A Micro Perspective of Business Climate in Pakistan · The Centre for Business and Economics Research (CBER) is dedicated to stimulate research by faculty, students and staff at IBA

Centre for Business and Economic Research

IBA Working Paper No. 18-3

A Micro Perspective of Business Climate in Pakistan

Haroon Jamal

August 2018

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The Centre for Business and Economics Research (CBER) is dedicated to stimulate research by faculty, students and staff at IBA. CBER has taken many initiatives since its inception including the establishment of a research grant, inauguration of the IBA Working Paper Series, initiation of seminar sessions (regular dissertation presentations by students and faculty), conferences, collaborations with education and Government Institutions. CBER aims to deliver opportunities for researchers to publish their work and later present it at national and international conferences. In short, CBER aims to breed and prosper research ideas at IBA. Research Funding and Publication Committee

Dr. Farrukh Iqbal Dr. Qazi Masood

Dr. Huma Baqai Dr. Sayeed Ghani Dr. Huma Amir Dr. Junaid Alam Dr. M. Ayaz Dr. M. Nishat Dr. Sajjad Haider Dr. Shahid Qureshi Dr. Shakeel Khoja Dr. Zeenat Ismail Disclaimer: The views expressed in this paper are those of the author/s and do not necessarily reflect those of the Institute of Business Administration, Karachi and Centre for Business and Economic Research.

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IBA Working Paper Series The Centre for Business and Economics Research (CBER) publishes its working paper series for the main purpose of disseminating preliminary research results, conference proceedings and unpublished work. This stimulates discussion and generates critical feedback from experts in the field. The work could later be published in reputed journals and presented at conferences abroad.

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1. Introduction This study provides a summary of characteristics of Pakistani firms by focusing on various factors that shape the business environment. The World Bank’s Enterprise Surveys (ES) provide a unique source of information, especially in developing countries that can be used to understand the heterogeneity in terms of dynamism and constraints of private firms. Firm level information are also useful to formulate the appropriate macro policies at national or sectoral levels. Findings of this research are entirely based on the ES database. The ES are conducted by the World Bank and its partners across all geographic regions and cover small, medium, and large establishments. The surveys are administered to a representative sample of firms in the non-agricultural formal private economy. The universe of the survey includes the entire manufacturing sector, the services sector, and the transportation and construction sectors. Uniform universe, uniform methodology of implementation, and a core questionnaire are the basis of the global methodology under which Enterprise Surveys have been implemented. The sample for ES is stratified by firm size, sector of activity, and regional location within a country. The main objective of the stratification criteria is to ensure enough observations for robust analysis will available for each level of stratification. Enterprise Surveys collect qualitative and quantitative information regarding the business environment and the productivity of firms through face to face interviews with firm managers or owners. The topics covered in the ES include infrastructure, trade, finance, regulations, taxes and business licensing, corruption, crime and informality, finance, innovation, labor, and perceptions about obstacles to doing business1. The paper proceeds as follows. The next section contains information regarding sample distribution across provinces, production activity and size of firms. This is followed by a detailed description of the enterprise data with respect to organizational features, characteristics of workforce, energy, finance, business government relation, capacity utilization, degree of competition, innovation, major obstacles to export activity, major obstacles to current business operations and perception of the top obstacle in subsequent sections respectively, while a thematic comparative summary of enterprise survey indicators for Pakistan is provided in the appendix. 2. Sample Spread For implementing ES in Pakistan, business owners and top managers in 1,247 firms were interviewed from May 2013 through May 2015. The provincial picture in terms of number of surveyed firms is portrayed in Exhibit 2.1. The exhibit also provides sample distribution across provinces and production activity after applying statistical weights.

1 Visit http://www.enterprisesurveys.org for detail information on sampling methodology and other aspects of the

World Bank enterprise survey.

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In terms of provincial segmentation, 41 percent sample firms belong to the province of Punjab (excluding Islamabad); whereas about 22 and 32 percent firms belong to Sindh and KPK provinces respectively. Relatively low representation of Sindh (Karachi) province in the sample is debatable; however explanation regarding fewer sample for Sindh is not provided in the survey documents. Nonetheless, analysis is carried out after applying statistical weights provided in the dataset. Islamabad is treated as a separate stratum and its share in the sample is about 3 percent, while about 2 percent sample firms belong to Balochistan province. The survey data also reveals that about 93 percent sample firms are located in either capital or in main business cities. The percentage distribution of sample according to production activity is furnished in Exhibit 2.2. Close to 46 percent sample consists of manufacturing firms, while the remaining service sector sample is divided into ‘Retail’ establishments (18 percent) and firms providing other services (36 percent).

Exhibit 2.1 Sample Distribution Across Locations and Production Activity

Punjab Sindh KPK Balochistan Islamabad Overall Number of Firms Interviewed: Un-Weighted Sample Manufacturing 600 140 170 50 82 1042 Retail 24 28 14 6 4 76 Other Services 44 47 28 5 5 129 Overall 668 215 212 61 91 1247 Weighted Sample: Manufacturing 2804 2029 1238 186 320 6576 Retail 1755 424 385 9 33 2607 Other Services 1332 738 2951 8 45 5074 Overall 5891 3190 4574 203 398 14256

Provincial Shares 41% 22% 32% 2% 3% 100%

Source: World Bank Enterprise Survey database

Exhibit 2.2 Percentage Distribution of Weighted Sample Across Production Activity


Manufacturing46 %Retail

18 %

Other Services36 %

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Exhibit 2.3

Distribution of Weighted Sample Across Firm Size – Percentages of Sample Firms

Source: World Bank Enterprise Survey database According to Exhibit 2.3 which furnishes distribution of sample across firm size and location, the largest segment (56 percent) of sample consists of small firms with less than 20 employees. The percentage of large firms with 100 or more employees is about 15, while 29 percent are medium firms with the employment size between 20 and 99. The ES data reveals that major manufacturing sectors in terms of selected sample include; food (17 percent), Textiles (8 percent), leather (6 percent), non-metallic mineral product (4 percent), garments (4 percent), chemical and chemical products (3 percent), machinery (3 percent) and chemicals (3 percent). In services, 13 percent sample each belongs to retail trade and hotel and restaurants, while transport, construction and IT firms are 7, 6 and 5 percent of the sample respectively. 3. Organizational Features The ownership patterns, location of firms and access to essential telecommunication facilities are briefly described in this section. These information represent the organizational status of private establishments in Pakistan as the Enterprise Survey is a representative survey of private firms in the nonagricultural, non-extractive formal sector of the economy. The current legal status of sample establishments is portrayed in the Exhibit 3.1. Sole proprietorship is reported by the majority of firms (74 percent), while close to 23 percent firms have status of partnership. The ownership of about 2 percent firms is represented by equity shares; however among these, one percent firms have shares which either are non-traded or traded privately.

Small (<20)55.8

Medium (20-99)29.3

Large (> 100)14.9

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Exhibit 3.1

Legal Status of Firms – Percentages

Source: World Bank Enterprise Survey database As expected, majority (98 percent) of firms are owned privately, while about one percent firms have joint venture with foreigners. The evidence of foreign ownership incidence is observed in HUB (Balochistan) and Islamabad cities. The sample also includes few cases of 100 percent foreign ownership in these cities (Exhibit 3.2).

Exhibit 3.2 Ownership of Establishments – Percentage of Firms

Punjab Sindh KPK Balochistan Islamabad Overall Private Ownership 98.9 98.5 100.0 65.0 94.2 98.4 Foreign Ownership 2.1 2.9 0.1 Private plus Foreign Ownership 0.7 0.6 32.4 2.9 1.1 Private plus Foreign plus State Ownership 0.4 0.9 0.5

0.4


Gender aspects of entrepreneurship are displayed in the Exhibit 3.3. Overall, about 11 percent establishments reported female principal owners. Nonetheless, understandably the phenomenon either does not exist or the incidence is very low in Balochistan and KPK provinces respectively due to culture and social norms. Besides principal ownership with major shareholdings, female participation in ownership is also reported by about 12 percent establishments. The incidence of female working in top management is also very low. Overall about 6 percent firms have female managers, while the incidence is relatively high (21 percent) in Karachi (Sindh). The comparative Enterprise Survey data indicates that the average incidence of female working in the top management positions in South Asian establishments is 11 percent.

