the state of domestic commerce in pakistan study 8 - storage

THE STATE OF DOMESTIC COMMERCE IN PAKISTAN

STUDY 8

STORAGE

For

The Ministry of Commerce Government of Pakistan

November 2007

By

Innovative Development Strategies (Pvt.) Ltd. House No. 2, Street 44, F-8/1, Islamabad

Table of Contents

List of Abbreviations .................................................................................................... i Acknowledgments ..................................................................................................... iv Executive Summary .................................................................................................. 3 Section 1: Introduction ......................................................................................... 5 1.1. Agricultural Storage – Grains........................................................................... 5 1.2. Cold Storage of Agricultural Goods ................................................................. 6 1.3. Non-Agricultural Storage and Warehousing .................................................... 8 Section 2: Domestic Commerce Survey – The Storage Sector ...................... 10 2.1 Storage Facilities – Questions for Wholesalers and Retailers ....................... 10 2.2 Types of Facilities .......................................................................................... 11 2.3 Infrastructure and Facilities ........................................................................... 12 2.4 Operations ..................................................................................................... 15 2.5 Seasonality of Operations ............................................................................. 16 2.6 Losses, Risk and Insurance .......................................................................... 17 2.7 Viability of Commercial Storage ..................................................................... 18 2.8 Contracts ....................................................................................................... 19 Section 3: Domestic Commerce Survey – Business Issues in Storage ......... 20 3.1 Market Competition ....................................................................................... 20 3.2 Constraints .................................................................................................... 20 3.3 Financing ....................................................................................................... 22 3.4 Employment................................................................................................... 22 3.5 Governance Issues ........................................................................................ 22 Section 4: Key Issues in the Storage Sector .................................................... 24 4.1 Business Volumes ......................................................................................... 24 4.2 Governance Issues ........................................................................................ 24 4.3 Conclusions and Policy Recommendations ................................................... 24

List of Tables Table 2.1: Types of Storages ........................................................................................ 12 Table 2.2: Land or Building Acquisition for Storage ...................................................... 13 Table 2.3: Condition of the Access Road ...................................................................... 14 Table 2.4: Access for Trucks/Large Vans ..................................................................... 14 Table 2.5: Marketing Methods ...................................................................................... 16 Table 2.6: Seasonality in Storage Operations ............................................................... 17 Table 2.7: Main Cause of Loss ..................................................................................... 17 Table 3.1: Similar Enterprises within a Radius of 1 km ................................................. 20

List of Figures Figure 1: Is the storage run commercially (goods are stored against payment)or for won

use (Cold storage)? ....................................................................................... 8 Figure 2: Cold Storage .................................................................................................. 8 Figure 3: Is the storage run commercially (goods are stored against payment) or for

own use (Retail)? ......................................................................................... 11 Figure 4: Is the storage run commercially (goods are stored against payment) or for

own use (Wholesale)? ................................................................................. 11 Figure 5: Land or Building Acquisition for Storage ...................................................... 13 Figure 6: Condition of the Access Road ...................................................................... 14 Figure7: Access for Trucks/Large Vans ..................................................................... 15 Figure 8: Marketing Methods ...................................................................................... 16 Figure 9: Main Cause of Loss ..................................................................................... 18 Figure 10: Most important constraint to growth ............................................................. 21 Figure 11: Second most important constraints to growth ............................................... 21 Figure 12: What is your sense of the market trend? ...................................................... 23

Innovative Development Strategies (Pvt) i

List of Abbreviations

ABAD Association of Builders and Developers

ADB Asian Development Bank

ADBI Asian Development Bank Institute

APCA All Pakistan Contractors Association

ATT Afghan Trade Transit

BAF Bank AlFalah

BCI Business Competitiveness Index

BOR Board of Revenue

CAA Civil Aviation Authority

CBM Cubic meter

CBR Central Board of Revenue

CDA Capital Development Authority

CIB Credit information bureau

CMR Contract for the International Carriage of Goods by Road

CPI Corruption Perceptions Index

CPIA Country Policy and Institutional Assessment

DFID Department for International Development

DHA Defense Housing authority

EDF Export Development Fund

EIU Economist Intelligence Unit

EOS Executive Opinion Survey

EPB Export Promotion Bureau

ESCAP Economic and Social Development in Asia and the Pacific

FBS Federal Bureau of Statistics

FCL Full Container Load

FDI Foreign Direct Investment

FIAS Foreign Investment Advisory Service

Ft Foot

FY Fiscal Year

GCI Global Competitiveness Index

GCR Global Competitiveness Report

GD Goods Declaration

GDP Gross Domestic Product

GoP Government of Pakistan

GOR Government Officials Residences

GRT Gross Register Tonnage

GST General Sales Tax

HBFC Housing Building Finance Corporation

HBL Habib Bank Limited

HDR Human Development Report

HFIs Housing Finance Institutions

IFC International Finance Corporation

IFS International Financial Statistics

IMF International Monetary Fund

ISAL Informal Subdivision of Agricultural Land

ISO International Standards Organization

IT Information Technology

ITU International Telecommunications Union

http://en.wikipedia.org/wiki/Gross_Register_Tonnage

Survey Report on Domestic Commerce

Innovative Development Strategies (Pvt) ii

KBCA Karachi Building Control Authority

KDA Karachi Development Authority

KESC Karachi Electric Supply Corporation

KM(s) Kilometer(s)

