NEW BUSINESS OPPORTUNITIES IN

NEW BUSINESS OPPORTUNITIES IN PAKISTAN

AN INVESTOR’S GUIDEBOOK

Consultants and authors of this report: Philippe Guitard Shahid Ahmed Khan Derk Bienen

This report has been produced with the assistance of the European Union under the Asia-Invest programme. The views expressed herein are those of the consultant and can therefore in no way be taken to reflect the views of the European Union. New Business Opportunities in Pakistan

TABLE OF CONTENTS

LIST OF TABLES ...... VIII

LIST OF FIGURES ...... X

LIST OF BOXES...... XI

LIST OF ACRONYMS ...... XII

INTRODUCTION ...... 1

EXECUTIVE SUMMARY...... 2

PART I: PAKISTAN GENERAL INFORMATION ...... 8

MAP OF THE COUNTRY...... 8

PAKISTAN AT A GLANCE ...... 9

1 GENERAL COUNTRY INFORMATION ...... 12 1.1 General environment...... 12 1.1.1 Population...... 12 1.1.2 Geography ...... 12 1.1.3 Climate...... 13 1.2 History ...... 13 1.3 Political environment...... 14 1.4 Foreign affairs ...... 15 1.5 Human resources and social environment...... 16 1.5.1 Social infrastructure...... 16 1.5.2 Social security...... 16 1.5.3 Education...... 16 1.6 Cultural environment...... 17 1.6.1 Languages ...... 17 1.6.2 Nationalities ...... 17 1.6.3 Religion...... 17 1.6.4 Values...... 18 1.7 Physical infrastructure...... 18 1.7.1 Road network...... 18 1.7.2 Railway network...... 18 1.7.3 Ports...... 19 1.7.4 Airport and international links ...... 19 1.7.5 Energy...... 19 1.7.6 Telecommunications...... 20

2 ECONOMIC OUTLOOK...... 21 2.1 Economic structure ...... 21 2.1.1 Agriculture...... 21 2.1.2 ...... 22 2.1.3 Services ...... 23 2.2 Economic reforms and policies ...... 24 2.2.1 Budget and fiscal reform...... 25 2.2.2 Liberalisation and privatisation ...... 26 2.2.3 Financial sector reform ...... 27 2.3 Short and medium-term economic performance ...... 29 Page i New Business Opportunities in Pakistan 2.3.1 Economic growth trends ...... 29 2.3.2 Inflation ...... 30 2.3.3 Employment...... 31 2.4 Foreign trade...... 32 2.4.1 Structure ...... 32 2.4.2 Foreign trade policy: recent developments...... 35 2.4.3 Trade balance...... 36 2.4.4 Trade with EU countries ...... 36 2.4.5 WTO issues and developments...... 38 2.4.6 Regional integration...... 40 2.5 Balance of payments and exchange rate ...... 43 2.6 Public finance and debt...... 44 2.7 Foreign investment...... 45 2.7.1 FDI flows and portfolio investment ...... 45 2.7.2 Structure of the FDI flows and stock per country of origin...... 46 2.7.3 Structure of FDI flows and stock per sector of investment ...... 47 2.7.4 Activities of EU enterprises in Pakistan, a success story ...... 48 2.7.5 Profitability ...... 48 2.8 Investment climate and sector policies ...... 49 2.9 Investor perceptions...... 51 2.10 Country risk assessment...... 51 2.10.1 Moody’s Investor Service...... 52 2.10.2 Standard & Poor’s...... 52 2.10.3 Export Credit Agencies...... 52 2.10.4 Bretton Woods institutions...... 53

3 BUSINESS ENVIRONMENT...... 55 3.1 Legal framework...... 55 3.2 Business regulations...... 56 3.2.1 Corporate regulation...... 56 3.2.2 Legal entities status ...... 56 3.2.3 Foreign exchange regulations ...... 57 3.2.4 Investment regulations...... 58 3.2.5 Labour law ...... 58 3.2.6 Competition law ...... 59 3.2.7 Industrial and intellectual property...... 59 3.2.8 Environmental law ...... 60 3.3 Foreign investment policy ...... 61 3.4 Transparency of the business environment...... 61 3.5 The banking and financial system...... 62 3.5.1 Banking sector ...... 62 3.5.2 Other financial institutions...... 64 3.5.3 Capital market...... 64 3.6 Market and distribution channels ...... 65 3.6.1 Distribution structure...... 65 3.6.2 Retailer profile...... 65 3.6.3 Commercial terms...... 65 3.6.4 Organised retail ...... 66 3.6.5 Government intervention ...... 66

4 SUMMARY: INTERNATIONAL COMPETITIVENESS OF PAKISTAN...... 66

Page ii New Business Opportunities in Pakistan

PART II: PRACTICAL BUSINESS INFORMATION...... 68

5 SETTING UP A BUSINESS IN PAKISTAN...... 68 5.1 Business regulatory environment...... 68 5.1.1 Types of investment and foreign shares allowed ...... 68 5.1.2 Types of legal forms for doing business ...... 69 5.1.3 Type of companies ...... 69 5.1.4 Business regulations for company registration...... 70 5.1.5 Acquisition of a Pakistani company ...... 72 5.1.6 Dealing in shares ...... 72 5.1.7 Protection of investor interest ...... 73 5.1.8 Other standards ...... 73 5.2 Business opportunities...... 74 5.2.1 Privatisation to date ...... 74 5.2.2 Privatisation plans...... 75 5.3 Foreign investment conditions ...... 76 5.3.1 Manufacturing/industrial sector...... 76 5.3.2 Services sector ...... 76 5.3.3 Infrastructure sector...... 76 5.3.4 Social sector ...... 76 5.3.5 Agriculture sector...... 76 5.3.6 Others ...... 77 5.3.7 Investment incentives ...... 77 5.4 Location decision ...... 78 5.4.1 Regional strengths and weaknesses...... 78 5.4.2 Cost of industrial land ...... 80 5.4.3 Industrial zones...... 80 5.4.4 Export processing zones (EPZ)...... 81 5.5 Business support institutions ...... 84 5.5.1 The Small and Medium Enterprise Development Authority (SMEDA) ...... 84 5.5.2 The Board of Investment ...... 84 5.5.3 The Export Promotion Bureau ...... 85

6 OPERATING A BUSINESS IN PAKISTAN ...... 85 6.1 Labour issues...... 85 6.1.1 Trade unions...... 85 6.1.2 Hiring and firing of labour...... 86 6.1.3 Minimum conditions of employment ...... 86 6.1.4 Wages rates...... 86 6.1.5 Statutory contributions...... 87 6.1.6 Labour Productivity ...... 87 6.2 Costs and prices ...... 87 6.2.1 Efficiency costs ...... 87 6.2.2 Energy costs ...... 88 6.2.3 Price level ...... 89 6.3 Insurance ...... 90 6.4 Financing and bank accounts ...... 90 6.5 Import and export procedures, tariffs...... 91 6.5.1 Tariff rates...... 91 6.5.2 Procedures ...... 91 6.6 Foreign exchange control ...... 93 6.6.1 Local currency ...... 93 6.6.2 Repatriation of capital and foreign currency accounts ...... 93 6.6.3 Technical assistance (Fee remittance)...... 93 6.7 Accounting and auditing...... 93 6.8 Taxation ...... 94

Page iii New Business Opportunities in Pakistan 6.8.1 Direct taxation...... 94 6.8.2 Indirect taxes ...... 98 6.8.3 Investment protection treaties ...... 99 6.9 Government procurement ...... 100 6.9.1 Pakistan regulatory authority ...... 100 6.9.2 Government purchasing and tenders ...... 100 6.10 Litigation and arbitration...... 101 6.10.1 Domestic arbitration...... 101 6.10.2 International arbitration (private/private)...... 101 6.10.3 International arbitration (private/public) ...... 102 6.11 Environmental issues and quality controls...... 102 6.11.1 Standards Development Centre (SDC) ...... 103 6.11.2 Quality Control Centre (QCC)...... 103 6.11.3 Technical Services Centre (TSC) ...... 103 6.11.4 Pakistan National Accreditation Council (PNAC) ...... 103 6.12 Regulation and bureaucratic control ...... 104 6.13 Social accountability of Investments (child labour, bonded labour)...... 104