Exhibit 3.3 Incidence of Female Ownership and Presence in Top Management – Percentage of Firms


74.1

18.2

5.1

0.9

1.2

Sole proprietorship

Partnership

Limited partnership

Shares traded in the stock market

Non-traded shares or shares traded privately

Islamabad Punjab Sindh KPK Balochistan Overall

Female Principal Owner 10.9 11.2 22.3 4.7 0.0 11.4

Female Top Manager 11.1 1.8 20.9 0 3.2 5.8

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Location of firm in export processing zones or industrial estate does matter for the business operations and productivity. These firms also enjoy the benefits of economies of scale in terms of infrastructure facilities and other services. Exhibit 3.4 indicates that about 26 and 18 percent firms are located in export processing zones in Sindh and Balochistan (Karachi and Hub) provinces respectively. The incidences of location of sample firms in industrial estates are relatively higher. Overall, close to 38 percent firms are located in industrial zones with the highest (70) percentage located in Islamabad.

Exhibit 3.4 Location of Firms – Percentages of Manufacturing Establishments

Punjab Sindh KPK Balochistan Islamabad Overall Firms Located in:

Export Processing Zone 5.1 26.1 3.2 17.5 5.6 9.4 Industrial Park/Zone 44.0 32.0 32.0 39.0 70.3 38.1 Source: World Bank Enterprise Survey database

The Exhibit 3.5 displays the distribution of firms’ output into national, indirect export and direct export categories. As expected, direct export phenomenon is relatively more evident by large establishments which employ more than 100 workers. About 24 percent large firms are engaged in the production for export, while this incidence is only 7 in the medium firms. The exhibit also reveals that majority of exporting firms are located in Sindh and Punjab provinces. Although the survey data does not reveal city codes, it would not be incorrect to assume that Karachi, Lahore, Gujranwala, Sialkot and Faisalabad are major cities where exporting establishments are located.

Exhibit 3.5 Sales Distribution

National Sales Indirect Exports Direct Exports

As a Percent of Total Sales Overall: 89 3 8 Firm Size:

Small (<20) 94 3 4 Medium (20-99) 92 2 7

Large (> 100) 70 5 24 Locations:

Punjab 90 1 9 Sindh 83 7 10 KPK 94 1 5

Balochistan 90 5 4 Islamabad 91 4 2


Modern telecommunication and internet facilities are important for boosting business as well as firm productivity. Exhibit 3.6 reports usage of e-mail, own website and cell phones services for business operations. About 46 percent establishments reported having their own website. Among these, Islamabad, Karachi (Sindh) and Hub (Balochistan) are distinct with relatively higher percentages. Close to 54 percent firms are using email for communicating; however this

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percentage is 78 in Karachi (Sindh). Not surprisingly, use of cell phones for business operations is common in almost all establishments.

Exhibit 3.6 Percentage of Establishments Using Telecommunication Services for Business Operation

Punjab Sindh KPK Balochistan Islamabad Overall

E-mail to communicate 41.4 77.6 54.0 42.3 56.2 54.0 Have own website 43.8 64.4 33.9 74.6 64.7 46.2 Cell phones for business operations 89.9 99.3 94.1 95.2 61.1 92.6 Source: World Bank Enterprise Survey database

ISO certification can be a useful tool to add credibility, by demonstrating that the product or service meets the expectations of customers. It is also a compulsory requirement for most of the exporting establishments. Exhibit 3.7 displays the percentage of firms which possess internationally-recognized quality certification. While the low incidence in KPK is not surprising; the relatively fewer firms which reported having ISO certification in Punjab is however worrying. Close to 52 percent establishments in Karachi (Sindh) confirmed having ISO certification. With respect to size of firms, the data reveals that majority (70 percent) of firms which reported possessions of ISO certificate are large.

Exhibit 3.7 Firms Reported Having ISO Certificate – Percentage of Establishments

Source: World Bank Enterprise Survey database 4. Characteristics of Workforce The ES data provide information on a wide range of labor-related issues including the level, growth rate, and composition of firm employment. This section summarizes the salient features of establishments in terms of composition and quality of workforce. Trend in employment growth in the private formal economy during the period 2009-2012 is sketched in the Exhibit 4.1. Overall, close to 3 percent annual growth in permanent workforce is estimated from the ES data. It is however worthy to note that this period is characterized in terms of extremely low economic growth, high inflation rate and turmoil due to worsening law and

27

52

24

34

50

33

Punjab

Sindh

KPK

Balochistan

Islamabad

Overall

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order conditions. The exhibit does not indicate a positive relationship between firm size and annual growth rates. In large firms, 4 percent annual growth rate is estimated, while it was 6 percent in case of medium firms. The provincial picture is showing relatively high growth rate in the Punjab as compared with other provinces, excluding Islamabad.

Exhibit 4.1 Growth in Permanent Workforce During 2009-2012

[Annualize Growth Rate – Percent]


The Exhibit 4.2 furnishes a summary of composition of workforce with respect to size of firms in manufacturing establishments. Proportions of non-production and unskilled workers are important considerations from the angle of labor productivity. Overall, the percentage of non-production workers in Pakistan’s manufacturing establishment is 28, while the percentage of unskilled workers among the total production workers is 20. It is worthy to note that the average percentage of unskilled workers is 25 for South Asian countries which were part of the World Bank Global Enterprise Survey. Another point which is evident in the exhibit is that these proportions are quite higher in medium firms as compared with the large and small establishments. The exhibit also reveals proportions of temporary workers across firm size. Overall 19 percent workforce is temporary or seasonally employed. Understandably, small and medium firms tend to hire more temporary workers perhaps due to financial reasons. Further, most of labor rules and regulations are not applicable in small firms.

Exhibit 4.2 Share of Non-Production, Unskilled and Temporary Workers in Total Workforce – Percent Proportion of

Non-Production Workers Proportions of

Unskilled Workers Proportions of

Temporary Workers


2.2

5.7

4.1

Small (<20) Medium (20-99) Large (> 100)

3.42.7 3.3

1.3

10.8

3.4

Punjab

Sindh

KP

K

Balochistan

Islamabad

Overall

2832

23

28

Small(<20)

Medium(20-99)

Large(>100)

Total

19

27

1620

Small(<20)

Medium(20-99)

Large(>100)

Total

20 20

12

19

Small(<20)

Medium(20-99)

Large(>100)

Total

10

The relevant empirical literature suggests a positive relationship between education of workforce and firm’s productivity. Exhibit 4.3 portrays average levels of education across provinces. Two education parameters are estimated from the ES dataset; percentage of workers completed secondary school and average years of schooling. The exhibit reveals significant variations in terms of both parameters. Overall, on average 52 percent workers possess Secondary School Certificate. However, the percentages of workers who completed secondary school are quite high in establishments located in Islamabad and Karachi (Sindh). The education parameter represented by the average year of schooling indicates a range of 8-10 years of schooling across provinces.

Exhibit 4.3 Education of Permanent Full-Time Production Workers

Percentage of Workers Completed Secondary School Average Years of Schooling


Formal training programs are an integral part of human resource development. Besides the level of education of workforce, the Enterprise Survey also enquires regarding workers’ training programs. Primary focus of these programs, main providers and beneficiaries of these programs were also investigated. Information regarding two aspects; establishments reported having training programs (incidence) and percentage of beneficiary employees are displayed in the Exhibit 4.4. Close to 30 percent organizations reported holding training programs; however incidence is relatively high in Karachi (Sindh), HUB (Balochistan and Islamabad cities. In terms of beneficiaries of training, Balochistan (HUB city) is stands out where about 90 percent permanent employees benefited training programs during the survey year (2012-13). Although the incidence of program is quite high (43 percent) in the Islamabad city, the percentage of beneficiary employees is surprisingly low (3.5 percent).