KPT Karachi Port Trust

KSE Karachi Stock Exchange

LCL Less Than Container Load

LOA Length Overall

MCB Muslim Commercial Bank

MENA Middle East and North Africa

MOC Ministry of Commerce

MOD Ministry of Defense

MTDF Medium Term Development Framework

NBP National Bank of Pakistan

NCS National Conservation Strategy

NER Net Primary School Enrollment Rate

NHA National Highway Authority

NIE Newly industrialized economy

NIT National Institute of Transport

NLC National Logistics Cell

NTN National Tax Number

NTRC National Transportation Research Center

NTTFC National Trade and Transport Facilitation Committee

NWFP North West Frontier Province

PASSCO Pakistan Agricultural Storage and Services Corporation

PEC Pakistan Engineering Council

PHDEB Pakistan Horticulture Development and Export Board

PIAC Pakistan International Airlines Corporation

PIDE Pakistan Institute Of Development Economists

PIHS Pakistan Integrated Household Survey

PKR Pakistani Rupee

PQA Port Qasim Authority

PR Pakistan Railways

PREF Pakistan Real Estate Federation

PSDP Public Sector Development Program

R&D Research and Development

REER Real Effective Exchange Rate

REITs Real Estate Investment Trusts

RICS Royal Institute of Chartered Surveyors

SAI Social Accountability International

SBP State Bank of Pakistan

SKAA Sindh Katchi Abadis Authority

SME Small and Medium Enterprises

SPS Sanitary and Phytosanitary

SRO Statutory Regulation Order

Std Standard

TEP Total Factor Productivity

TEU Twenty-Foot Equivalent Units

TI Transparency International

TOR Terms of Reference


Innovative Development Strategies (Pvt) iii

TSDI Transport Sector Development Initiative

TTFP Trade and Transportation Facilitation Program

UK United Kingdom

UNDP United Nations Development Program

US United States

USA United States of America

USC Utility Stores Corporation

USD United States Dollars

WAPDA Water and Power Development Authority

WDI World Development Indicators

WEF World Economic Forum

WGI Worldwide Governance Indicators

WTO World Trade Organization

Innovative Development Strategies (Pvt) iv

Acknowledgment

The IDS team owes a debt of gratitude to the officers of the Ministry of Commerce for their

guidance, assistance and feedback during the course of this study. Our special thanks go out,

in particular, to Syed Asif Ali Shah, Secretary; Mr. Naseem Qureshi and Mr. Ashraf Khan,

Additional Secretaries; Mr. Abrar Hussian, Joint Secretary; Syed Irtiqa Zaidi, Consultant and

Mr. Qaseem Subhani, Section Officer, for sparing their precious time and efforts for the

study.

We feel a deep sense of gratitude for the Minister for Commerce. Mr. Humayun Akhtar

Khan, who took out considerable time from his busy schedule to guide us. It was his sincere

and deep conviction which enabled us to conduct and compile this detailed and

comprehensive study on Domestic Commerce of our country. His apt guidance and keen

analytical oversight were extremely helpful in finalizing the study and formulating the policy

recommendations.

This study has benefited from comments received from the following:

1. State Bank of Pakistan, Karachi.

2. Federal Board of Revenue, Government of Pakistan, Islamabad.

3. Planning and Development Division, Government of Pakistan, Islamabad.

4. Trade Development Authority, Government of Pakistan, Karachi.

5. (Management Consultants) Establishment Division, Government of Pakistan,

Islamabad.

6. Finance Division, Government of Pakistan, Islamabad.

7. Pakistan Institute of Development Economics, Islamabad.

8. NTTFC, Karachi.

9. FPCCI, Karachi.

10. Planning and Development Board, Government of Punjab, Lahore.

11. Planning and Development Board, Government of NWFP, Peshawar.

12. Planning and Development Board, Government of Sindh, Karachi.

13. Planning and Development Board, Government of Balochistan, Quetta.

14. Investment and Commerce Department, Government of Punjab, Lahore.

15. Ministry of Food, Agriculture and Livestock, Government of Pakistan, Islamabad.

16. Pakistan Hortriculture Development and Export Board, Lahore.

17. Agriculture Department, Government of Punjab, Lahore.

18. Statistics Division, Government of Pakistan, Islamabad.

1

STORAGE*

by

SAFIYA AFTAB DR. SOHAIL J. MALIK

* For detailed survey results, please see separate volume entitled “Basic Statistics of the Sample Survey Data”.

Innovative Development Strategies (Pvt) 3

Executive Summary Introduction

1. Storage issues have been classified by sector in this report, with the two broad

categories being agricultural storage (storage of grains as well as of fruits and vegetables for

distribution to markets) and storage of manufactured products for distribution to retailers.

2. Grain storage in Pakistan is primarily in the public sector, and is the responsibility of

the Pakistan Agricultural Storage and Services Corporation (PASSCO), a department of the

Ministry of Food, Agriculture and Livestock; as well as of the four provincial Food

Departments. Storage practices at this level are very basic, and can range from storage in a

heap within the home compound, to storage in specially constructed mud bins or in bags.

Data on agricultural storage capacity in the country is sketchy, but total wheat storage

capacity in the public sector is estimated at about 5.2 million tons, of which 1.3 million tons

is with PASSCO, while the remaining is with provincial agriculture departments.

3. Cold storage facilities of agricultural goods are essential to promote trade, both

international and domestic, of perishable commodities. Unlike the developed world where

cold storage facilities are a link in a larger chain of logistics, a cold storage business in

Pakistan is often a stand-alone concern. Cold storage facilities in the country generally

consist of godown style facilities, which can accommodate 30,000 to 100,000 crates of

produce. In an effort to promote the provision of storage facilities in the private sector, the

Government announced a number of measures in the trade policy for FY2007, most to be

implemented through the Pakistan Horticulture Development and Export Board (PHDEB)

which provides cold storage facilities as part of its drive to promote export of horticulture

products.

4. Storage and warehousing of non-agricultural goods consists primarily of services to

production houses, with some storage and warehousing activity taking place for the

household sector also (primarily for diplomats). Producers of manufactured goods generally

use the services of distributors to supply goods to retail outlets all over the country.

Distributors generally use their own warehousing facilities, which differ depending on the

product being marketed and the spread of the business.

Domestic Commerce Survey – The Storage Sector

5. A total of 200 storages were sampled in the domestic commerce survey, of which 101

were in Punjab, 66 in Sindh, 22 in NWFP and 7 in Balochistan. The storage sector revolves

mainly around agricultural storage – either for grain (primarily wheat) or cold storage for

fruits and vegetables (primarily apples and potatoes). Of the total storages surveyed, 7.1

percent dealt only in wheat, 4.6 percent dealt only in other grain, 6.1 percent dealt only in

apples, and 6.6 percent only in potatoes. For non agricultural items, key items stored include

fertilizer, cement, petroleum products, pharmaceuticals, cloth and items of household use.

