Getting down to business

Do we need a World Bank report to tell us the state of business environment in Pakistan is far from satisfactory?

By Ather Naqvi

Doing a business in Pakistan, or starting a new one, has never been hassle-free owing to various factors such as bureaucratic and institutional hurdles, rising inflation, and lack of skilled workforce, etc. Things seem to have gone from bad to worse over the last few years affected by apparently as remote a factor as economic recession. If people who are running various small and medium businesses are to be believed, the cost of doing a business in Pakistan has sky-rocketed during the last few years and is multiplying with every passing day. This is well beyond the shock-absorbing capacity of a businessman who has invested millions of rupees in a business.

Lack of institutional support, according to businessmen, and unavailability of loans on easy terms has limited their capacity to make an investment. This is in addition to uncertainty in the market due to the worsening law and order situation.

In this backdrop, a yearly report issued by the World Bank on the costs of doing business in Pakistan offers a glimpse into issues that are faced by a businessman who intends to start a new business or plans to expand an existing one. "Doing Business 2010: Reforming Through Difficult Times", is the seventh in a series of annual reports by the World Bank "investigating regulations that enhance business activity and those that constrain it". Doing Business gives "quantitative indicators on business regulations and the protection of property rights" that can be compared with 183 economies of the world. In the light of the issues hinted at above Pakistan is ranked 85th out of 183 economies which indicates clearly that environment is not conducive for businesses and has a lot of room for reforms.

To judge the state of business environment in Pakistan the report identifies, "a set of regulations affecting 10 stages of a business's life", including: "starting a business, employing workers, registering property, getting credit, paying taxes, trading across borders, and closing a business" among other things. The report is significant because it "not only highlight(s) the extent of obstacles to doing business" but it "also help(s) identify the source of those obstacles" that can be used to guide policymakers.

While the report focuses on various factors that have affected business prospects in Pakistan, it mentions one area where some progress seems to have been made. It states, "Pakistan simplified business start-up by introducing a system that allows online registration for sales tax and removing the requirement to make a declaration of compliance on a stamped paper. These moves removed four days and one procedure and halved the cost of the business start-up process."

But a businessman, who sweats blood in the volatile business market knows precisely where the faults lie, "One indicator of how serious the government is taking the poor business environment is that it has applied a major cut in the Public Sector Development Programme (PSDP) recently. That means many people are not going to get business as there will be less development activity, resulting in less business," says Omer Akram Sheikh, a businessman in dairy products.

"Long hours of loadshedding means a decrease in the per unit manufacturing capacity of a business," Sheikh adds. He mentions a couple of steps that can improve the prospects of a business, "Our power tariffs are very high. They have to be brought down. Then, we also have very high mark-up rates. In this scenario, I think more people are closing down businesses than those who are doing a business or planning to start one."

Sheikhs' claim is borne out by Zeeshan Ali, a businessman who deals in lubricant products in Gujranwala, "One main problem is that we have not been able to develop enough institutions where we can train workforce for our industries and small and medium businesses. Trained workforce produces quick and better results and can also compete in the international market. That in turn reduces your cost and enhances production."

While a trained workforce is essential to get a business going, there are other factors that have added to the problems faced by a businessman. Zulfiqar Thawar, President Union of Small and Medium Enterprises, believes the rise in the cost of production, among other things, has landed businessmen in a position where they think twice before starting a new business or expanding the existing one, "The cost of production has increased many times and that includes cost of energy and cost of transportation. These two factors alone lay the ground for a business to survive," he says adding. "Initial steps to start a business such as applying for a National Tax Number (NTN) and opening a bank account sometimes take quite a few days. This is a very negative practice that has to change." Thawar believes the impression that every government institution is corrupt is exaggerated, "Sometimes it is the people who pressurise government officials to accept bribery and deliver services even before the minimum duration. One thing we have to improve is the lending facility for the SMEs," he says.

Sultan Tiwana, General Manager, Small and Medium Enterprises Development Authority (SMEDA) does not fully agree with Zulfiqar when he says, "Though lending facilities should be improved for those who actually need money, a businessman whose first priority is getting a loan cannot be trusted. There are people who seem to be more adept at wasting money than actually benefiting from it."

"The most important part is the planning of a business followed by execution and implementation stage, including risk assessment." Tiwana laments the fact that the lending percentage has reduced over the last one year, "There is a seven percent reduction in the current lending facility for small and medium businesses. So, that clearly means that the picture is not very positive." Tiwana identifies businesses where the government provided support and made a difference such as textiles, sports goods, leather garments, and surgical goods in Punjab, marble, granite, and gems industries in NWFP, and fisheries in Balochistan.

"The increase in the cost of production has risen to about 40 percent," says Tahir Malik, Chairman, Regional Standing Committee for Export and Trade, FPCCI. "This has left us well behind our neighbours such as India, Bangladesh, and China. Bangladesh now tops the list of countries in the region that has very low cost of production."