7 LIVING IN PAKISTAN ...... 105 7.1 Visa and residence requirements ...... 106 7.1.1 Business visa...... 106 7.1.2 Work visa procedures...... 106 7.1.3 Registration of foreigners with the police...... 107 7.2 Housing ...... 107 7.3 Living costs ...... 107 7.4 Personal security...... 108 7.4.1 Terrorism...... 108 7.4.2 Crime ...... 109 7.4.3 Political situation ...... 109 7.4.4 Local travel ...... 109 7.4.5 Health...... 109 7.5 Holidays, time difference etc...... 109 7.5.1 Time difference ...... 109 7.5.2 Office hours and days worked ...... 109 7.5.3 Holidays ...... 109 7.6 Adjusting to the cultural environment...... 110 7.6.1 Introductions ...... 110 7.6.2 Build a solid relationship before talking business...... 111 7.6.3 Orientation to time ...... 111 7.6.4 Business customs & etiquette ...... 111 7.6.5 Meetings ...... 111 7.6.6 Business dress ...... 111 7.6.7 Negotiating style ...... 112 7.6.8 Further hints...... 112

PART III: SECTOR ANALYSES, INVESTMENT AND MARKET OPPORTUNITIES...... 113

8 INTRODUCTION AND SECTOR OVERVIEW...... 113

9 THE TEXTILE SECTOR...... 115 9.1 Sector overview...... 116 9.2 Main sub-sectors within the textile industry value chain...... 116 9.2.1 Cotton ginning and fibre production...... 116 9.2.2 Yarn spinning...... 116 9.2.3 Fabric weaving & knitting...... 117 9.2.4 Finishing sector including fabric processing, dying, printing & finishing...... 117 9.2.5 Garments, hosiery, knitwear and made ups including bed-linen, towels etc..... 117

Page iv New Business Opportunities in Pakistan 9.3 Type of businesses by size and category...... 117 9.3.1 Large companies (More than € 1 million turnover)...... 117 9.3.2 Small & Medium sized companies (Less than € 1 million turnover)...... 118 9.4 Break-up of Investment in Textile Sector...... 118 9.5 Value addition ...... 118 9.6 Growth of the textile industry in Pakistan...... 119 9.7 Main raw material and components ...... 119 9.7.1 Main machinery and equipment ...... 119 9.7.2 Main products manufactured ...... 120 9.8 Cost factor analysis...... 121 9.8.1 Labour...... 121 9.8.2 Raw-Material...... 121 9.8.3 Energy Cost ...... 122 9.8.4 Financing ...... 122 9.8.5 Logistics...... 122 9.8.6 Research and development...... 122 9.8.7 Government policies and incentives...... 122 9.9 Analysis of export flows ...... 122 9.10 Analysis of the main trends...... 123 9.10.1 Location ...... 123 9.10.2 Trends, possible evolution...... 123 9.10.3 Role of local exporters, foreign agents ...... 124 9.11 EU GSP, WTO rules and regulations...... 124 9.12 Exports and quotas ...... 125 9.13 Local and regional competition ...... 126 9.13.1 Competition from imports...... 126 9.13.2 Competition in the export markets...... 126 9.13.3 Domestic competition ...... 126 9.14 Identification and assessment of major business co-operation, project and investment opportunities...... 126 9.15 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint ventures, transfer of know-how, subcontracting etc...... 127 9.15.1 Subcontracting...... 127 9.15.2 Technical agreements ...... 127 9.15.3 Co-operation agreements...... 127 9.15.4 Joint Venture agreements...... 128 9.16 List of major local companies...... 128 9.17 Listing of European and other foreign companies present in the sector ...... 129 9.18 Main sources of information...... 129 9.19 Textile export statistics for Pakistan...... 131

10 THE FOOD PROCESSING AND PACKAGING SECTOR ...... 135 10.1 The dairy sector of Pakistan ...... 135 10.1.1 General description of the sector...... 135 10.1.2 Main industrial processes ...... 135 10.1.3 the dairy processing industry...... 136 10.1.4 Main raw material and components...... 138 10.1.5 Main cost factors...... 138 10.1.6 Analysis of import & export flows...... 139 10.1.7 Analysis of the main trends...... 140 10.1.8 WTO rules and regulations...... 140 10.1.9 Local and regional competition...... 140 10.1.10 Success stories...... 141 10.1.11 Listing of major local companies ...... 141 10.1.12 Listing of European and other foreign companies present in the sector ...... 142

Page v New Business Opportunities in Pakistan 10.1.13 Main sources of information...... 142 10.1.14 Import and export statistics on the food and dairy sector...... 143 10.2 Fruits and vegetables...... 145 10.2.1 General description of the sector...... 145 10.2.2 Main industrial process...... 145 10.2.3 Growth of the fruit and vegetable processing industry ...... 146 10.2.4 Main raw material and components...... 146 10.2.5 Cost factor analysis ...... 147 10.2.6 Analysis of Import & Export Flows...... 149 10.2.7 Regional production structure...... 149 10.2.8 WTO rules and regulations...... 150 10.2.9 Local and regional competition...... 150 10.2.10 Listing of major local companies ...... 151 10.2.11 Listing of European and other foreign companies present in the sector ...... 152 10.2.12 Main sources of information...... 152 10.2.13 Import and export statistics...... 153 10.3 ...... 154 10.3.1 Overview...... 154 10.3.2 General description of the sector...... 155 10.3.3 Cost factor analysis ...... 158 10.3.4 Analysis of import and export flows ...... 159 10.3.5 Analysis of the main trends...... 160 10.3.6 WTO rules and regulations...... 161 10.3.7 Local and regional competition...... 161 10.3.8 Co-operation with foreign investors ...... 162 10.3.9 List of major local companies ...... 162 10.3.10 Main sources of information...... 162 10.3.11 Statistics on Pakistan imports and exports ...... 163 10.4 Business co-operation in the food sector (dairy, fruit & vegetable, fisheries)...... 163 10.4.1 Identification and assessment of major business co-operation, project and investment opportunities...... 163 10.4.2 Analysis of the most interesting forms of co-operation in the food processing sector ...... 163

11 THE LIGHT ENGINEERING INDUSTRY...... 165 11.1 The Auto part sector...... 165 11.1.1 General description of the sector...... 165 11.1.2 Main parts manufactured locally...... 167 11.1.3 Cost factor analysis ...... 167 11.1.4 Analysis of import and export flows ...... 170 11.1.5 Analysis of the main trends...... 170 11.1.6 WTO...... 171 11.1.7 Identification and assessment of major business co-operation, project and investment opportunities...... 172 11.1.8 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint venture, transfert of know-how, sub-contracting etc. 172 11.1.9 Listing of major local companies ...... 173 11.1.10 Listing of European and other foreign companies present in the sector ...... 173 11.1.11 Main sources of information...... 174 11.1.12 Import and export statistics...... 175 11.2 Textile related engineering...... 176 11.2.1 General description of the sector...... 176 11.2.2 The Industry in Asia...... 176 11.2.3 Material and processes involved to produce a typical textile part /component . 177 11.2.4 Main machinery and equipment and their origin ...... 177 11.2.5 Main parts manufactured locally...... 178 11.2.6 Cost factor analysis ...... 178 11.2.7 Analysis of import and export flows ...... 179 11.2.8 Analysis of the main trends...... 179 11.2.9 WTO...... 179

Page vi New Business Opportunities in Pakistan 11.2.10 Identification and assessment of major business co-operation, project and investment opportunities...... 180 11.2.11 Listing of major local companies ...... 180 11.2.12 Listing of European and other foreign companies present in the sector ...... 180 11.2.13 Main sources of information...... 180 11.2.14 List of textile parts manufactured in Pakistan...... 181 11.2.15 Import and export statistics...... 184 11.3 Electrical capital goods ...... 185 11.3.1 Description of the size and nature of the sector ...... 185 11.3.2 Main products and manufacturers in the market ...... 185 11.3.3 Cost factor analysis ...... 185 11.3.4 Analysis of the Import and Export Flows ...... 187 11.3.5 Identification and assessment of major business co-operation project and investment opportunities...... 190 11.3.6 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint venture, transfer of know-how, sub-contracting etc. 190 11.3.7 Siemens, a success story...... 191 11.3.8 Listing of major local companies ...... 191 11.3.9 Listing of major foreign companies...... 192 11.3.10 Main sources of information...... 192 11.3.11 Import and export statistics...... 193

12 NICHE SECTORS...... 194 12.1 Surgical and dental equipment ...... 194 12.1.1 Pakistan surgical industry structure...... 194 12.1.2 Classification of Pakistani surgical instruments...... 194 12.1.3 Global trade of surgical instruments ...... 195 12.1.4 Pakistan export of surgical instruments...... 196 12.1.5 Tax Structure for Surgical Instrument Industry...... 198 12.2 Gem and jewellery ...... 198 12.3 Marble production ...... 200 12.4 IT software, call and financial services centres, specific software development (animated films, video games…)...... 200