6. A substantial number of wholesalers and retailers (67 percent of the total interviewed)

had storage space within their wholesale or retail premises, while a further 9.8 percent owned

storage space in another building. Commercial storage (or a space where retailers or

wholesalers could place their stocks against payment) was not available according to almost

84 percent of respondents.

7. Zoning regulations in major cities do not delineate land specifically for warehousing

purposes, but industrial plots may be used to build warehouses, if city authorities are notified

of the altered use of the plot. A breakdown of data on how the land or building of the storage

facility was acquired shows that cold storages tend to be located on designated land, or in

industrial areas, whether they are owned or rented.



8. Enumerators were asked to document the condition of access roads. For godowns

(used primarily for grain storage), a little over half of access roads were classified as

“average,” but for open storages which tend to be located in fields, access was largely poor,

often with no metaled roads. Cold storages, which tend to be located near wholesale markets

also, have average to poor access facilities with potholed roads and poor drainage.

9. Storage and warehousing do not function as part of an integrated system of logistics

services in Pakistan, but largely as self-contained inventory holding for individual businesses,

or in the case of agricultural storage, as a primarily public sector managed system for holding

strategic reserves.

10. Storage of grain and other agricultural commodities as well as cold storage can be a

highly seasonal business, which has implications for the feasibility of dedicated storages and

for the use of storage facilities during periods when the facility is not being used as a storage

facility. The data from the questionnaire showed that only cold storages had a high degree of

seasonality, depending on the fruits they stored.

11. Storage owners were asked to assess whether commercial storage was a viable

business, or whether traders were increasingly inclined towards creating and managing their

own storage spaces. About 55 percent of respondents felt that wholesalers and retailers were

likely to continue with the trend of managing their own storages, while almost 45 percent

thought that demand for commercial storage would increase in the future as business volumes

grow.

12. Domestic Commerce Survey – Business Issues in Storage

13. Market competition was intense in the storage sector also with about 51 percent of

storage owners saying that up to 5 similar enterprises existed in that location, within a radius

of 1 km. Almost 77 percent of storage owners interviewed reported that they had faced

barriers to entry, and when asked to rank the most important barriers, in order of importance,

almost 60 percent ranked capital requirements as the most important barrier. Access to

finance was also seen as the most important constraint to growth for retail enterprises, with

35 percent of respondents citing this as the most important factor restricting expansion. Of

the total storage owners, 78 percent had established their businesses, and the overwhelming

majority had funded the establishment of the business primarily through own or family

savings – on an average, 76 percent of the paid up capital had come through own or family

savings. Over 72 percent of storage establishments were registered with city authorities.

14. Key Issues in the Storage Sector

15. The small scale of the commercial storage sector is linked with the preponderance of

small, single owner retail businesses in the country. Small businesses tend to prefer to keep

their inventories under their own control, and do not require sophisticated logistics systems

for the most part. In a business atmosphere where dealings are based largely on personal

contacts and word of mouth, with little reliance of insurance services or legal contracts, the

development of logistics services is clearly difficult. The institution of contracts is essential

for third party management of inventory.

16. Based on the key issues identified in the survey, it is recommended that the

government focus on the development of agricultural and cold storage as it can have

implications for value addition in the export of fruits and vegetables.


Section 1

Introduction 1. There is very little information from secondary sources on storage and warehousing in

Pakistan, although some studies mention the need for better and improved storage facilities

for perishable agricultural products, and upgradation of warehousing facilities at major ports.

Storage issues can be classified by sector, with the two broad categories being agricultural

storage (storage of grains as well as of fruits and vegetables for distribution to markets) and

storage of manufactured products for distribution to retailers. The market structure and issues

in these categories are discussed as follows.

1.1. Agricultural Storage – Grains 2. The first level of storage is at the farm level, where grains are stored primarily for

own consumption. Storage practices at this level are very basic, and can range from storage

in a heap within the home compound, to storage in specially constructed mud bins or in bags.

Storage related losses are postulated to be high at the farm level, although estimates are hard

to come by. For the purposes of this study though, storage beyond the farm gate, at the stage

when food grains enter the market, is the focus of attention.

3. Grain storage in Pakistan is primarily in the public sector, and is the responsibility of

the Pakistan Agricultural Storage and Services Corporation (PASSCO), a department of the

Ministry of Food, Agriculture and Livestock; as well as of the four provincial Food

Departments. PASSCO and the provincial departments are also responsible for regulation of

agricultural commodity markets, and for the activities of provincial seed and fertilizer storage

agencies. Data on agricultural storage capacity in the country is sketchy, but total wheat

storage capacity in the public sector is estimated at about 5.2 million tons, of which 1.3

million tons is with PASSCO, while the remaining is with provincial agriculture

departments.1

4. Public sector storage capacity is often in jute bags in shed style godowns, the

specifications of which differ by region, in accordance with weather conditions, capacity

required etc. For example, storage depots in Karachi, one of the bigger grain markets,

measure on average 51.21m x 12.19m with a storage capacity for about 1,500 tons of wheat.2

The godowns do not provide significant protection against insect infestation, and cannot be

made gas impermeable to facilitate fumigation. Concrete or metal silos, which can store up

to 5000 tons of wheat, and which can be effectively fumigated and provide protection against

1 Asian Development Bank. 2001. Report and Recommendation of the President to the Board of Directors

on Proposed Loans to Pakistan for the Agriculture Sector Program II. November. Page 10. Para 32. Of the storage capacity with provincial Food departments, 2.45 million tons is with the Punjab Food Department, 0.71 million tons with Sindh, 0.16 million tons with the NWFP and the remaining is with the Balochistan Food Department.

2 See Khushk, Ali Muhammad and Bhugro Mal. www.pakissan.com/english/ advisory/storage.of.grain.shtml



insect infestation, are little used in Pakistan in the public sector, primarily for cost

considerations. The most common form of storage for wheat is actually open air storage,

with wheat being stored in bags on raised platforms. Although such storage is classified as

“temporary” in PASSCO records for example, PASSCO officials confirm that the grain has

sometimes been stored in this fashion for up to 36 months.

5. Storage losses for wheat in particular are estimated to be significant, where loss is

defined as a measurable decrease in quantity and quality, as opposed to superficial damage.