Exhibit 4.4 Formal Training Programs for Permanent Full-Time Employees

Percentage of Establishments Reported Having Formal Training Programs

Punjab 20.9 Sindh 43.4 KPK 31.8 Balochistan 54.9 Islamabad 42.7 Overall 30.5

Percentage of Permanent Employees who

Received Formal Training 37.0 15.4 44.7 89.8 3.5 37.6


47

64

46

49

77

52

Punjab

Sindh

KPK

Balochistan

Islamabad

Overall8

9 9 9 108

Punjab

Sind

h

KP

K

Balo

chistan

Islamab

ad

Ov

erall

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Gender aspect of workforce composition is depicted in the Exhibit 4.5. Not surprisingly, very low shares of female workforce are evident in the exhibit. About 5, 6 and 2 percent female production workers are reported in large, medium and small manufacturing establishments, while female shares in the non-production workforce is close to 2 percent irrespective of location. The provincial picture understandably reveals large female shares in production and non-production workforce in Karachi (Sindh) and Islamabad cities.

Exhibit 4.5 Percentage Share of Female Workers

Production Non-Production

Punjab 2.0 0.7 Sindh 9.1 2.8 KPK 1.1 1.4 Balochistan 0.5 0.0 Islamabad 7.1 2.4


In search of constraints to hiring women for managerial or non-managerial positions, the ES survey put various reasons/obstacles before business managers/owners to seek their views. Following specific statements were offered to vote (Yes/No);

Limited availability of women with management experience, Challenges of working with women due to their family commitments. Challenges of hiring women given government regulations such as working Hours, Clients would be unwilling or uncomfortable doing business with women, and Hiring women could cause disruption in the working environment

As evident in the Exhibit 4.6, about 23 to 28 percent establishments affirmed these assertions as constraints for hiring women employees. However factors such as family commitments and the disruption in the working environment due to women employees are on top.

Exhibit 4.6 Constraints to Hiring Women Employees

[Percentage of Establishments Which Agreed with the Statement]


2

65 4

1 2 2 2

Small(<20)

Medium(20-99)

Large(>100)

Total

Production Nonproduction

28

28

23

24

26

Limited availability of women with management experience

Challenges of working with women due to their family commitments

Challenges of hiring women given government regulations such asworking hours

Clients would be unwilling or uncomfortable doing business withwomen

Hiring women could cause disruption in the working environment

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5. Energy No doubt to generate a business environment conducive to firm growth and development, good and dependable infrastructure is required. The deficiencies in essential infrastructure would affect productive opportunities and increase costs. Among infrastructure and services, the provision of uninterrupted supply of electricity is the most important. Inadequate electricity supply can increase costs, disrupt production, and reduce profitability. The ES survey collects information regarding the extent to which firms are faced with failures in the provision of electricity and the effect of these failures on sales. Barring Islamabad city, majority of establishments showed their concerns regarding the electricity outage and breakdown. The ES data reveals that on average number of electricity outages in a typical month in Pakistan are 75; whereas the South Asian comparable average is only 25. The Exhibit 5.1 reveals that about 81 percent firms reported power outages with an average duration of 9 hours. As a results about 65 percent firms either own or share generators for smoothing out business operations and produce 44 percent electricity from own resources. In terms of provinces, the situation is worst in Punjab and Balochistan provinces. Nonetheless, the incidence of using generator to overcome problem of power outages is significantly high in Karachi (Sindh) as compared with other locations.

Exhibit 5.1 Incidence of Power outages and Usage of Generators

Power Outages Reported Usage of Generators


The estimated loss due to electricity failure and disruption which establishments face is summarized in the Exhibit 5.2. On the average, business manager perceive a loss of 36 percent in their annual sales volume. The exhibit further reveals that the estimated loss is relatively less in Sindh and Balochistan provinces and is close to 17 percent.

97

6574

86

25

81

8 313

3 6 9P

unjab

Sind

h

KP

K

Balo

chistan

Islamab

ad

Ov

erall

Perentage of firms reported power outages

Average duration of power outage in hours

70

85

4842 43

65

49

34

4639 39

44

Pun

jab

Sind

h

KP

K

Balo

chistan

Islamab

ad

Ov

erall

Percentage of establishments own or share generatorsPercent of electricity came from generators

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Exhibit 5.2

Estimated Loss as Percentage of Total Annual Sales due to Power Outages

Source: World Bank Enterprise Survey database 6. Finance Importance of developed financial markets is vital for investment as well as for smooth business operations, especially for small and medium firms. Efficient financial markets ease investment financing and thus reduce the reliance on internal funds by connecting firms to a broad range of lenders and investors. The Enterprise Surveys provide indicators of how firms finance their operations and the characteristics of their financial transactions. The Exhibit 6.1 provides information regarding the relative use of various sources to finance working capital and investment financing. The exhibit clearly reveals heavy reliance on internal funds for both working capital requirement as well as purchasing assets (land, machinery etc.). Overall, 92 and 87 percent establishments use internal funds for financing working capital and assets purchase respectively. However excessive reliance on internal funds is a sign of potentially inefficient financial intermediation.

Exhibit 6.1

Financing Patterns – Average Percent Working Capital Assets Purchased


Overall

Punjab

Sindh

KPK

Balochistan

Islamabad

36

37

17

43

17

22

92.2

2.7

0.7

4.1

Internal Funds

Bank Borrowing

Suppliers' Credit

Loans for Informal Sources

87.1

9.2

2.2

0.7

1.3

Internal Funds

Bank Borrowing

Suppliers' Credit

Loans from Informal Sources

New Equity Shares

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A limited role of suppliers’ credit for investment and financing working capital is reported by establishments in Pakistan. According to Exhibit 6.1, the share is only 1 and 2 percent in financing working capital and purchase of assets respectively. The exhibit 6.2 further explains this assertion by documenting the extent of sale or purchase on credit. The incidence of credit purchase and sale is close to 16 and 24 percent respectively. Variations, especially in purchase of material input or services however are evident across size of firms.

Exhibit 6.2 Annual Purchase or Sales On Credit – Average Percent

Material inputs or services Purchased on credit

Small (<20) 14.2 Medium (20-99) 10.7 Large (> 100) 30.4 Overall 15.6

Goods or services sold on credit

21.5 23.2 37.1 24.1


The ES data also focuses on the use of financial services by private firms both on the credit side, by measuring the percentage of firms with bank loans or lines of credit, and on the deposit mobilization side, by measuring the percentage of firms with checking or savings accounts. Surprisingly 45 percent establishments do not have either credit or saving account (Exhibit 6.3). Overdraft facility is reported by about 23 percent firms, while close to 6 percent firms have a line of credit. Predictably these three indicators have a positive relationship with the size of firms.

Exhibit 6.3 Banking Practices – Percentage of Firms Reported Having:

Current/Saving Account Overdraft Facility Line of Credit or Loan Small (< 20) 46.2 16.8 3.2 Medium (20-99) 57.3 19.3 6.1 Large (>100) 79.8 54.1 14.5 Overall 54.5 23.1 5.7 Source: World Bank Enterprise Survey database

Exhibit 6.4 furnishes information regarding sources of getting loan and type of collateral required. The incidence of getting loan from non-bank financial institutions and informal sources is close 9 percent. The size of all these establishments is either small or medium. For large firms, private commercial bank is the source to obtain loans. Regarding type of collateral, majority (84 percent) of establishments described land or building under the ownership of the establishment as the collateral for getting loan. Other types of collateral which were narrated by establishments include; personal assets of owner (34 percent), accounts receivable (23 percent), machinery and equipment (49 percent).

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Exhibit 6.4

Financial Institutions and Collateral Requirement for Most Recent Loan Loan Obtained from: Type of Collateral


Only 4 percent establishments confirmed applying loan during the last financial year. The reasons for not obtaining loans are collated in the Exhibit 6.5. About 59 percent establishments, among those which were not applied loan categorically stated that they have sufficient capital and do not require any loan. Close to 21 percent showed their concern regarding unfavorable interest rate, while 3 percent complained about excessively high collateral requirements. Complex application procedure is also a concern which was narrated by 5 percent establishments which opted not to obtain loan.

Exhibit 6.5 Reasons for Not Applying Credit Facility


An important security measure from the perspective of financial institution for granting loan is the firms’ financial health as certified by external auditor. The ES data also collects information regarding the practice of getting audit of financial statements from professional chartered accountants. The Exhibit 6.6 reveals about 23, 38 and 61 percent small, medium and large establishments respectively confirmed having certified financial statement by external auditors. No significant differences across provinces exist in the prevalence of certified financial statements.

