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Businesses go for e-commerce not for technology hype, but for economic and business reasons

Mar 12 - 25, 2001

The shakeout for the dot com companies on NASDAQ and elsewhere has again put in sharp focus the fundamentals of e-commerce feasibility. The feasibility is primarily based on cost reductions and efficiency, and only subsequently on innovation and new channels. However, the hype associated with the internet explosion and the consequent dot com bubble, obfuscated this for a little while as companies started thinking more about innovation and market access before working out the traditional components of costs and efficiencies. Lately, however, market has forced the sanity to prevail as B2C proponents are sending their project feasibilities Back-2-Consultants.

The transaction mix and the associated cost reductions must be worked before selecting any particular model for e-commerce. To do this, the difference between the infrastructure and technologies required to support Business to Business (B2B) and Business to Consumer (B2C) models need to be appreciated. The two differ in their focus on industries, nature of transactions, business needs, and technical attributes. B2B is much larger and has over 80% share of the market. It requires server to server, automatic transaction processing with no manual intervention. Whereas, B2C typically requires a browser at one end that is operated by the user, and is, thus, constrained by the manual limit of the number of transactions that can be handled by the user through the browser.

Businesses go for e-commerce not for technology hype, but for economic and business reasons. The most important determinants for investment in e-commerce are the efficiency and cost reasons. Determinants of these costs are shown in Table-1 and need to be analyzed for selecting a particular model for industries and markets in Pakistan.

Table 1: Different Attributes of Transactions




Frequency of transactions/day

Low (in 10s)

High: 100s and 1000s per day

Volume of data per transaction



Content criticality



Time criticality for processing a transaction



Average value of transactions



Liability of partners



Number of trading partners



Size of trading partners



Contractual obligations

Varies on a per transaction basis

Over a large number of transactions and longer term

Source: Dr. Irfan Hyder, EPB-IBA Research Study on E-Commerce for Pakistan, Vol. 4, 1999

Selection of Appropriate Infrastructure for Pakistan

Analysis of various stakeholder interactions in Pakistan indicates that the model more feasible for implementation in Pakistan is the B2B model. The number of consumers with internet access within Pakistan has yet to assume a critical mass and there are just not enough local "C" in Pakistan to support B2C feasible. Estimates for the total number of internet population in Pakistan varies between 2 lakh to 3 lakh.

However, IBA-EPB research on "Financial and Economic Implications of Electronic Commerce for Pakistan," indicates that there is major potential for a Pakistani ěBî doing e-commerce with foreign "C". That is, exports by SMEs through electronic channels has a huge potential for Pakistan. E-commerce makes the costs of reaching into new markets and offering innovative products and services is much less and offers exciting new possibilities. However, even these cost savings are more than offset by two major B2B related infrastructure constraints:

•Inability of the local banks to offer internet merchant accounts and thus reduce the cost of remittance of credit card payments from abroad into the local accounts of the Pakistani merchants. This requires electronic banking and funds transfer infrastructure at the branch level in at least 20 major cities in Pakistan.

•Costly paper documentation and paper-based procedures for clearing large number of small shipments through customs and ports. This requires electronic trade facilitation from customs, SBP, Ports, shippers and other stakeholders.

Unless the infrastructure for electronic banking transactions and electronic trade facilitation (which is primarily the B2B infrastructure) is in place, even SME exports through the best of e-commerce portals is not viable for Pakistan. The order may reach the supplier in Pakistan at the web-speed. However, the traditional international trade channel would move at snail pace with paper transactions wiping out all efficiency gains obtained through the internet.

Furthermore, over 60% of Pakistan's GDP component is international trade. Therefore, there is tremendous opportunity for reducing costs and increasing efficiencies by implementing B2B electronic trade facilitation infrastructure connecting Customs, Ports, airlines, shipping lines, shipping agents, traders, banks and other stakeholders. The investment in this infrastructure would be justified on the basis of already existing high frequencies, high volumes, time criticality and other feasibility determinants of the B2B model.

Another area for the focus is the B2B local trade and commerce supply chains. This would require focusing on industries with large frequency and volumes of transactions and large number of trading partners. This is typically the case in industries requiring large distributor to retail networks.

E-Commerce Implementation Focus of the Ministry of Science and Technology

Based on the analysis of the above project feasibility, the E-Commerce Working Group of the Ministry of Science and Technology has been focusing on the more fundamental infrastructure components of the banking sector and international trade. A step by step process has been prepared. The projects for the next two months include:

1. Working with Customs, PRAL, EPB and CBR to work out the modalities for electronic trade facilitation.

2. Procedure for reducing the paper work required for small e-commerce transactions of less than $500 has been prepared. It has been approved by SBP and is in the process of being approved by CBR.

3. Development of a pilot project to connect some selected exporters, importers and shipping agents for the exchange of electronic commercial documents. This project would involve conversion of bill of entry and shipping bill to their counterpart electronic messages, exchanging them and the development of the procedures, regulations, and notifications. Once these procedures are finalized and experience has been gained, a full-scale deployment would be undertaken.

4. Establishment of a payment gateway to facilitate internet merchant accounts for the SMEs.

5. E-Commerce enabling legislation.

6. Electronic funds transfer infrastructure for banks.

7. Awareness and training of the key stakeholders from EPB, Customs, CBR, Port Authorities, Shipping Agents, Exporters, Importers, and other stakeholders.

The strategy is that Pakistan would develop the infrastructure required for business to government (B2G) and business to business (B2B) transactions. This is because the volume and frequency of transactions for these interactions is high enough to justify the investment in the necessary infrastructure. Once the business justification for B2G and B2B has put in place the necessary infrastructure, G2C, B2C and C2C transactions would ride and grow on it. The incremental strategy is shown in the Figure.

EC-PAK Integration With Financial & Other Networks




Filling of electronic shipping bill (600 exporters)


Filing of Electronic Bill of Entry (400 importers)

Ports Network Integration

BPR for e-Docs


e-Duty Drawbacks

Dry Ports Airports Sea Ports

Internet Merchant Accounts

CGO for <$500

EC-Pak Service

e-Payments of duties, taxes

The writer is head of e-commerce working group, Ministry of Science and Technology