Loss assessment surveys dating from the late 1980s show that storage losses for wheat can

vary considerably depending on the type of storage container, and whether the area surveyed

supported irrigated or rain-fed agriculture. Storage losses can range from 6.6 percent for jute

bag storage in irrigated areas, to 2 percent for metal bin storage.3

6. Multilateral financing agencies such as the Asian Development Bank (ADB) have

emphasized the “privatization,” rental or leasing of agricultural storage facilities, and policy

loans such as the $350 million Agriculture Sector Program Loan II, approved in November

2001, included conditionalities on the role of PASSCO (restricting its role largely to the

management of a strategic reserve of wheat, and restructuring it to compete with the private

sector), and stipulated that the provincial food departments be phased out. These

conditionalities, have, however, not been complied with to any significant degree, and

PASSCO continues its operations as before. The private sector has, however, entered into

wheat procurement since 2000 and in 2005-06; the private sector is estimated to have picked

up 1.3 million tons of wheat.

7. In August 2006, a UK based firm entered into a joint venture with a Pakistani partner

to set up a bulk storage facility for grains. This will be an integrated logistics facility,

providing storage as well as transport services. The company has yet to set up a fully

functional office in Islamabad, so more information on the venture will be forthcoming in

another two to three months.4

1.2. Cold Storage of Agricultural Goods 8. Cold storage facilities are essential to promote trade, both international and domestic,

of perishable commodities. The availability of cold storage facilities for rent can facilitate

marketing and distribution of agricultural commodities, and help to stabilize prices. Using

common facilities can be particularly cost effective, given the proliferation of small trading

establishments in Pakistan who can reap economies of scale with the outsourcing of storage

facilities, costs of refrigeration (given power costs that are high and increasing) and lack of

space in wholesale and retail markets. International best practice models indicate that cold

storage facilities offer a range of cooling techniques (freezer, cooler and dry storage, blast

and room freezing), as well as product handling, shipment and distribution services. Ideally,

the storage facility should also have a data logging and documentation system to certify the

freshness of the produce. This is particularly true to satisfy export requirements in some

countries.

9. Unlike the developed world where cold storage facilities are a link in a larger chain of

logistics, a cold storage business in Pakistan is often a stand-alone concern. Cold storage

facilities in the country generally consist of godown style facilities, which can accommodate

30,000 to 100,000 crates of produce. The storages generally use industrial refrigeration

equipment with ammonia compressors. Rates charged can vary by location and facilities

provided, but on the average are Rs. 10 – 12 per month per crate. The storages provide some

3 See Baloch, U. K. et. al. 1994, Loss Assessment and Loss Prevention in Wheat Storage ... in Pakistan. In

Stored Product Protection ed. Ed Highley, CAB. International. Pp 906-10 4 See http://www.pakissan.com/english/news/newsDetail.php?newsid=10932

Storage


labor for handling services, but in general, transport and handling of goods is the

responsibility of the arti or trader who wishes to use the storage facilities. Most storages

employ at least one or two mechanics or machine operators to service the equipment,

watchmen or security guards, and an accountant who maintains an inventory, in addition to

one or two staff for handling. These are thus stand-alone operations, which function on a

seasonal basis and market their services with wholesalers and retailers of agricultural

products.

10. City administrations in Pakistan provide space for cold storage construction in areas

near wholesale fruit and vegetable markets. However, space for storage and warehousing

operations is typically designated as “industrial” space, which means that such facilities are

liable to pay industrial rates for basic infrastructure, particularly power. Land near wholesale

markets, which is designated specifically for cold storages is generally leased from the city

authorities, generally on 33 year leases.5 However, for cold storages that are not located on

designated land, land can be purchased in industrial areas. In all cities except Karachi, when

land for storage is purchased in an industrial area, the city authorities have to be paid a

conversion fee to have the land re-designated as a storage facility.6 Karachi is the only city,

which has land designated for construction of warehouses and storages.

11. In an effort to promote the provision of storage facilities in the private sector, the

Government announced a number of measures in the trade policy for FY2007, most of them

to be implemented through the Pakistan Horticulture Development and Export Board

(PHDEB) which provides cold storage facilities (two each in NWFP and Balochistan) as part

of its effort to promote the export of horticultural projects. The policy also specified that any

company setting up a cold storage can avail a facility whereby the first 6 percent of credit

obtained for the purpose is picked up by the Export Development Fund (EDF). This scheme

is being developed and a PC-1 has been submitted to the Ministry of Commerce for review.

The proposed project will be known as the Establishment of Cool Chain System under

National Trade Corridor Improvement Project. This facility will be open to everyone, and

not just to exporters. However, cold storage owners interviewed in focus group discussions

in the course of research for this study maintained that recourse to bank financing was not

feasible for them given that interest rates charged are too high to justify investment in a

commercial activity which has highly variable returns.

12. An increasing number of wholesalers of agricultural produce are now building their

own cold storages in their outlets. It is not clear whether this trend has picked up due to lack

of commercial cold storages, or whether this is happening because of lack of trust, and lack of

confidence in the services provided by cold storage owners.

5 The lease for an industrial plot is 99 years, but for commercial plots it is 33 years in general. 6 The conversion charge in Islamabad for commercial plots is currently Rs. 3000 per square yard.



Figure 1: Is the storage run commercially (goods are stored against payment)or for won use (Cold storage)?

Commercial Non-commercial

Is the storage run commercially (goods are stored against payment) or for own use_Cold storage?

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Figure 2: Cold Storage

Number of crates Dimensions Other

Cold storage

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1.3. Non-Agricultural Storage and Warehousing

13. Storage and warehousing of non-agricultural goods consists primarily of services to

production houses, with some storage and warehousing activity taking place for the

household sector also (primarily for diplomats). Producers of manufactured goods generally

Storage


use the services of distributors to supply goods to retail outlets all over the country.

Distributors generally use their own warehousing facilities, which differ depending on the

product being marketed and the spread of the business. In general, most distributors use field

warehousing and satellite warehousing models, with field warehouses servicing main

consumption areas at the district level, and satellite warehouses then servicing smaller towns

and villages. Satellite warehouses are in the most close proximity to retail outlets. For some

commodities which require significant storage space, field warehouses are normally

constructed by private owners against a letter of intent from the marketing companies, saying

that they will rent the premises for a specified period. Once the construction is complete,

warehouses are rented legally.