PART IV: SOURCES OF INFORMATION...... 201

13 USEFUL ADDRESSES...... 201 13.1 Addresses in Member States...... 201 13.2 Web sites about Pakistan ...... 204 13.2.1 Web sites of multilateral organisations ...... 204 13.2.2 Web site of U.S. official sources of information...... 204 13.2.3 Web site providing information on investment promotion/FDI in general...... 205 13.2.4 Websites of EU and EU Member State representations in Pakistan: ...... 205 13.3 Internet sources in Pakistan...... 205 13.3.1 Pakistan Government entities web sites...... 205 13.3.2 The Pakistan web directory ...... 206 13.3.3 Commercial information providers web sites...... 206 13.3.4 Business associations web sites ...... 208 13.3.5 Private consulting firms...... 209 13.3.6 Foreign banks in Pakistan ...... 209 13.4 Useful addresses of public entities in Pakistan...... 209 13.5 Recent relevant publications...... 211 13.5.1 Practical guides for investment in Pakistan...... 211 13.5.2 Pakistan – general country/economic analyses ...... 211 13.5.3 Pakistan – investment climate/investment environment...... 211

Page vii New Business Opportunities in Pakistan

LIST OF TABLES

Table 1: Pakistan Traffic volume, road vs. rail, 2002-03...... 19 Table 2: Federal Budget 2003-2004 ...... 26 Table 3: Pakistan Major exports by Commodity (values in million USD)...... 33 Table 4: Pakistan Direction of Exports (Share% of each country in total exports) ...... 34 Table 5: Pakistan Major Imports by Commodity (values in million USD)...... 35 Table 6: Pakistan Pattern of trade with EU countries (1998-99 to 2002-03, values in million USD) ...... 37 Table 7: Pakistan Trade with ECO Countries; (USD million)...... 43 Table 8: Pakistan – Debt servicing (Rs billion) ...... 44 Table 9: FDI Inflows to South and East Asian countries, USD million...... 46 Table 10: Rate of return on FDI (in%)...... 46 Table 11: Inflows of Direct and Portfolio Investment to Pakistan, 1995-2003 (USD million) ...... 47 Table 12: Sector breakdown of FDI Inflows to Pakistan, 1990-2003 (USD million)...... 47 Table 13: Corporate Performance of Major Companies-Return on Equity (), in%...... 49 Table 14: Court case statistics...... 55 Table 15: Pakistan - Commercial banks ...... 63 Table 16: Pakistan – Non-banking financial institutions ...... 63 Table 17: Pakistan's investment climate compared to India and China...... 67 Table 18: Starting a business in Pakistan and selected other countries, 2002 ...... 68 Table 19: Summary of foreign investment regulations ...... 69 Table 20: Summary of privatisation transactions by sector, 1991- June 2003 (values in RS million) ...... 75 Table 21: List of Upcoming Major Transactions (as of December 2003)...... 75 Table 22: Concessional tariffs...... 78 Table 23: Cost of Industrial Land...... 80 Table 24: Overview of minimum employment conditions ...... 86 Table 25: Salaries & Benefits...... 86 Table 26: Energy costs (gas & fuel costs, as of July 2003) ...... 88 Table 27: Water and Power Development Authority (Wapda) tariff schedule ...... 88 Table 28: Import tariffs and their dispersion ...... 91 Table 29: Residency status...... 95 Table 30: Corporate tax rates evolution...... 95 Table 31: Presumptive rates of income tax ...... 96 Table 32: Personal Income Tax Rates ...... 97 Table 33: European Union rates under the tax treaties ...... 98 Table 34: List of 45 countries with substantial investment in Pakistan ...... 106 Table 35: Rental for private accommodation ...... 107 Table 36: Prices of consumer goods ...... 108 Table 37: Selected SME Projects in Pakistan - Cost Analysis ...... 115 Table 38: Pakistan large textile companies ...... 117 Table 39: Pakistan small and medium size companies ...... 118 Table 40: Breakdown of investment in the textile sector by sub-sector (total investment) ...... 118 Table 41: Pakistan value addition in textile...... 118 Table 42: Pakistan growth of cotton textile industry ...... 119 Table 43: Pakistan consumption of raw material ('000 kg) ...... 119 Table 44: Pakistan consumption of man made fibre ('000 kg; '000 Rs)...... 119 Table 45: Pakistan import of textile machinery (in Rs million) ...... 120 Table 46: Textile exports – core categories (values in USD million) ...... 121 Table 47: Import of polyester staple fibre (values in USD million) ...... 122 Table 48: Breakdown of Pakistani textile exports by destination country ...... 123 Table 49: Pakistan Textile export (USD million) ...... 125 Table 50: Textile export market analysis ...... 125 Table 51: Pakistan Competitor countries in the textile industry ...... 126 Table 52: Yarn trade statistics (SITC 651), values in USD '000 ...... 131 Table 53: Cloths trade statistics (SITC 652, 653, 654, 655, 656, 657), values in USD '000...... 131 Table 54: Garments trade statistics (SITC 841, 842, 843, 844, 845), values in USD '000...... 132 Table 55: Towels trade statistics, values in USD '000 ...... 132 Table 56: Bedwear and linen trade statistics (SITC 65841, 65842, 65843), values in USD '000...... 133 Table 57: Made-up textile articles trade statistics (SITC 658), values in USD '000...... 133 Table 58: Bedwear trade statistics, values in USD '000 ...... 134 Table 59: Annual production of milk and milk products (2001-02)...... 136 Table 60: Per capita consumption (kgs.) of milk and milk products (2000) ...... 137 Table 61: Pakistan number of cattle per type ...... 138 Table 62: Pakistan – number of cattle per region type (in millions) ...... 138 Table 63: Food processing and packaging trade data - SITC 0 (excl. 00 live animals except fish and 08 animal feed), values in USD '000 ...... 143 Table 64: Milk and dairy products (excl. eggs) - SITC 022, 023, 024, values in USD '000 ...... 144 Table 65: Pakistan surface under cultivation, ‘000 hectares ...... 146 Table 66: Production of major fruits and vegetables in Pakistan, 2001-02, in tonnes ...... 147 Table 67: Pakistan, regional production of fruits and vegetables, in tonnes...... 149 Table 68: Pakistan, export of major fruits and vegetables in Pakistan in 2001-02 ...... 150 Table 69: Pakistan, major export markets of Kinnow (mandarin and oranges) – global exports in USD million...... 150 Table 70: Pakistan, major orange and mandarin producing countries (1999 figures) ...... 150 Table 71: Vegetables (fresh, chilled, frozen, preserved, preparated), values in USD '000 ...... 153 Table 72: Fruits (fresh, dried, preserved, preparated, including juice), values in USD '000...... 154 Table 73: Pakistan fish production (in '000 tons) ...... 156

Page viii New Business Opportunities in Pakistan Table 74: Pakistan Exports of Fish & Fish Preparations, values in USD million ...... 156 Table 75: Types of fish catch in Pakistan ...... 157 Table 76: Summary of registered vessels, 2001 ...... 158 Table 77: Pakistan main fishing ports...... 160 Table 78: Fish and (SITC 03), values in USD '000 ...... 163 Table 79: Pakistan / India Japanese price comparison ...... 168 Table 80: Pakistan auto part cost breakdown...... 168 Table 81: Pakistan auto manufacturing installed capacity...... 168 Table 82: Pakistan auto manufacturing forecasts...... 168 Table 83: Pakistan auto manufacturing required investments...... 169 Table 84: Pakistan auto manufacturing local content ...... 169 Table 85: List of technical agreements in the vendor industry...... 173 Table 86: Auto parts import and export statistics (SITC 784), values in USD '000...... 175 Table 87: List of Textile machinery parts/components manufactured in Pakistan...... 181 Table 88: Textile/leather machinery (SITC 724), values in USD '000...... 184 Table 89: Pakistan power generation equipment sector...... 187 Table 90: Pakistan power generation equipment market ...... 189 Table 91: Pakistan power generation equipment projected per 100 MW ...... 189 Table 92: Average additional power required per year...... 190 Table 93: Trade statistics SITC 71 (power generating equipment), 771 (power equipment), values in USD '000..193 Table 94: Pakistan exports of surgical and dental equipment ...... 196 Table 95: Gemstone productive areas...... 199 Table 96: Pakistani exports of gems and precious stones 2000-2002, USD 000...... 199 Table 97: Pakistan's gem exports by destination...... 199