91

3

6

Private CommercialBanks

Non-Bank FinancialInstitutions

Other - Informal

84

49

23

34

Land, buildings underownership of the establishment

Machinery and equipmentincluding movables

Accounts receivable andinventories

Personal assets of owner(house, etc.)

59

5

21

3

2

3

6

No need for a loan - Had sufficient capital

Application procedures were complex

Interest rates were not favorable

Collateral requirements were too high

Size of loan and maturity were insufficient

Did not think it would be approved

Not Interested - Religious Reasons

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Exhibit 6.6

Annual Financial Statements Checked and Certified by an External Auditor [Percentage of Establishments which Confirmed]

Punjab 30.1 Sindh 38.4 KPK 31.9 Balochistan 35.1 Islamabad 38.6


7. Business Government Relation An important requisite for the favorable business environment is good economic governance in areas of regulations, taxation, permits and licensing etc. The ES data collect information regarding incidence of informal payments for ‘get things done’ and also measures the time spent by senior management in meeting with public officials. The specific question for approximation of ‘time tax’ imposed by regulations was “In a typical week over the last year, what percentage of total senior management's time was spent on dealing with requirements imposed by government regulations?”. The Exhibit 7.1 disseminates responses of business managers regarding the average percent of time per week. Overall, 5 percent management’s time is spent on working or fulfilling requirements of regulations. The corresponding percentages however are high (4-11 percent) in Sindh and KPK provinces. The governance of federal government is perhaps relatively better as only 2 percent time is reported by establishments located in Islamabad industrial zone.

Exhibit – 7.1 Senior Management's Time Spent on Dealing With Government Regulations - Percent

Source: World Bank Enterprise Survey database Higher incidences of required meetings with and visits of tax officials indicates higher burden on firms. According to the Enterprise Survey data, overall 65 firms confirmed 4 visits of tax officials per annum (Exhibit 7.2). Variations in incidence and visits however exist across provinces. In KPK and Balochistan provinces, the incidences of tax official’s visits are relatively

2338

61

33

Small (<20) Medium (20-99) Large (> 100) Overall

Punjab4

Sindh11KPK

4

Balochistan2

Islamabad2

Overall5

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high. The Exhibit also furnishes information regarding incidence of informal gift requested by tax officials. Overall, close to 19 percent establishments confirmed the request for informal gift or payment by tax officials. Relatively the prevalence rates for corruption in the tax system are higher in KPK and Balochistan provinces (23 and 65 percent respectively).

Exhibit – 7.2 Visit of Tax Officials During Last 12 Months

Percentage of Establishments Confirmed Visit or Inspection by Tax

Officials

Average Number of

Visits

Gift or Informal Payment was Requested by Tax Officials

[Percentages] Confirmed Refused to Answer Punjab 56.0 5 19.9 15.2 Sindh 67.8 4 11.0 16.4 KPK 74.2 3 22.7 0.9 Balochistan 75.5 4 65.3 7.2 Islamabad 49.2 2 0.0 32.6 Overall 65.3 4 19.3 9.8

Source: World Bank Enterprise Survey database Establishments are sometime required to make gifts or informal payments to public officials to “get things done” with regard to customs, taxes, licenses, regulations, services etc. The ES survey enquires about the incidence of informal payments to public officials. These information for Pakistan and its provinces are furnished in Exhibit 7.3. It is however difficult to get true estimates of the extent of corruption in offices providing public services. Thus the exhibit portrays a crude picture of the incidence of corruption. According to the Exhibit, a good percentage of establishments abstained either by saying “Not Aware” or categorically refusing to give answers. Overall, close to 11 percent establishments asserted the informal payment; relatively the percentage is significantly high (16 percent) in the Punjab province. However the reported incidence seems very low according to the general perceptions.

Exhibit – 7.3 Gifts or Informal Payments to Public Officials

[Percentage of Establishments] Not

Aware Refused

to Answer No payment or Gifts are Paid

Confirmed Informal Payments

Punjab 33.9 12.7 37.0 16.4 Sindh 49.6 18.1 27.4 5.0 KPK 67.3 8.7 16.1 7.8 Balochistan 21.4 14.8 59.5 4.3 Islamabad 49.6 13.7 32.4 4.3 Overall 48.4 12.7 28.3 10.6

Source: World Bank Enterprise Survey database In the previous exhibit the answers of business managers regarding informal payment were obtained by asking a general and wide-ranging question i.e. payment to customs, taxes, licenses etc. To get a closer look of the incidence of corruption, Exhibits 7.4 and 7.5 are developed which summarize the incidence with the help of two specific instances; informal payments by those firms which obtained Government’s contract and by those who applied for an operating license.

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In case of informal payment or gifts to secure the Government’s contract, the majority (close to 65 percent) categorically refused to answer, while close to 12 percent firms, among those who obtained the contract denied to pay anything for the favor. Overall, close to 20 and 4 percent establishments admitted payment of 1-10 and 11-20 percent of the contract value respectively. Significant interprovincial differences exist; however the ES date does not distinguish the awarding authority (federal or provincial).

Exhibit – 7.4 Informal Payments or Gifts to Secure the Government Contract?

[Percentage of Establishments Which Obtained Government’s Contract]

Refused to Answer

No

Payment

Paid 1-10 Percent

of the Contract Value

Paid 11-20 Percent

of the Contract Value Punjab 17.4 41.6 18.5 22.5 Sindh 83.6 16.4

KPK 74.8 0.8 24.4 Balochistan 35.4 64.6

Islamabad 72.8 8.9 18.3 Overall 64.7 11.5 19.4 4.3

Source: World Bank Enterprise Survey database The Exhibit 7.5 summarizes answers of business managers regarding the informal payment or gifts expected or requested by public officials for awarding an operating license. Here also, close to 40 percent firms either refused to answer or showed the lack of awareness. Only close to 14 percent establishments among those who applied for the license admitted the case of unofficial payment.

Exhibit – 7.5 Informal Gift or Payment Expected or Requested for application for an Operating License

[Percentage of Establishments Which Applied]

Source: World Bank Enterprise Survey database 8. Capacity Utilization Capacity utilization of manufacturing establishments not only contributes to growth rate of employment from macro viewpoint but also an important determinant of firm’s productivity at micro level. The ES data provides information on capacity utilization rates – defined as current

Not Aware30.9

Refused to Answer7.5

Informal Payment Expected

13.8

Not Requseted47.8

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output as a percentage of maximum possible given firm’s resources – for Pakistan’s manufacturing sector. On average, capacity utilization level is 79 percent (Exhibit 8.1). Across size of firms, the highest (close to 87 percent) utilization rate is reported by large establishments, followed by small firms (83 percent). Medium firms have quite low (67 percent) capacity utilization rate as compared with small and large. The exhibit also reveals normal operating hours in manufacturing establishments. As expected, large establishments reported comparatively more hours than the small or medium firms. With the positive relationship between size of firms and operating hours, average 59 operating hours per week are evident in the exhibit.

Exhibit – 8.1 Capacity Utilization Across Size of Firms

Output Produced as a Proportion of the Maximum Output Possible

[Average Percent] Small (<20) 83.1 Medium (20-99) 66.9 Large (> 100) 86.5 Overall 79.1

Hours per Week Establishments

Normally Operate [Average Hours]

55.6 58.5 64.3 58.7


The regional picture of the level of capacity utilization is portrayed in the Exhibit 8.2. The highest level (90 percent) is reported establishments located in Sindh (Karachi), followed by firms located in Islamabad (87) city and KPK (84) province. Surprisingly, utilization level is comparatively quite low in the province of Punjab.