14. In general though, distributors simply rely on retailers to provide storage space, often

in or close to retail outlets, and simply deliver goods to retailers. Karachi is the only city in

Pakistan where warehousing is provided on a commercial basis for domestic distributors,

with distributors being able to rent space in warehouses. Retailers prefer to have their own

storage space primarily because of lack of confidence in the business environment, and the

perception that the inventory is best kept close at hand, with retailers themselves taking full

responsibility for security.


Section 2

Domestic Commerce Survey – The Storage Sector

15. A total of 200 storages were sampled in the domestic commerce survey, of which 101

were in Punjab, 66 in Sindh, 22 in NWFP and 7 in Balochistan. Identifying storages for the

survey was not straightforward, given that commercial storage facilities, other than cold

storages which typically are located near fruit and vegetable wholesale markets, are often not

advertised as such. Many storages are not run commercially, but are maintained by

distributors or wholesalers and sometimes also by retailers. The key findings of the survey

on storage and warehousing are discussed in this section.

16. Other than the questionnaires specifically designed for storage outlets, a brief section

on storage modalities was also included in the questionnaire on wholesale and retail trade, as

it was surmised that many wholesalers and retailers might not be using dedicated storages for

their goods. The findings of that section are also included in this report as follows.

2.1 Storage Facilities – Questions for Wholesalers and Retailers 17. A substantial number of wholesalers and retailers (67 percent of the total interviewed)

had storage space within their wholesale or retail premises, while a further 9.8 percent owned

storage space in another building. Almost 86 percent felt that the space was adequate for their

needs. Those (270 in total) who needed more storage space were constrained by cost of

additional space and the fact that additional space was generally not available close by.

Traders were asked if they had looked for premises with storage space when they were

looking for a space for their shop, and the response was evenly split, with half of respondents

saying that storage space was not a consideration in their choice of location.

18. Commercial storage (or a space where retailers or wholesalers could place their stocks

against payment) was not available according to almost 84 percent of respondents. For those

to whom the option of using commercial storage was available, almost 80 percent said that

they would not be interested in using the option. When asked why commercial storage was

not used, almost 70 percent of respondents felt that commercial storage was either too

expensive, or not secure enough (35 percent of respondents each, out of a total of about

1300). Location was also an issue – about 22 percent of respondents said that commercial

storages were not conveniently located near their places of business. Although only one

respondent specifically mentioned that the small size of his business was a reason for not

using commercial storage facilities, a number of respondents mentioned that they had no need

for additional storage facilities. As mentioned earlier, a significant number of respondents

had said that storage located within their premises was adequate. It would appear that

Storage


business volumes in general do not support the development of large scale commercially

viable storages.

19. For the small number (56 respondents) who had used commercial storage, the

majority had rented space per square foot, or had rented a room in a commercial building for

storage purposes. The median annual cost of storage was Rs. 30,000 while the maximum

paid (by one respondent) was Rs. 180,000.

Figure 3: Is the storage run commercially (goods are stored against payment) or for own

use (Retail)?


Is the storage run commercially (goods are stored against payment) or for own use_Retail?

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Figure 4: Is the storage run commercially (goods are stored against payment) or for own

use (Wholesale)?


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2.2 Types of Facilities 20. Of the total storages sampled, 39 were in the form of godowns, used mainly for

agricultural storage. Ten of the storages were open stores, used again primarily for grain, but

also in one case for wood. The sample also included 65 cold storages, 24 storages belonging



to distributors, and storages affiliated with wholesale and retail outlets. Table 2.1 below

gives the complete breakdown.

Table 2.1: Types of Storages

Type of Storage Number

Grain Storage

Godown 39

Open storage 10

General Storage

Cold storage 65

Distributor's storage 24

Storage for retail outlet 15

Storage for wholesale outlet 47

Total 200

21. Of the total godowns, 14 (or about 36 percent) were run commercially meaning that

goods were stored at these facilities against payment. The same was true for 8 open storages

and 59 of the 65 cold storages. Storages run by distributors and wholesalers, were for the

most part not run commercially.

22. The storage sector revolves mainly around agricultural storage – either for grain

(primarily wheat) or cold storage for fruits and vegetables (primarily apples and potatoes).

Of the total storages surveyed, 7.1 percent dealt only in wheat, 4.6 percent dealt only in other

grain, 6.1 percent dealt only in apples, and 6.6 percent only in potatoes. For non agricultural

items, key items stored include fertilizer, cement, petroleum products, pharmaceuticals, cloth

and items of household use.

2.3 Infrastructure and Facilities 23. Zoning regulations in major cities do not delineate land specifically for warehousing

purposes, but industrial plots may be used to build warehouses, if city authorities are notified

of the altered use of the plot. In Islamabad and Karachi, if a warehouse is built on an

industrial plot, a conversion fee has to be paid to the city authorities, but zoning regulations

of other cities are not explicit about such rules.7 As such, storages and warehouses that are

not located in port areas tend to be located in rented accommodation – rooms or shops in

commercial locations, and often even in houses. City authorities also provide land for cold

storages near fruit and vegetable markets.

24. A breakdown of data on how the land or building of the storage facility was acquired

shows that cold storages tend to be located on designated land, or in industrial areas, whether

they are owned or rented. The same is largely true for grain storage, which is primarily in

the public sector, in designated godowns. Distributor’s storages and storages for retail and

wholesale outlets are generally placed in rented accommodation in market places or

commercial areas. In some cases, storage facilities located in commercial areas were

classified as existing on “plot for storage” when owners claimed that the commercial space

was primarily for storage purposes based on its proximity to retail or wholesale space.

Overall, other than agricultural storages and cold storage, space for storage and warehousing

is generally not designated as such by city authorities, and warehousing facilities are either

developed on industrial plots or in non-designated commercial or residential areas.

7 Only 24 respondents reported having to pay a conversion fee for use of an industrial plot for storage and

warehousing. 16 of these respondents were based in Sindh.