Page ix New Business Opportunities in Pakistan

LIST OF FIGURES

Figure 1: Reliance on power generators...... 19 Figure 2: Pakistan Structure of GDP by sectors, 2002-2003...... 21 Figure 3: Pakistan Composition of agriculture, 2002-03, in% of value added ...... 22 Figure 4: Pakistan Composition of Services sector, 2002-03, in% of value added ...... 24 Figure 5: Regional markets index ...... 28 Figure 6: Comparison of average growth rates of various countries with Pakistan 2002-2003...... 29 Figure 7: Pakistan Growth rates of main economic sectors, 1998–2003, in% ...... 30 Figure 8: Pakistan Annual rate of inflation, 1990-2003, in%...... 31 Figure 9: Pakistan Employment by sectors, 2003 ...... 31 Figure 10: Pakistan import and export evolution (USD million) ...... 32 Figure 11: Pakistan Trend in Exports (1998-99 to 2002-03)...... 33 Figure 12: Pakistan Growth in Imports over the Years ...... 34 Figure 13: Pakistan Pattern of balance of trade ...... 36 Figure 14: Pakistan Trade with European Union Countries, USD million...... 37 Figure 15: Pakistan Trade with India, 1997-2003 (USD million)...... 42 Figure 16: Exchange rate, Rupees per USD, average of period, 1996-2003 ...... 44 Figure 17: Exchange rate, Rupees per USD and EURO, average of period, 2002-2003...... 44 Figure 18: How do general constraints differ? ...... 50 Figure 19: Contracts, property rights and rule of law...... 60 Figure 20: Pakistan: Turnover of shares at KSE and KSE-100 index ...... 65 Figure 21: Privatisation proceeds ...... 74 Figure 22: EPZ location map ...... 81 Figure 23: Organisation Chart of The Board of Investment...... 84 Figure 24: Electricity prices, a comparison in Asia, 1999...... 89 Figure 25: Customs delays on imports ...... 93 Figure 26: Milk processing chart...... 136 Figure 27: Market share of local manufacturers ...... 171 Figure 28: Import of ECG, 1995-2001...... 188 Figure 29: World export trends in ECG, 1995-1999 ...... 188 Figure 30: Pakistan – ECG exports, 1995-2002 ...... 189 Figure 31: World export share 2000 of surgical and dental equipment ...... 195 Figure 32: Global import market for medical instruments ...... 196 Figure 33: Pakistan and world exports, surgical and dental equipment, 1993-2000 (USD million)...... 196 Figure 34: Pakistan export destinations of surgical instruments...... 197

Page x New Business Opportunities in Pakistan

LIST OF BOXES

Box 1: Recent political developments...... 15 Box 2: The Kashmir conflict ...... 15 Box 3: The impact of 11 September 2001 on the Pakistani economy ...... 30 Box 4: Recent developments concerning the EU-GSP with Pakistan ...... 38 Box 5: SAFTA main characteristics ...... 40 Box 6: SAFTA likely impact on regional trade ...... 41 Box 7: Pakistan, India to cut duties on 500 items ...... 42 Box 8: Pakistan and the Paris Club ...... 45 Box 9: ICI PAKISTAN ...... 48 Box 10: Opinion of the Pakistan-Britain Advisory Group on the Pakistan Investment Climate...... 51 Box 11: Rating spectrum...... 52 Box 12: Coface Pakistan review, October 2003 ...... 53 Box 13: World Bank Country Paper Pakistan, 2003 ...... 53 Box 14: Pakistan no more on list of ‘high-risk’ economies...... 54 Box 15: Application for registration of copyright ...... 60 Box 16: Islamic banking and financing ...... 64 Box 17: Available Infrastructure and conditions at KEPZ ...... 83 Box 18: Price control of public utilities ...... 90 Box 19: Taxes in Pakistan, an overview ...... 94 Box 20: List of countries with double taxation agreements...... 97 Box 21: List of Countries / Organisations with which Pakistan has Bilateral Investment Treaties...... 100 Box 22: Arbitration and legal dispute in Pakistan, the Siemens-Westinghouse case...... 102 Box 23: The Ltd. case...... 102 Box 24: Child labour and education in 2003 ...... 105 Box 25: Holidays in 2004 ...... 110 Box 26: Bank holidays ...... 110 Box 27: Six Reasons to Invest in Pakistan as presented by the BOI ...... 114 Box 28: Textile sector overview ...... 116 Box 29: GSP negociations with the EU ...... 125 Box 30: NESTLE MILKPAK ...... 141 Box 31: Britain to invest in seafood processing ...... 162 Box 32: Main products and manufacturers in the market ...... 185 Box 33: SIEMENS PAK LTD...... 191 Box 34: SWOT analysis of surgical instrument manufacturing in Pakistan ...... 198 Box 35: SWOT Analysis of the gem and jewellery sector...... 200

Page xi New Business Opportunities in Pakistan

LIST OF ACRONYMS

ADB Asian Development Bank ICSID International Centre for Settlement ADPB The Agriculture Development bank of Investment Disputes AOP Association of Persons IDA International Development Agency APO Asian Productivity Organisation ILO International Labour Organisation APTMA All Pakistan textile Mills Association IMF International Monetary Fund ASP Agricultural Statistics of Pakistan IOML International Organisation for Legal ATC Agreement on Textile and Clothing Metrology BEL Bankers Equity Limited IOSCO International Organisation of BOI Board of Investment Securities Commission CAF Corporate Agricultural Farming IPEC International Programme on the C & F Cost and Freight elimination of Child Labour CBA Collective Bargaining Agents IPF Investor Protection Fund CBR Central Board of Revenue IQF Individual Quick Freezing CCOI Cabinet Committee on Investment ISE CGO Customs General Order ISO International Standards CHPF Clearing House Protection Fund Organisation CLA Corporate Law Authority JETRO Japanese Export Trade COFACE Compagnie d’Assurance pour le Organisation Commerce Extérieur KAPCO CTL Central Testing Laboratories KCCI Camber and Commerce DFI Development Finance Institutions and Industry DTRE Duty and Tax Remission for KEPZ Karachi Export Processing Zone Exporters KESC Karachi Electricity Supply Company ECG Electrical Capital Goods KSE ECGD Export Credit Guarantee LFO Legal Framework Order Department MFA Multi-Fibre Arrangement ECO Economic Cooperation Organisation MFN Most Favoured Nation (MFN) EDS Export Development Surcharge MIRDC Metal Industry Research and EFA Education for All Development Centre EFS Export Finance Scheme MMA Muttahida Majli-i-Amal EOBI Employees Old Age Benefits NAB The National Accountability Bureau Institution NBP National Bank of Pakistan EPB Export Promotion Bureau NCB Nationalised Commercial Banks EPZ Export Processing Zone NCCWD National Commission for Child EPZA Export Processing Zone Authority Welfare and Development ESR Education Sector Reforms NCEL National Commodity Exchange FATA Federally Administered Tribal Areas Limited FBS Federal Bureau of Statistics NDFC National development Finance FCS Fishermen Co-operative Society Corporation FPIA Foreign Private Investment NDND No-duty No-drawback (Promotion & Protection) Act NEPRA National Electricity Regulatory FTA Free Trade Agreements Authority GATS General Agreement on Trade in NOC No Objection Certificates Services NPL non-performing loan GATT General Agreement on Tariff and NSS National Saving Schemes Trade NTB Non-Tariff Barriers GDP Gross Domestic Product NTDC National Transmission & Despatch GIP Gross Industrial Product Company GOP NTN National Tax Number GSD Government Supplies Department NUST National University of Sciences and GSP Generalised Scheme of Tariff Technology Preferences NWFP North West Frontier Province Gw Giga watt OCSIR Pakistan Council for Scientific and Gwh Giga watt per hour Industrial Research HACCP Hazard Analysis and Critical Control OECD Organisation for Economic Co- Points operation and Development HBFC House Building Finance Corporation OEM Original Equipment Manufacturers Hydel Hydro Electric OGRA Oil and Gas Regulatory Authority IAS International Accounting Standards OIC Organisation of Islamic Conference

Page xii New Business Opportunities in Pakistan OICCI The Overseas Investors Chamber of RIA Reportable Injury Accident Commerce and Industry SAARC South Asian Association for PAAPAM Pakistan Association of Automotive Regional Cooperation Parts and Accessories SACE Istituto per i Servizi Assicurativi del Manufacturers credito all’Esportazione PC&A Pohl Consulting and Associates SAFTA South Asian Free Trade Area PE Permanent Establishment SAPTA South Asian Preferential Trading PEFGA Pakistan Export Finance Guarantee Arrangements Agency SBP PEMRA Pakistan Electronic Media SCCI Chamber of Commerce and Regulatory Authority Industry PIA Pakistan International Airline SDC Standards Development Centre PMLQA Pakistan Muslim League Quaid-i- SECP Securities and Exchange Azam Commission of Pakistan PNAC Pakistan National Accreditation SIPEC Sino Petroleum Import Export Council Company PPIB Private Power and Infrastructure SMC Single Member Company Board SME Small and Medium Enterprise PPP Pakistan People’s Party SMEDA Small and Medium Enterprise PPRA Public Procurement Regulatory Development Authorities Authority SRO Special Regulatory Order PRGF Poverty Reduction and Growth TEC International Electrochemical Facility Commission AJK Azad Jammu and Kashmir TRIPS Trade-related aspects of intellectual PSI Pakistan Standards Institution property rights PSQCA Pakistan Standards and Quality TSC Technical Services Centre Control Authority UHT Ultra High Temperature Pakistan Telecommunication UR Uruguay Round Company Ltd. WAPDA Water Resources & Power PUD Peeled, undeveined Development Authority PWC Pakistan Workers Confederation WTO World Trade Organisation QCC Quality Control Centre RCCI Chamber of Commerce and Industry

Page xiii New Business Opportunities in Pakistan

INTRODUCTION

This Guidebook for European Investors in Pakistan has been prepared under contract for the European Commission with funding for both the research and production of the Guidebook financed by the Asia Invest Programme of the Europe Aid Cooperation Office.

