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Hidden cost of doing business

April 02, 2012

The ‘hidden’, refers to facilitation fee paid to political power yielders, speed money paid to different government departments involved in certifications, bribes to regulators and tax authorities and payments to extortionists and criminal elements. - File photo

The hidden cost of doing business in Pakistan is said to be one of the highest for industry and the lowest for commercial trading.

The textile industry claims that the unaccounted charges have shot up to 15-20 per cent of the total cost whereas commercial traders project it to be under one per cent.

In the manufacturing sector, exporters have to spend more than those catering to the local market. However, there appears to be no uniformity in incidence of hidden cost to businesses across regions and sectors.

Though some cities of Punjab are trailing behind closely, Karachi is said to be the most expensive in terms of undeclared costs.

Anecdotal evidence provided by corporate leaders brought some interesting facts influencing the shape, size and possible direction of business activity in a country that desperately needed huge chunks of new investment. The investment to GDP ratio currently at around 13 per cent is the lowest in the region.

Apart from other factors, the rising rate of unmitigated costs are said to be directing the tycoons to rethink their business strategy. Many readjusted the focus of their business back from volumes to margins. The heavy cost also discourages specialisation and vertical integration. Businesses are diversifying to cushion extra costs. Many old business houses have branched out into trading to absorb the blow of higher hidden cost incidence in manufacturing.

There is no clear cut definition of what constitutes the non-transparent cost. Most corporate leaders consider it to be the sum total of all kinds of expenses they incur to sustain their business that they cannot or choose not to include into their books.

The ‘hidden’, refers to facilitation fee paid to political power yielder, speed money paid to different government departments involved in certifications, bribes to regulators and tax authorities and payments to extortionists and criminal elements.

Included is also the cost incurred on account of unscheduled outages of gas and electricity, additional cost of availing more expensive mode of transportation to meet export delivery deadlines, penalties for delays, etc.

“We have not worked on it so far. I have not come across any credible data identifying its incidence in percentage for different sectors. There is no unanimity on definition of ‘hidden cost’ either. If you ask me the impact of tax evasion on tax compliant companies should also be treated as hidden cost to lawful businesses,” Kamran Mirza, CEO, Pakistan Business Council, said.

The market compulsions discourage businesses from internalising these expenditures in their cost accounting to be reflected in minimum price of a product or service.

“The market has become very competitive particularly for exporters with players like China, India, Bangladesh and Vietnam vying to protect and expand their share in international trade. If we add our extra spending honestly into our product cost , we will not be able to export a single unit,” a leading exporter commented.

“Believe it or not, I have long given up on calculating the real total cost of my operations. I have no clue. I know it is a lot more than what it should be or what we expected at the feasibility stage of our project,” Iqbal Ebrahim, CEO of Al Karam Textiles, told over telephone.

“Five years back Pakistan was ahead of most regional competitors in global textile market. Today, we are taking beating not just from China and India but also from Bangladesh and Vietnam. I wonder what our policymakers are waiting for. The collapse of cotton textile industry in a manpower-abundant country is a recipe for disaster,” he said.

Deliberating on reasons of keeping extra costs out of formal account books, a leading exporter of bed linen Shabbir Ahmed said exporters could not afford to quote the real cost in pricing per unit of exports or they would lose to competitors.

“Unforeseen happenings such as steep price variations in inputs, lack of government oversight to adhere to environment and health standards by service providers such as dyers, etc., production losses owing to strikes, holidays, demands of multiple government departments and inspectors of export merchandise, damage incurred by inspectors because of rough handling, penalties incurred for delays beyond business control, extortion, gratification and incidence of speed money to move files, and sudden changes in fiscal policies, all entail costs that business bear, making it very challenging to carry on with work we know best,” he explained.

“The cumulative hidden cost to my business is as high as 25 per cent,” Shabbir said.

The leading traders were shocked at the hidden costs quoted by some businessmen. “I find 20-25 per cent too exaggerated. I cannot believe that for Rs100 million any businessman would spend Rs20-25 million as hidden cost,” Aziz Mania, a leading trader, commented.

“It can possibly not be more than five per cent for any business. For commercial traders, it cannot be more than one per cent. For me, it is a maximum of 0.25 per cent, though in absolute terms even that is high,” he said.

There is a need to study the issue to deal with the hidden costs which compromise productivity and competitiveness, he said.