Storage


Table 2.2: Land or Building Acquisition for Storage

Industrial plot

Plot for storage

Lease of industrial

plot

Lease of plot for

warehouse

Other (mainly rent

of non-designated

space)

Total

Godown 5 12 1 2 18 41

Open storage 1 2 2 1 8

Cold storage 21 19 3 20 64

Distributor's storage 5 2 2 4 10 24

Storage for retail outlet 5 5 10

Storage for wholesale outlet 7 13 5 15 41

Total 39 54 5 14 69 189

Figure 5: Land or Building Acquisition for Storage

0

5

10

15

20

25

Godown Open storage Other Cold storge Distributor's

storage

Storage for

retail outlet

Storage for

wholesale

outlet

Outright purchase of

industrial

plot/building

Outright purchase of

plot/building for

warehouse

Lease of industrial

plot/building

Lease of

plot/building for

ware

Other

25. For those respondents (about 100) who acquired land and set up storage facilities

from scratch, acquiring utility connections could potentially be very difficult. There appeared

to be little standardization in time taken to get the requisite services – the median time taken

to get an electricity connection was 3 weeks, but the mean was almost 90 weeks! Natural gas

and water connections generally took less time (from a mean of 9 weeks and median of 3

weeks for gas and a mean of 6.2 weeks and median of 2 weeks for water).

26. Enumerators were asked to document the condition of access roads and the results of

their observations are documented in Table 2.3. It should be kept in mind that an “average”

classification here is entirely relative, and by no means implies “average” by international

standards. As one enumerator pointed out, in many cases (in rural areas where agricultural

storages are located, or in the vicinity of wholesale markets) the presence of a rudimentary

metaled road, even if in bad condition, would be considered a blessing, and enumerators

would classify access as “average.”

27. For godowns (used primarily for grain storage), a little over half of access roads were

classified as “average,” but for open storages which tend to be located in fields, access was

largely poor, often with no metaled roads. Cold storages, which tend to be located near

wholesale markets also have average to poor access facilities with potholed roads and poor

drainage. Distributor’s storages and storages maintained by wholesalers for own use, many



of which were located in commercial areas in relatively up-market localities tended to fare

better, with average to superior access facilities.

Table 2.3: Condition of the Access Road

Superior Average Poor Total % Average

Godown 9 21 8 41 51%

Open storage 2 6 8 0%

Cold storage 14 25 25 64 39%

Distributor's storage 6 15 3 24 63%

Storage for retail outlet 5 2 3 10 20%

Storage for wholesale outlet 10 23 8 41 56%

Total 46 86 54 189

Figure 6: Condition of the Access Road

0

5

10

15

20

25

30


storage

Storage for

retail outlet

Storage for

wholesale

outlet

Superior

Average

Poor

28. Enumerators were also asked to record their impression of truck access, the results of

which are given in Table 2.4.

Table 2.4: Access for Trucks/Large Vans

With difficulty

Not at all With ease

Don’t need truck

access

Total

Godown 12 25 1 41

Open storage 6 2 8


Distributor's storage 6 3 15 24



Total 63 7 107 9 189

Storage


Figure7: Access for Trucks/Large Vans

0

5

10

15

20

25

30

35

40


storage

Storage for

retail outlet

Storage for

wholesale

outlet

With difficulty

Not at all

Easily

Do not need

truck acces

29. Other than open storages, most facilities could be accessed with relative ease by

trucks or large vans. This was particularly true of urban based facilities not centered on

wholesale markets, which were presumably deliberately located in areas where access for

large vehicles would be possible.

2.4 Operations 30. As expected, storage and warehousing does not function as part of an integrated

system of logistics services in Pakistan, but largely as self-contained inventory holding for

individual businesses, or in the case of agricultural storage, as a primarily public sector

managed system for holding strategic reserves. Transportation services are de-linked from

the storage system, with 70 percent of storage companies not providing transport services.

Even loading and unloading services, which should be essential in storage facilities were

provided by only 52 percent of storage owners. About 12 percent of storage owners provided

distribution or shipment services. About 20 percent of storage owners provided data logging

services, although these were generally of a highly rudimentary nature, comprising for the

most part just inventory registers.

31. Storage owners did not, for the most part, use any marketing services for their

products, given that storages are generally not operated commercially. Even for those

facilities that were operated with some commercial intent, for example grain storages and

open storages, marketing primarily took the form of contacts with wholesale agents

(artis) and for distributors, contacts with manufacturing companies. For largely commercial

ventures like cold storages, contacts with artis was the paramount form of marketing. Thus,

as observed in the analysis of wholesale and retail trade in the country, storage owners also

rely primarily on reputation and personal contacts to drum up business. Only wholesale

storage depots seemed to practice some form of formal marketing with the use of

advertisements in addition to contacts. Interestingly only 2 companies each in Punjab and

Sindh mentioned the use of print advertisements, and these were primarily distributors

probably advertising their distribution capabilities with manufacturing firms, rather than their

storage expertise per se.



Table 2.5: Marketing Methods Contacts

with artis Contacts

with companies

Print advertisements

Other (primarily

combinations of 1, 2 and 3)

No marketing

Total

Godown 8 7 6 21

Open storage 2 1 5 8


Distributor's storage

1 12 2 1 5 21

Storage for retail outlet

2 1 1 1 5

Storage for wholesale outlet

3 12 1 5 13 34

Total 40 53 4 9 45 151

Figure 8: Marketing Methods

0

5

10

15

20

25

Godown Open storage Cold storge Distributor's

storage

Storage for

retail outlet

Storage for

wholesale outlet

Insects/infest

ation

Damp

Pilferage

Other

32. Storage owners were, however, more inclined to use the services of business support

companies than retail and wholesale traders. Almost a third of storage owners had used

engineering services (these were primarily cold storage owners who needed to use these

services for their air conditioning units); while a little above a quarter of respondents claimed

to have used advertising services and accounting services.

2.5 Seasonality of Operations 33. Storage of grain and other agricultural commodities as well as cold storage can be a

highly seasonal business, which has implications for the feasibility of dedicated storages, and

for the use of storage facilities during periods when the facility is not being used as a storage

facility. The data shows that only cold storages have a high degree of seasonality, depending

on the fruits they store.