This Guidebook and the research behind it are the work of POHL CONSULTING & ASSOCIATES. In the course of their research, the consultants had discussions in many key business centres of the EU Member States and Pakistan in order to validate current financial and factual information, and to gain an insight into the perceptions, motivations and experiences surrounding European investment in Pakistan from both viewpoints.

The Guidebook attempts to deal with the various topics that are likely to be relevant to potential investors and also includes useful internet addresses in order to allow investors to update their information.

The material in this Guidebook is solely provided for the guidance of those contemplating investment, but it is no substitute for professional advice, which should be sought before taking any specific action. The information in this document is believed to be correct as of December 2003 but no responsibility is taken for its accuracy.

This report has been produced with the assistance of the European Union under the Asia- Invest programme. The views expressed herein are those of the consultant and can therefore in no way be taken to reflect the views of the European Union.

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EXECUTIVE SUMMARY

Despite some negative perceptions among the international, including European, public, Pakistan has shown remarkable political and economic developments since the late 1990s when the country was on the verge of bankruptcy. With a rapidly growing population of about 150 million, Pakistan is a major country, recognised by the international community, and is one of the most important actors in the Islamic world.

Based on its geographical location Pakistan has close political and economic relations with the Middle East, Central and South Asia. It is the main gateway to Central Asia and supplier to the Emirates. Economic integration with South Asia has been less effective in the past due to the strained relations with India on the Kashmir issue. However, recently notable steps have been taken by the South Asian Association for Regional Co-operation (SAARC), of which Pakistan is a member, to establish a South Asian Free Trade Area (SAFTA), including India.

Politically, despite some reservations from the European Union about the last presidential and legislative elections, Pakistan has been moving towards democracy. Based on the experience of the last thirty years, it is hoped that the present administration and its successors will continue to pursue the sound economic reform policies initiated by President Musharraf. By the end of 2003, an agreement between President Musharraf and the main opposition Islamic Parties helped to resolve a serious impediment to the functioning of Parliament. It is hoped that soon the European Union as well as the Commonwealth of Nations will recognise Pakistan as a full-fledged democracy.

Economically, the support from Pakistan’s main creditors after 9/11 has initiated a virtuous economic circle, allowing fast export growth, a positive balance of payments, reduction of the cost of debt service, a dramatic increase in the country’s currency reserves and an all time low for domestic interest rates, coupled with the appreciation of the Rupee against the US Dollar in 2002 and 2003. By the end of 2003, foreign reserves with the Central Bank reached more than USD 11 billion, while the Balance of Trade deficit kept reducing to USD 1 billion in fiscal year 2003. However, thanks to the reduced cost of debt servicing and a dramatic increase in remittances by overseas (up to USD 4 billion), the balance of payments has been positive over the last few years.

The main consequence of these macro economic successes has been an increased liquidity in the country and the subsequent lowering of interest rates to a single digit for prime borrowers, from rates as high as 17% to 18% a few years ago. This has enabled higher profits for most businesses, followed by an exceptional boom on the stock market.

Also, banks have aggressively marketed consumer finance to the emerging middle class, allowing for a consumption boom (more than a 7-month waiting list for certain models) as well as a construction bonanza.

The Central bank has carefully managed the incoming “hot money” so that inflation remains under control at less than 3% per annum.

Overview of the Economy and Foreign Trade

Pakistan's economy is still very dependent on agriculture. The sector contributes 25% to GNP but employs nearly 50% of the labour force. Industry contributes approximately 18% to GNP and services about 50%, of which wholesale and retail trade account for 15%, and transport and communication for 10%. As a result of the importance of the agricultural sector, climatic conditions and water resources have a significant impact on the yearly economic performance. Over the period 2000 to 2003, GNP growth has increased from an average of 3% per annum to nearly 5% in fiscal year 2003.

The industry is concentrated in the Karachi area, as well as in Punjab, around Lahore, Sialkot and . Other cities such as Quetta, Multan, Hyderabad or Peshawar also present some industrial activity but cannot compete with the former as far as the quality of the business environment is concerned.

Page 2 New Business Opportunities in Pakistan

The size of the domestic market has been increasing at a high rate based on a growing middle class, presently estimated at 7 million, with a Purchasing Power Parity of USD 7000.

The volume of foreign trade has been increasing since 1999; in 2003, total import value was USD 12 billion, approximately 1 billion higher than total exports.

Imports are dominated by petroleum and derivatives as well as machinery and equipment.

The largest export sector of Pakistan is the textile and apparel sector with nearly 70% of the total exports, the balance is made up of cereals (mainly rice), miscellaneous manufactured goods (mainly toys and sports goods), chemicals, food and and scientific instruments.

The European Union is the single largest trading partner of Pakistan and during fiscal year 2003, the share of Pakistani exports to the EU markets was in excess of 30% of Pakistan’s total exports. The exports to the EU market this year grew by more than 22% over the previous year. Pakistan enjoys a reasonable trade surplus with the EU. Growth in exports to the EU was primarily due to the enhancement of 15% in the textile quota and therefore, an increased market access for Pakistani exports from January 2002.

Chances for a substantial growth of intra-regional trade are high. In January 2004, the South Asia Free Trade Agreement has been signed, with the Free Trade Area expected to become effective in 2006. In a similar vein, bilateral trade between Pakistan and India is expected to gain momentum after tariff cuts were agreed on at the end of 2003.

Infrastructure

Infrastructure is regularly being improved, with a main focus on the road network which requires upgrading. The government is also making efforts to improve the reliability of the electricity supply. Despite a number of recent developments, including the opening of the sector to foreign investors, as well as attractive sites for the production of hydro-electric supply, most enterprises have to operate back-up generators, which increases the cost of their operations. Furthermore, the price of electricity is high compared to the rest of the region.

Telecommunications is an area where the situation is satisfactory with most cities in the country linked to internet, and equipped for mobile telephony.

International airports are well served by international airlines, while the Karachi Port is complemented by Port Quasim, a recent development a few kilometres from Karachi, as well as the Gwadar port, in , in the west of the country.

Regulatory framework

Business regulations have been profoundly overhauled along liberal lines, especially since 1999. Most barriers to the flow of capital and international direct investment have been removed. Foreign investors do not face any restrictions on the inflow of capital, and investment of up to 100% of equity participation is allowed in most sectors (local partners must be brought in within 5 years and contribute up to 40% of the equity in the services and agriculture sectors). Unlimited remittance of profits, dividends, service fees or capital is now the rule. Business regulations are now among the most liberal in the region. On these grounds, Pakistan appears much more investor friendly than its larger neighbour, India. However, implementation of business regulations especially by the lower level bureaucracy could still be improved.

Tariffs have been reduced to an average rate of 16%, with a maximum of 25% (except for the car industry). The privatisation process, which started in the early 1990s, has gained momentum, with most of the banking system privately owned, and the oil sector targeted to be the next big privatisation operation. It is worth noting, however, that very few OECD investors have shown an interest in privatisation: Most investors come from the Middle East and China.

Page 3 New Business Opportunities in Pakistan Corruption and transparency issues are still of concern, as demonstrated by the Transparency International ranking of Pakistan, despite a number of measures being implemented under the guidance of the World Bank to improve the situation. It is recognised by most people met during the course of this study that the situation has improved dramatically with the present administration.

Enforcement of laws, rules and regulations could still be improved, with lower levels of the administration not presently fully efficient. One major drawback is the contentious legal framework which does not automatically recognise and implement international arbitration decisions. The judicial system also still lacks effectiveness. Intellectual property rights, while legally protected, are not always enforced – pirated and copied goods are prevalent in most sectors of the economy.

