Pakistan’s ease of doing business ranking drops to 107th

Second drop in a row for the country on the benchmark global index compiled by the World Bank.

KARACHI:

For the second year in a row, Pakistan’s rank in the World Bank’s annual Doing Business report fell: the Washington-based lender ranked the country 107th out of 185 nations worldwide in terms of ease of doing business, a three-place drop in the benchmark global rankings.

Pakistan’s drop in ranking comes even as some of its regional peers leapfrogged the index to improve their global standing. The World Bank highlighted Sri Lanka as one of the nations that was particularly successful in improving its ranking, jumping 15 spots to end at 81st place. Pakistan, which ranked the best economy in South Asia for 2010 and 2011, was ranked third in the region for the 2013 edition of the report, released on Tuesday.

The Doing Business report, compiled by the World Bank and its subsidiary, the International Finance Corporation, measures the level of business regulations as well as the level of their enforcement across 185 countries. The World Bank has been compiling the report since 2003 and first introduced the rankings in the 2006 edition of the report.

In its current edition, the report measures indicators in 11 different categories, such as ease of starting a business, enforcing contracts, obtaining an electricity connection, hiring workers, winding down a business, paying taxes, trading across borders, dealing with construction permits, registering property, getting credit, and protecting investors.

Pakistan does not rank in the top 25 in any category, coming closest in the protecting investors segment, where the country is ranked 32nd. The worst ranking for Pakistan comes in obtaining an electricity connection, where the nation is ranked 171st, followed very closely by the ease of paying taxes, where Pakistan is ranked 162nd.

Pakistan improved in only one of the 11 categories, enforcing contracts, where the nation went from 156th place to 155th place. There was no change in Pakistan’s ranking for dealing with construction permits and registering property. In all of the other eight categories, Pakistan saw a drop in its ranking.

The most egregious drops – of five places each – were in obtaining an electricity connection and trading across borders. Pakistan dropped three places each in getting credit and protecting investors, two places in the ease of paying taxes, and one place each in the ease of starting a business and dealing with closing a business.

The report does not make for happy reading for anyone seeking to promote Pakistan as an investment destination. Perhaps the most scathing indictment of the government’s complacence in improving business conditions in the country comes from the World Bank’s observation that Pakistan implemented no reforms – major or minor – during the past two years that would improve the economic competitiveness of the country. Indeed, in 2012, the government actually made things worse by increasing the income tax rate for smaller companies.

While the Doing Business report is one among many international rankings used by global investors when deciding where to make investments, it is one of the most important ones, since it most directly addresses the day-to-day concerns of entrepreneurs and investors. Consistently underperforming in the report is bad for business, and it is no surprise that Pakistan attracted a paltry $87 million in net foreign direct investment during the first quarter of the fiscal year ending June 30, 2013.

The drop in rankings, however, does not mean that Pakistan is becoming a worse place to do business: it is just that other countries are doing better than Pakistan and consistently jumping up in the rankings for doing so. That many of these countries are Pakistan’s regional peers should be cause for concern for policymakers in Islamabad.

Starting a Business

It takes 10 steps over 21 days to register a firm in Pakistan. South Asian average is 7 steps over 19 days while OECD average is 5 steps over 12 days. There is no paid-in minimum capital requirement for registration in Pakistan, but the cost of registration is high – 9.9% of Pakistan’s per capita income.

Dealing with Construction Permits

Building a warehouse takes 11 steps over 222 days, compared to South Asian average of 16 steps over 201 days and OECD average of 14 steps over 143 days. The official cost of building a warehouse, however, is beyond the reach of most Pakistanis – 216% of per capita income.

Getting Electricity

Keeping aside load shedding and chronic outages, Pakistan fares very low in obtaining a permanent electricity connection for a business – 6 processes over 206 days, compared to South Asian average of 6 steps over 148 days and OECD average of 5 steps over 98 days. Costs are also prohibitive – 1,673% of per capita income.

Registering Property

It takes the same number of steps, 6, to register property in Pakistan as in South Asian countries on average, and one step more than OECD countries, but takes 50 days – twice as long as South Asian average of 100 days, and half as long as OECD average of 26 days. The cost of registration, as a percentage of property value, is 7.8, almost the same as South Asian average of 7.2, but much higher than OECD average of 4.5%.

Getting Credit

With 7.7 million people on public credit registry, and 2.2 million listed on a private credit bureau, Pakistan fares better than South Asia but below OECD average on depth of credit information index that measures rules and practices affecting the coverage, scope and accessibility of credit information available through a public credit registry or a private credit bureau. Pakistan scores 6, on a scale of 1 to 10, on strength of legal rights that protect the rights of borrowers and lenders and thus facilitate lending.

Protecting Investors

In its highest score on a benchmark, Pakistan scores 6.3, on a scale of 1 to 10, on strength of investor protection index – higher than OECD average of 6.1, and South Asian average of 5. The index measures transparency of transactions, liability for self-dealing by directors and shareholders’ ability to sue officers and directors for misconduct.

Paying Taxes

Pakistan has a higher profit tax, 17.9% compared to 17.1% in South Asia on average and 15.2% in OECD, and the process is cumbersome – requiring  47 payments over 560 hours a year, compared to 30 payments over 311 hours in South Asia and 12 payments over 176 hours on average in the OECD. The total tax rate at 35.3%, however, is lower than South Asian average of 40.2% and OECD average of 42.7%.

Trading Across Borders

It is cheaper to export and import a container in Pakistan – $660 and $705 respectively compared to South Asian average of $1,603 and $1,736 and OECD average of $1,028 and $1,080 – but the process is cumbersome. It takes 8 documents and 21 days to export and same number of documents but 18 days to import. South Asian averages are higher but OECD countries take 4 documents and 10 days for both import and export.

Enforcing Contracts

In the event of a dispute, it takes 976 days to resolve it, from the moment the plaintiff files the lawsuit in court until payment. South Asian average is 1,075 days whole OECD average is 510 days. The cost, in court fees and attorney fees, is 23.8% of the claim, compared to South Asian average of 27.2% and OECD average of 20.1%.

Enforcing Contracts

The average time to close a business in Pakistan is 2.8 years, compared to 3 years in South Asia and 1.7 years in OECD countries on average. The average cost of bankruptcy proceedings, as a percentage of the estate’s value, are low – 4% compared to South Asian average of 10% and OECD average of 9%.

Published in The Express Tribune, October 24^th, 2012.