KARACHI, Jan 11: The high cost of doing business has depressed investment, employment and production, says latest World Bank Pakistan Country Update, a view that is shared by manufacturing companies.

As the privileges claimed by large industries often insulates them from for general environment, the WB report states that the situation is most depressing for small and medium industries.

It is generally recognized that the high cost of doing business in the formal sector compels small businesses to operate in the informal sector, which may lack legal sanction but has acquired social acceptability. Small businesses, however, cannot grow fast because they cannot borrow from the banks, to leverage and expand their operations. Often physical assets cannot be converted into capital for productive use without bank credit.

As the bank lending rates are declining, the real gainers are big blue chip companies that can get loans at bargain price, because of the volume of business they can offer to the lenders and owing to “good” risk factor. These large companies are offered loans ranging from 7-9 per cent. Small and medium sized business gets credit at about 14 per cent, says a borrower.

The World Bank has re-emphasised respect for rule of law and a level-playing field for the private sector activities through the creation of a sound enabling and regulatory environment.

However, the overall decline in interest rates and a stronger rupee is generally reducing the cost of investment that includes imported machinery, plants, industrial raw materials, office equipments, etc.

Yet energy costs is still a problem. To quote WB, the inefficiencies in utilities like Wapda, KESC, PIA and Pakistan Railways results in raising the service costs very high. As would it appear, reforms, restructuring and injection of billions of rupees in these institutions have yet to yield positive results.

“ Similarly, scores of outdated or needlessly cumbersome regulations on the rule books, both at the federal and even more at the provincial levels extract extra payments and cause distraction and delay in the conduct of business,” say WB officials.

The World Bank has urged Pakistan to initiate an aggressive deregulation process, to remove the “hassle factor” of doing business that comes from the mock enforcement of un-needed rules and regulations. These plague the efforts of particularly small businessmen trying to earn a livelihood by employing others and producing what consumers and business want. And to add to what the WB has said the “hassle factor” breeds corruption.

Business often complains that good policies become meaningless because of weak implementation. Policy makers spend very little time in monitoring progress in execution of their decisions.

Faster economic growth requires an attractive investment climate. This in turn, reiterates the WB, requires a stable macro-economic environment, good governance and a low cost business operating environment—i.e. adequate and efficient government provided business services and infrastructure.

The WB observations are strengthened by annual accounts of listed companies. In the annual report 2002, Farooq Textile Mills has come out with a chart on the cost structure. The company chairman Mohammad Farooq Sumar says the costs have again been on the rise in the year under review. The overall increase is about 12 per cent.

The chart, perhaps, more specific to the company, indicates 17 per cent rise in cost of raw materials, mostly because of procurement of cotton yarn and grey cloth to make up for the gap in production and sales requirements.

Wages were up by 12 per cent on account of increase in minimum wages by the government and partly due to normal increments. Fuel and power costs went up by 12 per cent. From Rs90 million in 1996-97, the company’s fuel cost has jumped up to Rs151.6 million in 2001-2002.

Stating that interest rates fell appreciably, Farooq complains that still it was far away from the prevailing international rates to make industry competitive. Farooq wants export refinance rate to be around 4-5 per cent.

The cost structure chart shows that Farooq Textiles spends 49.73 per cent of its total cost on raw materials and 45.69 per cent on conversion costs. Wages and salaries account for 12.07 per cent, fuel and power 13.28 per cent, financial expenses 7.17 per cent and selling/distribution expense 4.58 per cent.