Another issue is the security situation, which has three dimensions: the still unstable situation in Afghanistan, which spills over to the neighbouring regions in Pakistan; the conflict with India over Kashmir, which is the subject of renewed peace talks between the two countries, initiated at the end of 2003; and sectarian violence between Shiites and Sunnis. In this context, foreigners need to be cautious and are advised to keep themselves informed e.g. by consulting travel advice issued by the European foreign ministries. It is worth noting however, that Pakistan-India relations have improved recently, and negotiations are being undertaken to try and resolve a number of issues including Kashmir.

Foreign investment in Pakistan

A number of large international companies have been operating successfully in the country for the last twenty years or more. However, no significant new entrants have come recently. The main multinationals in the country are in oil and gas exploration and production, electrical engineering, and the pharmaceutical, food, and chemical industries.

European and American companies have not shown much interest in privatisation to date. Most export credit agencies in EU Member States (with the exception of Hermes in Germany) do not cover Pakistan risk (October 2003), except on a case by case basis.

Despite this, inward foreign direct investment (FDI) has increased significantly in the fiscal year 2003 to USD 800 million, a large part being linked to privatisation. Major investors in the country come from the UK, the Middle East and the US, each contributing 25% of FDI. China has traditionally had a strong presence in the country, mostly through infrastructure development and supply of low cost goods and equipment. China accepts differed payment risks through large suppliers’ credit, up to ten year duration. It is certainly a country which has a long term strategy regarding its investments, and European Investors may have to compete with Chinese investments in Pakistan.

The recent improvements in the economy and the business environment have been recognised by international rating agencies such as Moody’s and Standard and Poor’s (country risk upgrade at the end of 2003). Provided the positive trend is maintained, Pakistan presents numerous and significant opportunities for investments aiming both at using Pakistan as an export base and at tapping an emerging market with a rapidly growing middle class.

Recommendations for potential investors

To limit the risks inherent in all business activities, medium sized investors from Europe are advised to: - select a reliable partner, with an obvious long term interest in a partnership, to help understand the local environment; - target a sector where Pakistan has a specific advantage, and to plan for a long term investment; - bring into the project a distinct and permanent advantage, such as a new technology, process, know how, brand, design or marketing ability; - ascertain that at least 75% of the output is exported, gaining therefore sufficient foreign currency income to service the foreign investment, while the local market, still small, shall only become significant over time.

It is worth noting that finance is not at present an area where Pakistani businessmen are looking for help or support from overseas partners. As discussed above, further to an improved macro economic

Page 4 New Business Opportunities in Pakistan situation, the country is liquid and many business groups are flushed with funds, eagerly looking for business opportunities and know-how.

High potential Sectors for Foreign Direct Investment

During the course of preparing this Investor Guidebook a number of sectors have been identified which are expected to be particularly attractive for foreign investors. The study has been based on the analysis of export led sectors, in term of volume and growth, import substitution sectors, as well as the domestic (non-tradeables) sector.

Among the significant sectors which provide clear opportunities for medium sized investors, the following ones are presented in greater detail in this Guidebook:

Textiles and garments

In the textile and garment sector Pakistan has a definite competitive advantage, further enhanced by the disappearance of the Multi-Fibre Agreement by the end of 2004. Despite its successes and its recent spate of investment in state of the art machinery, the industry still needs know-how and processes to improve the quality of its products, as well as design, fashion and marketing development.

This sector has been divided into the different stages of production, such as spinning, weaving, knitting and finishing, dyeing, etc. while the major groups usually cover all stages of the product cycle. Most products are cotton based with emphasis on the first stages of production like yarn, cloth and fabrics. Only recently has the country entered into the more added value production of garments. The particular emphasis on bed linen and towels is worth noting, given that it is the subject of an anti dumping review by the European Union.

Based on the competitive advantages of this sector in Pakistan, and the liberalising of international trade after the end of the Multi-Fibre Agreement by the end of 2004, there should be opportunities for a mutually beneficial co-operation between Pakistani business groups and European investors.

Food processing and packaging

Opportunities in the food processing and packaging industry (especially dairy products, fruits and vegetables, fish and sea food), based on a very large agricultural sector and a large and expanding fishing fleet, are primarily related to upgrading of the underdeveloped collecting, processing, packaging and distribution system.

Obvious export markets are the Middle East, South and Central Asia as well as Europe and the USA if the present phyto-sanitary constraints can be resolved. The local emerging middle class should also provide an outlet for well processed and packaged food in the medium term. The impression from the authors is that investment in this sector should definitely be long-term, in view of the necessity to organise the supply chain as well as the distribution network in a rather primitive environment, be it in the fruit, vegetable, dairy or fishing sectors.

Also, a major part of the sector depends on the packaging industry, including carton boxes, tin can, or freezing processes, which are still underdeveloped.

Light engineering and automotive parts

The light engineering and automotive parts industry should also provide opportunities, as far as they are backed up by export markets. Based on an infant automobile industry still protected by high tariffs and dominated by Japanese assemblers, the existing automotive supply industry is in dire need of technology improvements. Similarly, there is a great demand for machinery and equipment linked to the textile and garment sector, such as industrial dryers, cooling fans, spinning needles, etc.

Last but not least, the electrical and engineering sector linked to power generation and transmission is expected to face a strong and growing demand in coming years. However, this sector has been targeted only as a third priority sector mostly based on the competition which is already present from technology sourced from other Asian countries, such as Japan, Korea, Taiwan and more importantly

Page 5 New Business Opportunities in Pakistan China, which appears to be a main trading partner for Pakistan as well as a potential investor in this sector.

Other sectors

Other sectors have been identified as worthy of consideration by foreign investors, but are more limited in size. The following niche sectors have been identified:

- Surgical instruments This sector exports 95% of its production, mostly to the USA and the EU. It represents a turnover of about USD 150 million per annum and consists mostly of metal instruments. This industry is concentrated in Sialkot, north of Lahore, making it one of the significant clusters for such production worldwide. The technique is mostly based on forging and metal finishing for which co- operation with European firm with the proper know how might be required.

- Marble production Marble is used extensively by the domestic construction industry, and part of the production is exported, mostly to the Middle East. Mining and production sites are spread more or less over the North and East of the country. The production represents about USD 25 million per annum. The main drawback of this industry is the absence of sophisticated techniques: mining through explosives which do not allow the production of large slabs of marble and implies important wastage. The industry is definitely interested in acquiring know-how, as well as the proper slicing equipment to improve the quality of its products. The main drawback for a foreign investor would be to find the right partner in an industry which is made up of a number of small enterprises.

- Gems and jewellery This sector, based on vast resources of rough semi precious stones is still in the infant stages. The official export of rough stones represents about USD 5 million per annum, while no stones are cut locally yet. The government is trying to develop a stone cutting industry and has created three training institutes.

- IT (call centres, service centres, software development, etc.) It may be surprising that this sector has so far not been developed in Pakistan, especially when compared to its large neighbour India. At present there is no such industry in Pakistan, despite the opening of a few call centres by financial institutions or some overseas Pakistanis from the USA. Also, some incubators have projects in the animated video games sector. However, the government has recently launched initiatives to promote the industry, through the development of IT education and training.

Reader's Guide

This Guidebook consists of four parts, which can be read independently of each other, depending on the user's interest and needs.

Part I provides a comprehensive overview of Pakistan and its economy, with a special focus on issues which are of interest to the potential investor. It can be read as an introduction to the country, and may also serve as background reading for investors primarily interested in hands-on information on how to establish and run a business in Pakistan.

Such practical information is provided in Part II of the Guidebook. Here, the potential investor will find detailed information on how to establish a venture in Pakistan.

Important sectors of the Pakistani industry which have been identified as being particularly interesting for foreign direct investment are analysed in detail in Part III of the Guidebook. Again, the focus is on providing sector information which will be useful for a potential investor in taking an investment decision. This section also provides some details on high potential niche sectors.

Finally, Part IV provides an extensive list of other sources of information, both in and outside of Pakistan, and including online resources accessible through the World Wide Web. It goes without saying that the reader should consult and collect information from as many different sources as

Page 6 New Business Opportunities in Pakistan possible before taking a final decision on a potential investment. The institutions and publications listed in part IV of this Guidebook may serve as a starting point.

Page 7 New Business Opportunities in Pakistan

PART I: PAKISTAN GENERAL INFORMATION

MAP OF THE COUNTRY

Page 8 New Business Opportunities in Pakistan PAKISTAN AT A GLANCE

Page 9 New Business Opportunities in Pakistan

Page 10 New Business Opportunities in Pakistan

Page 11 New Business Opportunities in Pakistan

GENERAL COUNTRY INFORMATION

With presently 150 million inhabitants, Pakistan is expected to be the third most populous country by 2020. As a result, the domestic market, which is still small due to the limited purchasing power of large parts of the population, is expected to grow rapidly. In addition, the country's geographic position provides for an easy access to South and Central Asia and the Middle East, and trade liberalisations schemes are in the process of being established.