Exhibit – 8.2 Capacity Utilization Across Provinces


Punjab69

Sindh90

KPK84

Balochistan58

Islamabad87

Overall79

20

9. Degree of Competition To capture the degree of competition facing manufacturing firms, the ES data collects information on three diverse parameters; main market (local, national and international) for the sale of manufacturing products, firms using technology licensed from foreign company, and practices of competition against informal or unregistered firms. The Exhibit 9.1 disseminates distribution of Pakistan’s manufacturing firms across main markets for their products and across size of firms. It is evident from the exhibit that large (55 percent) proportions of manufacturing establishments compete in the local market. Understandably, these proportions are inversely related with the size of firms. The research on firm’s productivity highlights that localized competition may represent fragmented markets and lack of proper competition, with potential negative effects on firm performance. However, for small industries, competition at the local level is a natural outcome for some products. It is also evident from the exhibit that close to 34 percent large establishments are exporting their products and thus face an international competition.

Exhibit – 9.1 Main Market in Which Establishments Sold Their Main Product?

[Percentages] Local National International Small (< 20) 64.9 32.0 3.1 Medium (20-99) 54.0 42.6 3.4 Large (>100) 38.3 27.8 33.9 Overall 55.0 34.2 10.8 Source: World Bank Enterprise Survey database

For national and international competition, establishments using technology licensed from foreign-owned company have an edge over other firms. Overall, the incidence of such firms is quite low. The Exhibit 9.2 reveals that close to 10 percent firm reported having technology licensed from foreign company. Majority of these firms are located in Islamabad, HUB (Balochistan) and Karachi (Sindh) cities and most probably have either foreign ownership or joint venture with foreign firms. As described in the section of organizational features, the evidence of foreign ownership incidence is observed in HUB (Balochistan) and Islamabad cities. The cases of 100 percent foreign ownership are also noted in these cities. It is generally perceived that the informal sector is pervasive in the developing countries. No doubt, a large informal sector has serious consequences for the formal private sector by posing unfair competition for formal firms. According to the data collected by the ES for Pakistan, the business managers of about 45 percent establishments perceive that they compete against informal business (Exhibit 9.3). The percentage of firms competing against informal firms is significantly higher in Karachi (Sindh) and HUB (Balochistan) cities, while the incidence is quite low in the Punjab province.

21

Exhibit – 9.2 Percentage of Establishments Using Technology Licensed from a Foreign-Owned Company

[Excluding Office Software]


Exhibit – 9.3 Incidence of Competition with Informal Firms

[Percentage of establishments compete against unregistered or informal firms]


10. Innovation

Innovations in product, production process, managerial and marketing technologies are essential for increasing firm’s productivity. The ES data provides various indicators to estimate the extent of innovation across enterprises in Pakistan. The specific questions asked; “During the last three years, has this establishment introduced new or significantly improved products or process?” Exhibit 10.1 furnishes a summary of measures of innovation across size of firms. Overall close to 23 percent enterprises in Pakistan confirmed that they have introduced new products or services which were new for the establishment as well as for the market; the percentage is quite high (36 percent) in case of medium sized firms. Small firms do not have the capacity besides financial resources conducive to encourage innovation. Approximately quarter of firms affirmed the induction of new and improved methods for production and marketing, while innovations in organizational structure and management practices are also reported by about 20 percent establishments. Regarding formal research for improvement and innovation, close to 20 percent firms either facilitate innovation activities through providing financial resources or employees’ time.

Punjab7.3

Sindh21.9

KPK4.5

Balochistan27.5

Islamabad25.5

Overall10.4

Punjab

Sindh

KP

K

Balochistan

Islamabad

Overall

3854 46

5739 45

22

Exhibit – 10.1 Innovation Indicators

Small (<20)

Medium (20-99)

Large (> 100)

Overall

Percentage of Establishments which Introduced New or Significantly Improved: Products or process new for establishment 22.1 44.8 34.9 30.6 Products or services also new for main market 15.8 36.4 21.7 22.7 Method of manufacturing products or offering services 17.7 28.8 32.7 23.2 Logistics, delivery, or distribution methods for inputs or products 15.8 19.8 15.2 16.9 Supporting activities for production processes 27.7 40.0 25.7 31.0 Organizational structures or management practices 17.9 23.4 20.1 19.8 Marketing Methods 21.3 31.4 26.4 25.0 Percentage of Establishments which: Spend on formal research and development activities 16.2 24.4 19.7 19.1 Give employees time to develop or try out a new approach or new idea 21.5 16.1 24.6 20.4

Source: World Bank Enterprise Survey database 11. Obstacles to Export Activity From the micro perspective, access to international market allows domestic firms to achieve economies of scale and thus enhance their profitability. Export activity also leads to an improvement in economic efficiency by increasing the degree of competition and also contributes to productivity gains through diffusion of technical knowledge and learning. Thus a whole section is devoted in the ES survey to obtain perceptions of business managers or owners of establishments which are currently exporting or considering entering the export market in the next 12 months regarding obstacles to export activity. The ES survey investigates managers’ perceptions with the help of a statement (obstacle) and five choices or options; no obstacle, minor obstacle, moderate obstacle, major obstacle and very severe obstacle. Enumerators were directed to show option card as well as to read each option after narrating the obstacle. Owners or business managers of export establishments were requested to rate these statements from the given five options in response to the questions “to what degree is --------- an obstacles to export activity?” Nonetheless, for the purpose of summarizing opinions, two categories (major obstacle and very severe obstacle) are merged and the pertinent perceptions in terms of percentages are furnished in the Exhibit 11.1. The exhibit also furnishes the average score by assigning 0 to ‘No Obstacle’, 1 to ‘Minor Obstacle, 2 to ‘Moderate Obstacle’, 3 to ‘Major Obstacle’ and 4 to ‘Very Severe Obstacle’. Thus the score close to 4 indicate the extreme severity with respect to particular obstacle, while score close to 0 shows that the constraint is insignificant according to him/her perception. Following six constraints were investigated;

Meeting export market product specifications and requirements Price competitiveness in export markets Production capacity to meet order quantities and delivery dates Import regulations and non-tariff barriers in the export markets Transportation and delivery of raw materials and inputs used in production Transportation and delivery of the exported goods

23

The exhibit at large reveals that 25 to 35 exporting establishments declared these elements as major or very severe obstacle to export activity. Price competition and production capacity constraints however are stand out with a relatively higher scores. The exhibit also reveals that the perceptions of export establishments located in Islamabad are quite different; more than 70 percent export establishments of Islamabad conceive all these factors as major or very severe constraints.

Exhibit 11.1 Obstacles to Export Activity

Perentage of Exporting Establishments Which Rated Obstacle as

“Major” and “Very Severe”

Average Score

[0-4 Scale] Obstacles:

Punjab Sindh KPK Balochistan Islamabad Overall Overall

Meeting export market product specifications and requirements 17.4 27.4 11.3 2.4 69.8 23.5 1.6 Price competitiveness in export markets 24.9 37.6 13.7 10.6 83.6 32.4 1.9 Production capacity to meet order quantities and delivery dates 19.8 35.3 16.0 89.5 78.5 34.3 1.8 Import regulations and non-tariff barriers in the export markets 24.5 24.6 29 32.2 79.8 28.4 1.7 Transportation and delivery of raw materials and inputs used in production 20.4 29.2 22.9 8.2 78.5 26.8

1.7

Transportation and delivery of the exported goods 21.8 25.1 22.9 19.2 78.5 26.3 1.6 Note: Scores are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe Obstacle=4 Source: World Bank Enterprise Survey database

Owners or business managers of export establishments were also requested to record their perceptions regarding business services by probing “What business services would most help increase exports or facilitate entering the export market?” They have also provided the list of the services reported in the Exhibit 11.2. The exhibit reveals percentages of establishments which asserted that the particular service is the most important for boosting the export activity. It appears from the exhibit that workers’ training is a major services required by exporting establishments. Close to 43 percent export establishments confirmed the significance of this facility. Further, maintenance of factory equipment and technical assistance in production and quality management are also important. Close to 15 to 17 percent export establishments picked these services as most important from the list of possible services. Surprisingly, export financing is only considered important by about one percent exporting establishments. In contrast, export promotion services were favored by about 5 percent organizations.