Storage


Table 2.6: Seasonality in Storage Operations

Seasonality

Yes No Total

Godown 4 31 35

Open storage 3 5 8

Cold storage 38 24 62

Distributor's storage 6 16 22


Storage for wholesale outlet 11 28 39

Total 64 111 175

34. In spite of the high degree of seasonality, over 92 percent of respondents who had

reported seasonality said that their facility was not converted to any other use when it was not

in seasonal use. About 40 percent of these respondents said that the facility could not be used

for any other purpose and therefore lay vacant when not used for storage. A further 40

percent said that they did not need to convert the space to any other use out of season, and

therefore had not considered this option at all. Almost 15 percent of respondents said that

regulations did not permit the use of the storage facility for any other purpose.

2.6 Losses, Risk and Insurance 35. On an average, information from 187 respondents indicated that 5 percent of items in

storage ended up being wasted in a year. However, the standard error for this estimate was

46 percent, and the maximum reported as wasted was as high as 40 percent. Of a total of 137

respondents who reported reasons for loss, almost 44 percent said that losses occurred due to

damp, while in 32 percent of cases, losses were due to insect infestation (mainly true for cold

storages and godowns, but insect infestation also occurred in wholesale outlets). Other

causes for loss included electricity loadshedding (particularly true for cold storages) and rains

and dust storms (true for grain storage whether in godowns or open storage). Three

respondents also mentioned faulty handling and loading and unloading procedures as reasons

for loss. Interestingly, pilferage did not appear to be an issue. In about 61 percent of cases,

the storage owner bore the loss, but the extent of the loss is determined by mutual consent in

almost 60 percent of cases. In almost 19 percent of cases, the storage owner alone

determined the extent of the loss.

Table 2.7: Main Cause of Loss

Insects/infestation Damp Pilferage Other Total

Godown 6 8 1 6 21

Open storage 1 1


Distributor's storage 7 9 5 21



Total 42 62 5 28 137



Figure 9: Main Cause of Loss

0

5

10

15

20

25

Godown Open storage Cold storge Distributor's

storage

Storage for

retail outlet

Storage for

wholesale outlet

Insects/infest

ation

Damp

Pilferage

Other

36. Almost half of respondents (95 in number) said that goods were assessed before being

placed in storage, to check what was being placed in the facility, and to assess condition of

goods to protect storage owners against damage claims. In almost 80 percent of cases, this

assessment was carried out by storage owners themselves, while in the bulk of the remaining

cases, customers who were placing goods in storage provided declarations of the value of

goods. Almost 73 percent of respondents said that such assessments were done as a routine.

A further 18 percent said that assessments were only done when there was suspicion of

damage, while 7.6 percent claimed that assessments took place when losses were known to

have occurred due to natural or unnatural causes.

37. In spite of the fact that storage owners were generally held liable for losses, 90

percent of storage owners had no form of insurance against losses. According to storage

owners, customers also did not insure goods (storage owners claimed that over 90 percent of

goods were not insured by customers in any form). The insurance market thus simply has not

penetrated the storage sector – although in case of grain storage and storage of fruits and

vegetables, the need for protection seems apparent. Only 13 respondents claimed to have

used some form of insurance, and 10 of those said that insurance was available at viable rates.

2.7 Viability of Commercial Storage 38. Storage owners were asked to assess whether commercial storage was a viable

business, or whether traders were increasingly inclined towards creating and managing their

own storage spaces. About 55 percent of respondents felt that wholesalers and retailers were

likely to continue with the trend of managing their own storages, while almost 45 percent

thought that demand for commercial storage would increase in the future as business volumes

grow.

39. About 150 storage owners gave reasons why commercial storages were not widely

used as yet, and location and expense were cited as key reasons in this regard. 63 percent of

those who responded said that commercial storages are not conveniently located for most

wholesalers and retailers, and almost 84 percent felt that they were not cost effective.

Traders with small inventories would not like to use commercial storage when they can

accommodate their own storage needs. Over 60 percent of respondents did not think that

security and trustworthiness were issues in this regard.

Storage


2.8 Contracts 40. Almost 60 percent of the 165 respondents who answered queries on contract

modalities said that the only form of contract in commercial storage was a simple receipt

given by the storage owner to the consumer. About 20 percent of storage owners said that

records were computerized, and that electronic receipts were given out, while 18 percent

mentioned working with more formal contracts. Over 92 percent of contractual and other

disputes were reportedly solved through negotiation, with courts being resorted to relatively

seldom.


Section 3

Domestic Commerce Survey – Business Issues in Storage

41. The previous section detailed issues specific to the storage sector, and explained the

nature of storage facilities in Pakistan. This section focuses on the economics of the storage

business, how businesses are set up, and how day to day dealings occur.

3.1 Market Competition 42. Market competition was intense in the storage sector also with about 51 percent of

storage owners saying that up to 5 similar enterprises existed in that location, within a radius

of 1 km. The responses were roughly similar across revenue categories, indicating that both

large and small enterprises faced similar competition.

Table 3.1: Similar Enterprises within a Radius of 1 km

Frequency Valid Percent Cumulative Percent

1 to 5 96 51.1 51.1

6 to 11 33 17.6 68.6

12 to25 16 8.5 77.1

More than 25 14 7.4 84.6

Don’t Know 29 15.4 100.0

Total 188 100

43. Almost 77 percent of storage owners interviewed reported that they had faced barriers

to entry, and when asked to rank the most important barriers, in order of importance, almost

60 percent ranked capital requirements as the most important barrier. The need to have

personal contacts in the proposed business was cited as the most important barrier by 5.6

percent of respondents, while almost 24 percent of respondents cited it as the second key

barrier to entry. Government regulations and tariffs were also cited as important barriers to

entry, with 20 percent of respondents ranking this at no. 2.

3.2 Constraints

44. Access to finance once again came across as the most important constraint to growth

for retail enterprises, with 35 percent of respondents citing this as the most important factor

restricting expansion. However, taxation and regulation systems were also cited as the most

Storage


important constraints by just over a quarter of respondents. The quality of public services

was cited by almost 22 percent of respondents as the most important constraint. Interestingly,

corruption and law and order were cited strongly as the third ranked constraints to growth,

with almost 20 percent of respondents ranking corruption at no. 3, and 26.7 percent ranking

law and order as the third ranked constraint to growth. Interestingly, less than 13 percent of

respondents considered the lack of clear regulations on property ownership etc as

impediments to growth at any level.