Politically, the Government's reform initiatives since the 1990s, and especially in past five years have begun to show positive results: macro economic figures have improved substantially in the period 2000-2003; the financial sector has recovered; and the stock market has shown the best performance worldwide in the period since 2001. However, although the Government is committed to the eradication of terrorism and communal violence, the country’s stability depends on international factors such as the situation in Afghanistan and the Kashmir conflict. In this regard, the recent renewal of the peace process with India should be noted.

1.1 General environment

1.1.1 Population

Pakistan is the world's seventh most populous country with a population estimated, by the end of 2003, to be around 150 million. The population density ranges from 19 people per square kilometre in the province of Balochistan to 359 people per square kilometre in the province of Punjab. Pakistan’s population is distributed in 19.21 million households with an average household size of 6.8 members. Although the population growth rate is constantly decreasing, Pakistan is expected to become the world’s third most populous country after India and China within the next couple of decades.

The urbanisation process is accelerating in Pakistan. In 1970 only 25% of Pakistan’s inhabitants lived in urban areas; this figure has increased to 33% in 2000. There are remarkable differences concerning the degree of urbanisation between the provinces. Whereas almost one half of the population in is located in urban areas, nearly the whole Federally Administered Tribal Areas (FATA) remain rural.

The biggest cities in Pakistan are Karachi (11 million inhabitants), Lahore (8 million inhabitants), Faisalabad (2 million inhabitants), Rawalpindi (1.4 million inhabitants) and Peshawar (1 million inhabitants). The capital city Islamabad has about half a million inhabitants.

1.1.2 Geography

Pakistan has a strategic location, spread over a landmass of 796,096 square kilometres, which is about 1.5 times the size of France. Pakistan borders in the South West, Afghanistan in the West and North, China in the North-East and India in the East.

Pakistan exhibits a wide range of different landscapes including coastal beaches, lagoons and swamps in the South, deserts and fertile plains in the centre and high mountains in the North. Three major geographical areas can be identified: the northern High Mountain Region, the Plains, and the Balochistan Plateau.

The High Mountain Region stretches in the North from east to west including parts of the Himalayas, Karakorum, and Hindukush mountains. In this area there are 40 of the world’s 50 highest mountains; among them the K-2 (second highest with 8,611 meters) and the Nanga Parbat (eighth position with 8,126 meters). Because of their rugged topography and the rigors of the climate, the northern highlands and the Himalayas to the east have been formidable barriers to movement into Pakistan throughout history.

In the east of the country lie the flat, fertile plains of the Indus River and its tributaries. The Indus is the main river of Pakistan and the nation’s lifeline. It runs the length of the country from Tibet on its course to the , a total of almost 2,500 km. This area, which closely coincides with the provinces of Sindh and Punjab, is hot and dry and is occupied in its eastern borders by the Thar Desert. Extensive

Page 12 New Business Opportunities in Pakistan irrigation facilities, fed by the waters of the Indus, make the Indus basin the agricultural heartland of Pakistan, where most of its population is located.

The Balochistan Plateau in the western part of the country, which is roughly identical with the province of Balochistan, is an arid region with slightly wetter conditions in the northern part. Large portions of the area are not suitable for agriculture and are thus inhabited by nomads.

1.1.3 Climate

Pakistan lies in the temperate zone, characterised by hot summers and cold winters. Although within the monsoon region, it is generally arid with Balochistan as the driest part. However, there are distinct differences among particular locations attributable to the geographical differences. The coastal area, for instance, is usually warm, whereas the northern mountain region is cold throughout the year with rain in the summer and snow in the winter. The Plateau regions experience hot summers and cold winters with some rain in the winter.

Pakistan’s general climate can be divided into four seasons: cold season, hot season, monsoon season, and post-monsoon-season. The cold season (winter) lasts from November to March being cool and dry. The season from April to June is usually hot and dry. Temperatures often exceed 40°C and more. The monsoon season with somewhat lower temperatures and extensive rainfalls starts at the beginning of July. The post-monsoon season from October to November is a transitory period with hot days and cold nights; these two months are the driest months.

The climate in the capital city of Islamabad varies from an average daily low of 2°C in January to an average daily high of 40°C in June. Half of the annual rainfall occur in July and August, averaging about 255 mm in each of those two months. The remainder of the year has significantly less rain, amounting to about 50 mm per month. Hailstorms are common in spring.

Pakistan's largest city, Karachi, is more humid than Islamabad but gets less rain. Only July and August average more than 25 mm of rain in the Karachi area; the remaining months are exceedingly dry. The temperature is also more uniform in Karachi than in Islamabad, ranging from an average daily low of 13°C during winter to an average daily high of 34°C on summer days. Although the summer temperatures do not get as high as those in Punjab, the high humidity may cause discomfort.

Most areas in Punjab experience fairly cool winters, often accompanied by rain. By mid-February the temperature begins to rise; springtime weather continues until mid-April when the summer heat sets in. The monsoon used to reach Punjab by May, but since the early 1970s the weather pattern has been irregular. The spring monsoon either skipped the area or heavy rains caused floodings. June and July are extremely hot with temperatures above 40°C.

1.2 History

What presently comprises Pakistan was initially part of the larger Indian sub-continent with a long history and a recognised civilisation dating back to many centuries. However, in the 17th century, the sub-continent was annexed by the British.

After the unsuccessful First War of Independence in 1857, the British were determined to suppress and weaken Muslims, whom they held mainly responsible for the uprising. Sir Syed Ahmad Khan (1817-1898) made one of the first attempts to restore Muslim status by founding the , which later became the Muslim League.

In 1947 after the Second World War, the sub-continent gained independence with the creation of a Muslim majority state called Pakistan and India comprising the Hindu majority. Prominent amongst this struggle from the side of Pakistan were leaders such as Sir Syed Ahmad Khan, Dr. Muhammad Iqbal who proposed the creation of a separate Muslim state and Mr. Mohammad Ali Jinnah, the founder of the nation.

The division of the subcontinent proved difficult, particularly with respect to relocation of large population groups who migrated to reposition themselves in accordance with the religious status of each State. The main area of contention was the fertile Punjab, where Hindu, Muslim, and Sikh population were inextricably mixed. The result was that at Independence an estimated six million Muslim refugees, mainly from the Punjab, streamed across the border into Pakistan. Similarly, about

Page 13 New Business Opportunities in Pakistan 4.5 million Sikhs and Hindus crossed into India. This migration was accompanied by violence and bloodshed in which about 0.5 million people lost their lives.

There were other problems. One concerned Kashmir, a Muslim majority state whose Hindu ruler (Maharaja) opted to join India upon Independence, although the Kashmiris are predominantly Muslims. This led to the division of Kashmir in 1948. Today both Pakistan and India still claim Kashmir, and the territory has been a central issue behind most of the disputes between the two countries since Independence.

The greatest difficulty facing the new Pakistan was that it consisted of two parts, West Pakistan and East Pakistan, separated by nearly 2000 kilometres of India, with considerable differences in cultural and social patterns. Independent Bangladesh seceded in 1971. Today, Pakistan consists of only the western wing of the original Pakistan.

1.3 Political environment

The Islamic Republic of Pakistan is a federal republic consisting of four provinces (Balochistan, North- West Frontier Province, Punjab and Sindh), one territory (Federally Administered Tribal Areas) and the Islamabad Capital Territory. Additionally, Pakistan also administers its portion of the disputed Jammu and Kashmir region.

Although, with the adoption of the first Constitution in 1956, originally intended as a parliamentary democracy, Pakistan experienced some turbulent times since democracy was challenged by several military coups. Civilian and military administrations were alternating. The latest coup took place in October 1999 and has had an effect on the politics until now.

Until October 1999, Pakistan was governed by the constitution of 1973 as amended in 1985, which provides for a federal parliamentary form of Government with a prime minister as head of the Government and a president as head of the state. On 12 October 1999, the military mounted a bloodless coup. General Pervez Musharraf, Chief of the Army Staff, took control over all parts of Government, suspended the constitution, and assumed the title of Chief Executive. In May 2000, the Supreme Court validated the coup but imposed restrictions to return to an elected Government within three years. On 20 June 2001, General Musharraf declared himself President and Head of State and dissolved the suspended assemblies. His presidency was extended for five years by a referendum.