24

Exhibit – 11.2

Business Services that Would Help Increase Export [Percentages of Exporting Establishments which Confirmed]

Export Financing

Reforming domestic regulations that affect export markets Government assistance in lowering barriers imposed by other countries Assistance with improving IT capabilities Information about foreign markets Export promotion services Assistance with product design, packaging and labeling for foreign markets Technical assistance in production and quality management Maintenance and repair of factory equipment Workers’ training

Source: World Bank Enterprise Survey database Close to one-third establishments verified the role of Chambers of Commerce or industry associations in helping to obtain these services. These information are displayed in the Exhibit 11.3 and are gathered by asking question “Does your local chamber of commerce or industry association support your business in obtaining the services previously identified?” Comparatively the role of these institutions in helping export industry is relatively less in KPK and Balochistan provinces.

Exhibit – 11.3 Establishments Verified Support for Business Services from Chamber and Associations

[Percentages of Exporting Establishments] Chamber Support Support of Industry Association Punjab 45.4 38.1 Sindh 41.0 48.6 KPK 11.1 16.0 Balochistan 33.2 31.3 Islamabad 51.2 46.6 Overall 33.4 33.5 Source: World Bank Enterprise Survey database

12. Major Obstacles to Current Business Operations Perceptions of business managers or owners on a series of obstacles to the current business operations of establishments were also gathered in the ES survey. The obstacles or constraints, reported in the survey are grouped into five categories; infrastructure and services, law and order, inflation, Government-Business relation and access and availability of various resources. This section summarizes the opinions or views of business managers on these obstacles or constraints; how serious they perceive these obstacles? Like the obstacles to export activity, obstacles to current business operations were probed with the help of five choices or options; no obstacle, minor obstacle, moderate obstacle, major obstacle and very severe obstacle. Enumerators were directed to show option card as well as to read each option after describing the obstacle. Owners or business managers of establishments were requested to rate these statements from the given five options in response to the questions

43

15

17

4

5

5

7

1

1

1

25

“to what degree -------- is an obstacle to the current operations of this establishment?” Nonetheless, for the purpose of furnishing the summary of opinions, two categories (major obstacle and very severe obstacle) are merged and the pertinent perceptions in terms of percentages are furnished in the following Exhibits. These exhibits also furnish the average score by assigning 0 to ‘No Obstacle’, 1 to ‘Minor Obstacle, 2 to ‘Moderate Obstacle’, 3 to ‘Major Obstacle’ and 4 to ‘Very Severe Obstacle’. Thus the score close to 4 indicate the extreme severity with respect to particular obstacle, while score close to 0 shows that the constraint is not much significant according to him/her perception. The Exhibit 12.1 collates owners or managers’ perceptions regarding infrastructure related constraints to business operation. Not surprisingly, electricity is perceived as a major constraint with the average score 3. It is worth repeating that the ES survey was conducted during May 2013 through May 2015 which is period of severe power outages in the country. However its severity is comparatively low in Sindh province (mainly Karachi) as compared with industries located in Punjab and KPK provinces. Overall telecommunication was not considered constraint to business operation with an average score of 0.8. However, about 40 percent of industries which are located in Islamabad industrial zone regard it as a major constraint. Road transport is in the midst in terms of severity with 1.5 score. However, industries located in Islamabad and Balochistan zones are critical regarding problems of road transport.

Exhibit 12.1 Obstacles to the Current Operations of Establishments – Infrastructure and Services

Perentage of Establishments Which Rated Obstacle as


Average Score



Electricity 87.3 58.4 70.4 61.7 92.2 75.2 3.0 Telecommunication 4.3 33.2 4.0 8.0 40.7 11.8 0.8 Transport 15.4 34.3 25.3 40.8 64.7 24.6 1.5 Note: Score are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe obstacle=4 Source: World Bank Enterprise Survey database

Nature of problems in road transport was further diagnosed by asking the biggest transportation obstacle. The Exhibit 12.2 displays the responses of business managers. Cost and availability of fuel was narrated as the major problem by about 51 percent establishments. Other problems which are stand out include; road closures due to strike and protests (22 percent) and network and quality of roads (19 percent).

26

Exhibit – 12.2

Biggest Transportation Obstacle by Road [Percentage of Establishments]


Three indicators (political instability, corruption and crimes) were selected to record business managers’ perception. How serious they take these as constraints to business operation? Among these, corruption stands out with an average score 2.8 indicating corruption as harmful as the shortage of electricity for business operation (Exhibit 12.3). More than 80 percent establishments in KPK, Balochistan and Islamabad rate corruption as major or very severe constraint. Barring Punjab and Sindh provinces, political instability is also considered a major constraint. Overall 40 percent establishments rate political instability as a major constraint. Interestingly, crime, theft and disorder are not perceived as a major constraint in KPK and Balochistan provinces which are affectively terror-torn areas. In contrast, close to 60 percent establishments located in Karachi (Sindh) and Islamabad cities were anxious regarding the crime rates.

Exhibit 12.3 Obstacles to the Current Operations of Establishments – Law and Order



Average Score



Political Instability 22.8 27.2 66.8 75.8 65.7 40.0 2.0 Corruption 58.2 68.5 80.9 85.9 89.7 68.7 2.8 Crime, Theft and Disorder 41.7 60.8 2.8 24.1 59.6 34.1 1.5 Note: Score are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe Obstacle=4 Source: World Bank Enterprise Survey database

According to Exhibit 12.4, which disseminates business managers’ perception regarding inflation related constraints, rising prices of energy and raw material is a major or very server constraints with an average score 2.8. Overall, close to 64 percent establishments rated it as major constraint to business operation. On the contrary, currency exchange rate is considered as major constraint by about 38 percent establishments; however provincial differences exist. The comparative percentage in Punjab and Balochistan provinces is significantly low (17 to 21 percent).

1

3

3

19

22

51

Lack of competition in transportationcompanies

Availability and quality of transport vehicles

Time and distance to markets

The network and quality of roads

Road closures due to strikes and protests

Cost and availability of fuel

27

Exhibit 12.4 Obstacles to the Current Operations of Establishments – Inflation



Average Score



Currency Exchange Rate 20.7 49.7 48.2 16.7 78.3 37.7 1.7 Prices of Energy and Raw Materials 72.6 56.6 55.1 71.9 88.0 63.9 2.8 Note: Score are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe Obstacle=4 Source: World Bank Enterprise Survey database

The perceptions of business managers on various aspects of Government-Business relation were collated in the Exhibit 12.5. Among these constraints, tax rate and tax administration stand out with higher average scores. Overall, close to 55 percent establishments consider tax rate is a major or very severe constraint to the current business operation. The comparative provincial percentages of establishments which declared tax rate as a major constraints are 47, 63, 57, 20 and 71 for Punjab, Sindh, KPK, Balochistan and Islamabad respectively. It is also evident from the exhibit that close to 35 percent establishments rated tax administration and Courts as major constraints to business operations. However, the relative percentages are low in Punjab and KPK provinces. Business licensing and permits were rated as major constraints by about 25 percent establishments, while less than 20 percent establishments consider trade and labor regulations as major constraints.

Exhibit 12.5 Obstacles to the Current Operations of Establishments – Government Business Relation



Average Score



Customs and Trade Regulations 20.5 25.6 9.9 15.1 41.2 18.7 1.4 Tax Rate 47.1 63.0 56.7 20.0 70.8 54.4 2.3 Tax Administration 32.7 44.9 25.2 51.7 47.1 34.1 1.8 Licensing and Permits 23.7 26.0 22.0 13.7 59.6 24.6 1.6 Labor Regulations 13.3 17.4 3.2 5.3 71.2 12.8 1.2 Courts 30.2 37.2 34.9 44.8 67.1 34.6 1.7 Note: Score are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe Obstacle=4 Source: World Bank Enterprise Survey database

Obstacles related to access and availability of resources which are grouped in the Exhibit 12.6 include; access to finance, access to land, inadequately educated workforce, access to inputs and supplies, access to production technology, availability of storage facilities and lack of an ISO certification. The exhibit at large reveals that these business aspects are not considered as major constraints for the current business operation by the majority of establishments in Pakistan. Barring two obstacles (inadequately educated workforce and access to production technology),

28

the average scores are close to 1 indicating low degree of severity. However, the trend in perceptions of establishments located in Islamabad industrial zones is quite different with establishments located elsewhere. In general, close to 50 percent or more establishments of Islamabad rated all these aspects as major constraints. Similarly, about 66 percent establishments located in HUB (Balochistan) industrial zones perceive ‘inadequately educated workforce’ as a major or severe constraint to the current business operation.