Figure 10: Most important constraint to growth

Taxation and regulation system

Quality of public

services ( Electricity roads etc)

Lach of access to finance

Lack of clear rgulation for

property rights

Corruption Law and order

situation

Most important constraint to growth

0

10

20

30

40

Pe

rce

nt

Figure 11: Second most important constraints to growth

Taxation and regulation system

Quality of public

services ( Electricity roads etc)

Lach of access to finance

Lack of clear rgulation for

property rights

Corruption Law and order

situation

Second most important constraints to growth

0

5

10

15

20

25

30

Pe

rce

nt



3.3 Financing

45. Of the total storage owners, 78 percent had established their businesses, and the

overwhelming majority had funded the establishment of the business primarily through own

or family savings – on an average, 76 percent of the paid up capital had come through own or

family savings. Similarly, an average of 11 percent of funds had come from sale of assets.

46. In spite of the fact that access to finance was repeatedly mentioned as an obstacle to

growth, and an impediment when it came to starting a business, only 23 respondents reported

having applied for a loan in the last three years. When asked to rank reasons why they had

considered applying for loans, about 46 percent of respondents they did not need funds, while

40 percent expressed reservations about contracting loans for religious reasons. About 3.3

percent said it was more convenient to rely on family and friends, while 7.3 percent felt that

interest rates would be too high.

47. Of the few storage owners (23 in total) who had applied for loans in the last three

years, 10 applied to commercial banks and 10 to friends and relatives, while the remaining

three had gone to private money lenders. The average loan amount asked for was just over

Rs. 500,000. However, the distribution of loan amounts asked for showed that 35 percent of

loans requested were up to Rs. 300,000 only.

48. Payment systems for commercial storage systems show a degree of risk taking on

behalf of storage owners. Of the 153 respondents who answered questions on payment

systems, 70 percent that payment for use of storage facilities is not taken in advance, and 77

percent of respondents said that clients are only required to make payments when goods are

being taken out of storage.

3.4 Employment 49. Storage facilities employ on an average 10 persons as full time paid employees and 6

persons as part time paid employees (where part time is defined as employees working less

than 5 hours a day). The sector provides employment largely to non-skilled workers, with

only 5 percent of employees, on an average, having completed primary school.

3.5 Governance Issues 50. Over 72 percent of storage establishments were registered with city authorities.

However, about 73 percent of respondents who had not registered their businesses said that

registration was not required. A further 12 percent cited high registration fee as the reason

for not registering the business.

51. The analysis of the governance data reveals some interesting anomalies. Over 90

percent of respondents agreed, or strongly agreed with the statement that they relied on the

reputations of those that they entered into contracts with. But 88 percent also agreed or

strongly agreed with the statement that contracts would prevent them from being cheated.

About 48 percent agreed with the statement that the legal system was functional, in that they

had confidence that their contracts and property rights would be upheld in a business dispute

in fact a further 13 percent strongly agreed with this statement. Almost 51 percent of

respondents disagreed with the statement that people from other baradaris or ethnic groups

were likely to cheat them. Most of these responses reflect a degree of faith in the legal

system, and in formal business processes (like contracts).

52. Late payment disputes appear to be the most common governance issue faced by

storage owners, with 53 percent of storage owners reporting that they had faced this issue in

the last year, but 86 percent of these cases were resolved through negotiation.

Storage


Figure 12: What is your sense of the market trend?

Demand for commercial storage increasing

Trend towards creating own storage space

What is your sense of the market trend

0

10

20

30

40

50

60

Pe

rce

nt


Section 4

Key Issues in the Storage Sector 53. The domestic commerce survey is probably the first attempt to track the nature of the

storage business in Pakistan. The key issues apparent for the sector based on this small scale

survey are as follows.

4.1 Business Volumes 54. The small scale of the commercial storage sector is linked with the preponderance of

small, single owner retail businesses in the country. Small businesses tend to prefer to keep

their inventories under their own control, and do not require sophisticated logistics systems

for the most part. The one area where there is considerable scope for expansion of the

business is the cold storage business, where more scientific systems of data logging and the

development of cold chain infrastructure could do much to boost the export of fruits and

vegetables. However, none of the storage owners questioned knew anything about the

government’s professed policy of instituting credit lines for the establishment of cold

storages, and even officials of the Ministry of Commerce could not provide more information

on this initiative.

4.2 Governance Issues 55. In a business atmosphere where dealings are based largely on personal contacts and

word of mouth, with little reliance of insurance services or legal contracts, the development

of logistics services is clearly difficult. The institution of contracts is essential for third party

management of inventory.

4.3 Conclusions and Policy Recommendations 56. Based on the key issues identified in the survey, the following recommendations may

serve to enhance growth and development in the sector.

57. Medium Term: The storage and warehousing industry will grow when business

volumes in individual businesses are large enough to support such an industry. For the

medium term, the government needs to focus on the development of agricultural and cold

storage – the development of the latter facilities in particular can have implications for value

addition in the export of fruits and vegetables.

The Ministry should review food security policies in conjunction with provincial

governments to assess how private sector entry into grain storage can be facilitated;

Storage


The government role in procurement, storage, distribution, export and import, and price

maintenance has to be clearly stated and then the government has to stick to the role. The

important issue is predictability;

Government storage facilities need to be run on corporatized and business oriented basis,

with strong performance and outcome based incentives;

The government has already devised a set of incentives for development of cold storages.

However, there has been no action on the implementation of these initiatives, and the

private sector did not respond to the incentive. The Ministry may have to underwrite the

initial investments in the creation of cold storage chains, in conjunction with private

sector parties

58. Long Term: The long term role of the government should focus more on the

development of insurance and other support services for the logistics sector. It is important to

understand how entrepreneurs in the sector manage risk.

The Ministry should work with the Securities and Exchange Commission (SECP) to

facilitate extension of insurance to the storage sector;

As in the case of earlier recommendations for competitiveness and wholesale and retail

trade, the storage sector would benefit particularly from strengthening of systems of

contract enforcement.

the state of domestic commerce in pakistan study 8 - storage

Economy & Finance

storage operations

storage sector

nonagricultural storage

storage facilities questions

agricultural storage

table of contentslist

access road

governance issues