage sector also with about 51 percent of storage owners saying that up to 5 similar enterprises existed in that location, within a radius of 1 km. The responses were roughly similar across revenue categories, indicating that both large and small enterprises faced similar competition.
Table 3.1: Similar Enterprises within a Radius of 1 km
Frequency
Valid Percent
Cumulative Percent
1 to 5
96
51.1
51.1
6 to 11
33
17.6
68.6
12 to25
16
8.5
77.1
More than 25
14
7.4
84.6
Don’t Know
29
15.4
100.0
Total
188
100
43. Almost 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 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.
3.2 Constraints
44. Access to finance once again came across as the most important constraint to growth for retail enterprises, with 35 percent of respondents citing this as the most important factor restricting expansion. However, taxation and regulation systems were also cited as the most

Storage
important constraints by just over a quarter of respondents. The quality of public services
was cited by almost 22 percent of respondents as the most important constraint. Interestingly,
corruption and law and order were cited strongly as the third ranked constraints to growth,
with almost 20 percent of respondents ranking corruption at no. 3, and 26.7 percent ranking
law and order as the third ranked constraint to growth. Interestingly, less than 13 percent of
respondents considered the lack of clear regulations on property ownership etc as
impediments to growth at any level.
Figure 10: Most important constraint to growth
Taxation and
regulation
system
Quality of
public
services (
Electricity
roads etc)
Lach of
access to
finance
Lack of clear
rgulation for
property
rights
Corruption Law and
order
situation
Most important constraint to growth
0
10
20
30
40
Percent
Figure 11: Second most important constraints to growth
Taxation and
regulation
system
Quality of
public
services (
Electricity
roads etc)
Lach of
access to
finance
Lack of clear
rgulation for
property
rights
Corruption Law and
order
situation
Second most important constraints to growth
0
5
10
15
20
25
30
Percent

3.3 Financing
45. Of the total storage owners, 78 percent had established their businesses, and the overwhelming majority had funded the establishment of the business primarily through own or family savings – on an average, 76 percent of the paid up capital had come through own or family savings. Similarly, an average of 11 percent of funds had come from sale of assets.
46. In spite of the fact that access to finance was repeatedly mentioned as an obstacle to growth, and an impediment when it came to starting a business, only 23 respondents reported having applied for a loan in the last three years. When asked to rank reasons why they had considered applying for loans, about 46 percent of respondents they did not need funds, while 40 percent expressed reservations about contracting loans for religious reasons. About 3.3 percent said it was more convenient to rely on family and friends, while 7.3 percent felt that interest rates would be too high.
47. Of the few storage owners (23 in total) who had applied for loans in the last three years, 10 applied to commercial banks and 10 to friends and relatives, while the remaining three had gone to private money lenders. The average loan amount asked for was just over Rs. 500,000. However, the distribution of loan amounts asked for showed that 35 percent of loans requested were up to Rs. 300,000 only.
48. Payment systems for commercial storage systems show a degree of risk taking on behalf of storage owners. Of the 153 respondents who answered questions on payment systems, 70 percent that payment for use of storage facilities is not taken in advance, and 77 percent of respondents said that clients are only required to make payments when goods are being taken out of storage.
3.4 Employment
49. Storage facilities employ on an average 10 persons as full time paid employees and 6 persons as part time paid employees (where part time is defined as employees working less than 5 hours a day). The sector provides employment largely to non-skilled workers, with only 5 percent of employees, on an average, having completed primary school.
3.5 Governance Issues
50. Over 72 percent of storage establishments were registered with city authorities. However, about 73 percent of respondents who had not registered their businesses said that registration was not required. A further 12 percent cited high registration fee as the reason for not registering the business.
51. The analysis of the governance data reveals some interesting anomalies. Over 90 percent of respondents agreed, or strongly agreed with the statement that they relied on the reputations of those that they entered into contracts with. But 88 percent also agreed or strongly agreed with the statement that contracts would prevent them from being cheated. About 48 percent agreed with the statement that the legal system was functional, in that they had confidence that their contracts and property rights would be upheld in a business dispute in fact a further 13 percent strongly agreed with this statement. Almost 51 percent of respondents disagreed with the statement that people from other baradaris or ethnic groups were likely to cheat them. Most of these responses reflect a degree of faith in the legal system, and in formal business processes (like contracts).
52. Late payment disputes appear to be the most common governance issue faced by storage owners, with 53 percent of storage owners reporting that they had faced this issue in the last year, but 86 percent of these cases were resolved through negotiation.

Storage
Figure 12: What is your sense of the market trend?
Demand for commercial storage
increasing
Trend towards creating own storage
space
What is your sense of the market trend
0
10
20
30
40
50
60
Percent

Section 4
Key Issues in the Storage Sector
53. The domestic commerce survey is probably the first attempt to track the nature of the storage business in Pakistan. The key issues apparent for the sector based on this small scale survey are as follows.
4.1 Business Volumes
54. The small scale of the commercial storage sector is linked with the preponderance of small, single owner retail businesses in the country. Small businesses tend to prefer to keep their inventories under their own control, and do not require sophisticated logistics systems for the most part. The one area where there is considerable scope for expansion of the business is the cold storage business, where more scientific systems of data logging and the development of cold chain infrastructure could do much to boost the export of fruits and vegetables. However, none of the storage owners questioned knew anything about the government’s professed policy of instituting credit lines for the establishment of cold storages, and even officials of the Ministry of Commerce could not provide more information on this initiative.
4.2 Governance Issues
55. In a business atmosphere where dealings are based largely on personal contacts and word of mouth, with little reliance of insurance services or legal contracts, the development of logistics services is clearly difficult. The institution of contracts is essential for third party management of inventory.
4.3 Conclusions and Policy Recommendations
56. Based on the key issues identified in the survey, the following recommendations may serve to enhance growth and development in the sector.
57. Medium Term: The storage and warehousing industry will grow when business volumes in individual businesses are large enough to support such an industry. For the medium term, the government needs to focus on the development of agricultural and cold storage – the development of the latter facilities in particular can have implications for value addition in the export of fruits and vegetables.
 The Ministry should review food security policies in conjunction with provincial governments to assess how private sector entry into grain storage can be facilitated;

Storage
 The government role in procurement, storage, distribution, export and import, and price maintenance has to be clearly stated and then the government has to stick to the role. The important issue is predictability;
 Government storage facilities need to be run on corporatized and business oriented basis, with strong performance and outcome based incentives;
 The government has already devised a set of incentives for development of cold storages. However, there has been no action on the implementation of these initiatives, and the private sector did not respond to the incentive. The Ministry may have to underwrite the initial investments in the creation of cold storage chains, in conjunction with private sector parties
58. Long Term: The long term role of the government should focus more on the development of insurance and other support services for the logistics sector. It is important to understand how entrepreneurs in the sector manage risk.
 The Ministry should work with the Securities and Exchange Commission (SECP) to facilitate extension of insurance to the storage sector;
 As in the case of earlier recommendations for competitiveness and wholesale and retail trade, the storage sector would benefit particularly from strengthening of systems of contract enforcement.

The State of Domestic Commerce in Pakistan Study 8 - Storage

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The State of Domestic Commerce in Pakistan Study 8 - Storage