Exhibit 12.6 Obstacles to the Current Operations of Establishments – Access and Availability of Resources



Average Score



Access to Finance 7.0 22.4 11.1 11.1 53.7 13.1 1.1 Access to Land 11.0 17.9 3.0 17.9 66.5 11.6 1.0 Inadequately Educated Workforce 27.1 17.5 20.4 65.9 65.2 24.4 1.5 Access to Input and Supplies 6.2 19.7 5.7 54.1 46.2 11.1 1.1 Access to Production Technology 13.8 33.5 5.6 12.8 58.2 20.6 1.5 Availability of Storage Facility 8.3 20.5 2.2 23.3 66.5 11.1 1.0 Lack of an ISO Certificate 11.2 12.8 4.0 7.2 76.7 11.1 0.7 Note: Scores are assigned as: No Obstacle=0, Minor Obstacle=1, Moderate Obstacle=2, Major Obstacle=3, Very Severe Obstacle=4 Source: World Bank Enterprise Survey database

13. Perception of the Top Obstacle Two subjective measures are used in the ES survey to obtain perceptions of business managers or owners regarding business environment. These are ‘Major Constraints’ and ‘Top Obstacle’. The major obstacles or constraints, discussed in the previous section reflect the degree to which each individual element is an obstacle to daily business operation, while the ‘top obstacle’ statistic reflects which business environment element is the most relevant obstacle faced by a firm among a list of obstacles. Business managers were requested to identify only one business environment element out of a list of thirteen that “represents the biggest obstacle faced by this establishment”. Thus the information regarding the top obstacle indicates a relative position (or ranking) of constraints to business operation. The Exhibit 13.1 displays the percentage of firms that report a particular business environment element to be their top obstacle. There are a number of observations that stand out. As expected, electricity load-shedding and breakdown was conceived as the biggest obstacle by 45 percent establishments of Pakistan. Corruption and political instability stood at second and third

29

positions. Close to 17 and 9 percent establishments respectively declared these as top obstacle. Tax administration and crime are perceived as the top obstacle by close to 7 and 6 percent establishments respectively.

Exhibit – 13.1

Elements of the business environment currently represent the biggest obstacle faced by establishments [Percentage of Establishments]


1

1

1

2

2

3

3

4

6

7

9

17

45

Labor regulations

Access to land

Practices of competitors in the informal sector

Transport

Customs and trade regulations

Access to finance

Inadequately educated workforce

Tax rates

Crime, theft and disorder

Tax administration

Political instability

Corruption

Electricity

30

Appendix: Thematic Summary of Enterprise Survey Indicators

Firm Characteristics Pakistan Punjab Sindh KPK Balochistan Islamabad South Asia

Age of Establishments (years) 21.8 23.3 28.1 15.9 25.2 13.0 16.9

Proportion of private domestic ownership in a firm (%) 99.1 99.1 99.0 99.9 94.1 95.4 98.4

Proportion of private foreign ownership in a firm (%) 0.6 0.4 0.9 0.0 5.8 4.6 1.2

Proportion of government/state ownership in a firm (%) 0.1 0.1 0.1 0.0 0.0 0.0 0.2

Proportion of a firm held by the largest owner(s) (%) 92.7 91.3 94.2 92.9 93.2 99.4 87.3

Percent of firms with legal status of publicly listed company 0.9 1.0 0.3 0.4 19.3 2.9 1.1 Percent of firms with legal status of privately held Limited Liability Company 1.2 2.0 1.5 0.0 0.0 0.0 8.5

Percent of firms with legal status of Sole Proprietorship 73.8 79.4 68.7 70.3 41.8 91.3 69.9

Percent of firms with legal status of Partnership 18.1 15.6 9.9 27.7 36.7 0.7 15.4

Percent of firms with legal status of Limited Partnership 5.4 1.3 19.5 1.2 1.8 2.2 4.4

Finance

Percent of firms with a checking or savings account 58.1 47.9 74.2 57.4 92.7 60.0 77.6

Percent of firms with a bank loan/line of credit 6.7 9.3 6.6 1.9 38.2 15.3 27.0

Proportion of loans requiring collateral (%) 64.0 85.4 26.9 28.4

49.4 81.1

Value of collateral needed for a loan (% of the loan amount) 153.4 147.9

236.0

Percent of firms not needing a loan 57.0 70.0 77.2 29.4 60.6 43.3 44.7

Percent of firms whose recent loan application was rejected 13.5 7.8 14.7 3.3

14.4

Percent of firms using banks to finance investments 8.1 7.5 0.8 1.8 83.4 45.4 21.8

Proportion of investments financed internally (%) 87.6 92.9 97.9 68.9 40.5 79.3 73.9

Proportion of investments financed by banks (%) 2.0 1.8 0.5 0.4 24.7 8.0 14.4

Proportion of investments financed by supplier credit (%) 0.9 1.4 0.3 0.1 8.4 0.7 1.0

Proportion of investments financed by equity or stock sales (%) 8.5 3.5 1.0 29.6 9.9 11.4 6.9

Percent of firms using banks to finance working capital 8.6 6.4 3.7 13.3 4.3 42.5 25.0

Proportion of working capital financed by banks (%) 2.5 1.9 1.2 4.1 2.1 8.1 12.4

Proportion of working capital financed by supplier credit (%) 3.6 3.2 4.1 3.9 9.6 2.1 4.3

Percent of firms identifying access to finance as a major constraint 13.2 7.0 22.2 10.8 11.2 53.9 26.5

31

Trade Pakistan Punjab Sindh KPK Balochistan Islamabad South Asia

Days to clear direct exports through customs 11.4 14.7 8.3 2.2 n.a. ... 8.7

Percent of firms exporting directly or indirectly (at least 1% of sales) 18.6 16.6 27.6 11.8 17.9 31.5 12.9

Percent of firms exporting directly (at least 1% of sales) 13.2 15.1 16.6 6.2 14.2 16.9 7.9

Proportion of total sales that are domestic sales (%) 89.3 90.4 81.9 94.2 90.2 94.2 91.0

Proportion of total sales that are exported directly (%) 7.9 8.9 10.7 4.4 4.3 1.8 5.0

Proportion of total sales that are exported indirectly (%) 2.8 0.7 7.4 1.4 5.5 4.0 4.0

Days to clear imports from customs* 12.7 11.0 14.8 n.a. 11.7 n.a. 8.9

Percent of firms using material inputs and/or supplies of foreign origin* 27.1 24.2 31.4 15.8 39.2 57.0 40.2

Proportion of total inputs that are of domestic origin (%)* 88.3 89.8 85.3 92.2 84.2 81.4 76.0

Proportion of total inputs that are of foreign origin (%)* 11.7 10.2 14.7 7.8 15.8 18.6 24.0

Days of inventory of main input* 47.8 20.0 24.1 144.8 19.1 5.9 40.9 Percent of firms identifying customs and trade regulations as a major constraint 21.4 22.2 28.3 12.3 16.7 44.7 17.0

Workforce

Percent of firms offering formal training 32.0 23.4 44.3 31.2 56.0 44.2 28.2

Proportion of workers offered formal training (%)* 46.7 42.6 36.2 63.1 n.a. 38.3 49.6

Years of the top manager's experience working in the firm's sector 13.2 12.4 17.7 11.5 9.6 7.4 14.6

Number of permanent full-time workers 81.1 77.8 172.1 22.8 141.3 71.8 57.8

Number of temporary workers 10.9 13.2 12.9 7.3 10.8 13.8 5.5

Number of permanent production workers* 133.8 119.9 251.6 25.7 154.1 34.8 71.1

Number of permanent non-production workers* 31.0 21.9 70.7 8.0 0.3 16.5 14.8

Number of permanent skilled production workers* 106.4 86.8 210.5 19.2 153.7 26.6 55.3

Number of permanent unskilled production workers* 13.3 11.8 23.8 6.5 0.3 8.3 12.8

Proportion of unskilled workers (out of all production workers) (%)* 19.7 18.2 17.0 29.4 2.1 18.3 25.5

Percent of firms identifying labor regulations as a major constraint 12.9 13.3 17.4 3.7 5.4 71.4 9.8 Percent of firms identifying an inadequately educated workforce as a major constraint 24.2 27.0 17.2 20.1 66.0 65.5 20.2

32

Infrastructure Pakistan Punjab Sindh KPK Balochistan Islamabad South Asia

Number of electrical outages in a typical month 75.2 110.1 26.7 65.5 32.6 6.9 25.4

Duration of a typical electrical outage (hours) 13.2 8.9 1.3 26.0 2.8 1.2 3.1 If there were outages, average duration of a typical electrical outage (hours) 16.9 9.2 2.6 35.5 3.4 6.2 5.3

Losses due to electrical outages (% of annual sales) 21.2 28.7 6.5 23.8 12.4 3.2 6.6 If there were outages, average losses due to electrical outages (% of annual sales) 33.8 35.9 16.7 39.4 15.8 22.2 10.9

Percent of firms owning or sharing a generator 65.4 70.0 84.9 47.3 65.0 45.2 45.4

Proportion of electricity from a generator (%) 25.2 31.1 22.0 20.2 23.6 17.8 12.4 If a generator is used, average proportion of electricity from a generator (%) 41.4 46.1 28.0 45.4 37.6 39.3 24.4

Days to obtain an electrical connection (upon application) 82.8 105.8

77.1

55.1

Percent of firms identifying electricity as a major constraint 75.3 87.3 59.1 70.8 61.3 92.3 46.1

Number of water insufficiencies in a typical month* 5.9 10.6 4.7 0.2 2.6 0.0 1.7 Proportion of products lost to breakage or spoilage during shipping to domestic markets (%)* 2.7 0.6 1.8 7.1 1.7 1.8 1.2

Percent of firms identifying transportation as a major constraint 25.5 16.0 35.3 26.0 40.5 69.3 21.1

Innovation and Technology

Percent of firms with an internationally-recognized quality certification 35.8 29.3 55.3 27.6 34.4 59.5 17.2

Percent of firms using technology licensed from foreign companies* 22.1 17.3 30.0 19.5 31.1 24.1 11.4

Percent of firms having their own Web site 46.9 45.3 64.3 33.7 74.9 67.0 31.4

Percent of firms using e-mail to interact with clients/suppliers 54.4 41.9 78.3 53.4 42.9 56.6 54.9 Percent of firms with an annual financial statement reviewed by external auditors 37.5 35.6 47.2 32.6 57.0 45.6 46.3

Performance

Capacity utilization (%)* 76.8 68.1 92.0 80.0 58.7 87.7 77.6

Real annual sales growth (%) 4.7 4.7 12.5 3.7 ... ... 4.0

Annual employment growth (%) 5.4 7.3 3.0 4.6 1.9 12.1 6.2

Annual labor productivity growth (%) 0.7 2.1 9.6 -2.3 ... ... -1.0

Percent of firms buying fixed assets 30.4 26.8 37.0 28.7 49.6 36.2 28.1

33

Gender Pakistan Punjab Sindh KPK Balochistan Islamabad South Asia

Percent of firms with female participation in ownership 11.8 11.3 23.0 4.9 0.0 11.6 18.4

Percent of firms with a female top manager 6.0 1.8 21.2 0.0 3.3 11.8 11.0

Percent of firms with majority female ownership 8.0 6.7 16.7 3.7 0.0 11.6 9.6

Proportion of permanent full-time workers that are female (%) 7.3 13.0 5.1 1.8 0.0 5.4 18.3 Proportion of permanent full-time production workers that are female (%)* 0.8 0.9 0.4 1.1 0.0 0.6 19.8 Proportion of permanent full-time non-production workers that are female (%)* 1.5 1.5 1.1 1.2 0.0 6.0 18.4

Regulation and Taxes

Senior management time spent dealing with the requirements of government regulation (%) 3.5 3.2 3.5 4.1 2.2 2.0 7.2

Number of visits or required meetings with tax officials 2.0 1.6 2.1 2.3 2.8 0.6 1.4 If there were visits, average number of visits or required meetings with tax officials 3.6 3.7 4.0 3.4 3.9 1.8 2.5

Days to obtain an operating license 10.4 n.a. n.a. 5.6 37.0 ... 14.8

Days to obtain a construction-related permit 33.6 47.7 26.6 n.a. n.a. ... 55.1

Days to obtain an import license 33.5 43.9 n.a. n.a. n.a. ... 15.5

Percent of firms identifying tax rates as a major constraint 54.1 47.0 63.3 55.5 20.1 70.9 26.4

Percent of firms identifying tax administration as a major constraint 34.1 32.7 45.4 25.0 51.4 47.6 18.8 Percent of firms identifying business licensing and permits as a major constraint 24.5 23.8 25.7 21.8 13.8 60.0 15.9

Informality

Percent of firms competing against unregistered or informal firms 46.5 41.4 53.9 47.1 60.2 41.1 41.1

Percent of firms formally registered when they started operations in the country

79.8 72.0 88.4 82.0 78.9 82.3 86.8

Number of years firm operated without formal registration 0.7 1.0 1.1 0.0 0.4 0.1 0.8

Percent of firms identifying practices of competitors in the informal sector as a major constraint

13.1 6.1 25.8 9.2 4.4 55.8 20.4

34

Corruption Pakistan Punjab Sindh KPK Balochistan Islamabad South Asia

Bribery incidence (percent of firms experiencing at least one bribe payment request)

30.8 34.2 28.0 27.7 72.0 39.5 24.8

Bribery depth (% of public transactions where a gift or informal payment was requested)

28.5 33.1 27.4 24.0 45.9 39.0 21.0

Percent of firms expected to give gifts in meetings with tax officials 28.8 35.1 26.5 23.4 72.2 33.1 19.6

Percent of firms expected to give gifts to secure government contract 88.2 58.3 83.5 99.1 91.0 45.5

Value of gift expected to secure a government contract (% of contract value) 8.2 8.2 2.9

Percent of firms expected to give gifts to get an operating license 31.0 47.0 56.3 8.8 64.0 25.3

Percent of firms expected to give gifts to get an import license 6.0 0.0 27.4

Percent of firms expected to give gifts to get a construction permit 28.7 10.1 27.9 87.5 30.9

Percent of firms expected to give gifts to get an electrical connection 57.8 26.5 52.8 81.2 37.3

Percent of firms expected to give gifts to get a water connection 30.9 16.3 19.6 70.5 36.7

Percent of firms expected to give gifts to public officials "to get things done" 45.8 44.9 46.4 50.9 24.9 35.7 25.5

Percent of firms identifying corruption as a major constraint 68.3 58.1 69.0 78.8 85.7 89.7 40.1

Percent of firms identifying the courts system as a major constraint 34.6 30.2 37.9 34.1 44.4 67.4 16.8

Crime

Percent of firms paying for security 51.7 59.3 64.4 30.7 35.3 77.3 44.8

Security costs (% of annual sales) 2.4 3.4 2.6 0.9 1.0 4.8 1.2

If the establishment pays for security, average security costs (% of annual sales)

6.5 6.6 6.4 6.4 4.6 6.6 3.4

Percent of firms experiencing losses due to theft and vandalism 9.5 10.5 17.8 1.8 15.2 18.0 10.5

Losses due to theft and vandalism against the firm (% of annual sales) 0.4 0.4 0.6 0.1 2.5 0.9 0.9

If there were losses, average losses due to theft and vandalism (% of annual sales)

6.5 6.1 5.7 8.5 16.6 5.5 8.0

Products shipped to supply domestic markets that were lost due to theft (% of product value)*

1.1 0.7 1.6 0.9 1.7 1.5 0.8

Percent of firms identifying crime, theft and disorder as a major constraint 34.1 41.5 61.1 3.0 24.2 60.0 17.7

Note: (*) asterisk denotes that this indicator is computed using data from manufacturing firms only Source: World Bank Enterprise Survey database, downloaded from, http://www.enterprisesurveys.org/data/exploreeconomies/2013/pakistan on

February 13, 2016.

Documents

A Micro Perspective of Business Climate in Pakistan · The Centre for Business and Economics Research (CBER) is dedicated to stimulate research by faculty, students and staff at IBA