In accordance with the decision of the Supreme Court, national and provincial elections were held on 10 October 2002 restoring constitutional Government. Under the amended constitution there is a bicameral parliament, comprising a 342-member national assembly (lower house) with 272 members directly elected on a first-past-the-post system and the rest, designated to women and minorities, nominated by the parties according to their overall election results, and a 100-member senate (upper house) chosen mainly either by provincial assemblies or, in tribal areas, by popular election. Each assembly is elected for a five-year term. The President is the Head of State, and the Prime Minister the chief executive. Each province has its own legislative assembly whose members are elected by direct popular vote, a provincial governor appointed by the President, and a chief minister elected by the legislative assembly. There is an independent judicial branch of Government.

In the elections of 2002, no single party won a majority. The major political forces within the National Assembly turned out to be the Pakistan Muslim League Quaid-i-Azam (PML QA) with 136 , followed by Muttahida Majli-i-Amal (MMA) with 67 seats and the Pakistan People’s Party (PPP) with 58 seats. Mr Zafarullah Jamali (PML QA) became Prime Minister of Pakistan while General Musharraf remained . The PML and the PPP are the most popular parties, which have widely influenced recent political history. Both parties are committed to a liberalising, market-oriented economic policy.

Today, the biggest domestic political issue stems from a conflict further to the modification of the Constitution towards a Presidential regime as per the Legal Framework Order (LFO), issued by President Musharraf on 21 August 2002, prior to the parliamentary elections. The main issue arising from this LFO comes from the new right given to the President, to dissolve the parliament as well as request the resignation of the Government. This modification in the Constitution was approved by the Supreme Court which it is argued does not have such authority. Amendments to the Constitution are the preserve of the Parliament, based on a two third majority rule.

Page 14 New Business Opportunities in Pakistan The LFO, as well as the circumstances of the latest elections (Presidential referendum and parliamentary elections) have been contested by the opposition, and has provoked international criticism, including by the European Union. Pakistan has not yet been reinstated as a full member of the Commonwealth, based on its democratic record. However, a tentative agreement on how to solve the LFO conflict has been reached by the President with the opposition party, the Muttahida Majli-e- Amal, (MMA), by the end of 2003 (see Box 1).

Box 1: Recent political developments The has now been fully restored. Elections to the Provincial Assemblies and National Assembly were held on October 10, 2002, and elections to the Senate were held on February 24, 2003. A major debate is underway on whether the amendments made to the Constitution by the Legal Framework Order (issued by General Pervez Musharraf on August 21, 2002) are valid. By the end of 2003, the PML-Q (the President party) has negotiated with the opposition MMA party (the Islamic parties) the following agreement, to be approved by the parliament: By end of 2004, President Musharraf shall renounce his functions as Head of the Armed Forces; Revocation of the Government by the President shall only be effective after consultation with the Prime Minister and agreement from the Supreme Court; Finally, the President should be confirmed in his post by a 51% vote from Parliament, within thirty days from the Constitution revision.

1.4 Foreign affairs

Pakistan’s foreign policy is influenced by its Muslim state status in South Asia as well as its relationship with India, which has led to four armed conflicts (see Box 2). In an unstable regional environment, one of the main objectives of the Pakistani foreign policy is the preservation of its security and territorial integrity.

Since its foundation, Pakistan has maintained good relationship with the United States and the West as well as with China. The country's standing in the international community has been strengthened by the position taken after 9/11 and its committment against international terrorism, as well as the continued efforts of the present Government to support a democratic process. In spite of certain resistance resulting from the aftermath of the military coup in 1999, its relationship with the EU has been restored and the EU is committed to assist the country in its efforts to promote economic growth and social reforms.

Pakistan is a member state in regional organisations including ECO and SAARC. The Economic Cooperation Organisation (ECO) is a regional organisation, established in 1985 by Iran, Turkey and Pakistan, for the purpose of sustainable socio-economic development of its member states. In 1992, seven other countries including Afghanistan and the southern former Soviet Union states joined the organisation.

The South Asian Association for Regional Cooperation (SAARC) consisting of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and was founded in 1981 to promote the welfare of the peoples of South Asia and to improve their quality of life.

Box 2: The Kashmir conflict The Kashmir conflict dates back to the partition of British India in 1947 when the Hindu Maharajah of a Muslim majority Kashmir decided to join his state with India under a contract dated 26 October 1947. This led to the conflict and it was agreed that the position would be resolved at a later stage through a referendum which until now has not been organised.

Since then, the cease-fire line which followed the first conflict, in 1948, has divided Kashmir into two parts, one controlled by Pakistan (1/3), the other controlled by India (2/3). Two subsequent wars were fought over Kashmir, one in 1965 and another in 1971, followed by the secession of East Pakistan. On a number of occasions, tension between Pakistan and India over Kashmir mounted; for the last time in 2000.

Peace talks have been initiated towards the end of 2003, with further discussions among senior diplomats to be held in February 2004. It is hoped that progress towards a resolution of the conflict can be achieved in the near future. In the past, although economic relations between the two countries have persisted, the conflict has had a negative impact not only on bilateral relations but also on the regional economy, e.g. by preventing a free trade regime among SAARC countries.

The signing of a South Asian Free Trade Area Agreement (SAFTA) in January 2004, to be operational on 1st January 2006 is contributing to increased regional trade expectations (see 1.11.6.1).

Pakistan is also a member of the Organisation of the Islamic Conference (OIC), which includes all Islamic countries worldwide and combines all resources of the Muslim world to ensure their interests.

Page 15 New Business Opportunities in Pakistan Besides this, Pakistan is a member of the United Nations and has always played an active and constructive role within the UN and its affiliated organisations. Pakistan is also a founding member of GATT (now WTO) and a signatory to all important WTO agreements.

1.5 Human resources and social environment

1.5.1 Social infrastructure

Although health indicators in Pakistan have been improving, the situation is still serious in many regions of the country. Unhygienic living conditions, lack of appropriate outreach of health facilities, scarcity of potable water and malnutrition, particularly among children, contribute to a poor health status. Pakistan has one of the highest child mortality rates in Asia (110 out of 1000 under 5 years) and a low life expectancy (63 years). In 2001-2002, 49% of the households did not have access to a reasonable system of sanitation system. Both public and private spending on health is low with expenditures totalling 0.7% of GNP in 2002. However, poverty alleviation initiatives recently launched by the Government have brought about an increase in Government spending on areas which include health and sanitation.

Apart from this, improvement has also been brought about through increasing health facilities and launching of a number of health programmes. These programmes address various health problems such as Malaria, AIDS, or malnutrition as well as immunisation in order to reduce child mortality.

1.5.2 Social security

As in many developing countries, poverty (affecting one third of the population) is one of the main social problems. Social security schemes, first introduced in the 1960s, have not been very successful, due to lack of financial means. Traditionally, family and kin provide a social security net.

Nevertheless, there are some formal social security schemes provided through the Zakat and Ushr Ordinance. Under this system, the poor receive support. In FY 2002, 1.7 million people benefited from the Zakat Programme. Also various other programmes have been launched to support the Government drive on supporting the poor, through poverty alleviation programmes.

There are various state run programmes providing retirement benefits, such as the Employees Old Age Benefits programme, which is available for workers in private sector establishments with a minimum of 10 employees. However, private sector pension funds are rarely put into practice except by large firms. Generally, participation in retirement benefit schemes is low. Under the EOBI programme, for example, only 1.6 million employees (out of an estimated 10 million eligible) were insured at the end of 2000.

There is also a pension scheme for civil servants who have worked at least 25 years for the Government.

1.5.3 Education

Despite notable improvements, literacy rates are still low. According to the last census in 1998, the literacy rate was 43.9% with marked differences between the urban (63.1%) and the rural (33.6%) population. There is also a remarkable gender difference; only 32% of Pakistani women are able to read and write whereas this ratio amounts to 54.8% for Pakistani men. Presently (2003), the overall literacy rate has increased to 51.6%.

Pakistani general education comprises twelve years, of which ten years are compulsory. Higher education is provided by universities and professional universities. Presently, there are 96 universities and higher education institutions where over 100,000 students are enrolled. The Government established a Higher Education Commission in 2002 to strengthen higher education. The Higher Education Commission aims to increase student enrolment from 2.6% to 5% by 2005, corresponding to doubling the number of students to 200,000. 1% of GDP are planned to be dedicated to higher education (currently 0.39%).

Page 16 New Business Opportunities in Pakistan The Government has taken steps to enhance the educational level by implementation of the Education Sector Reforms (ESR) and the Education for All (EFA) programmes. ESR is a comprehensive programme for increased access and improved quality at all levels of education. The EFA programme refers to the commitment to ensure that by 2015 all children would complete primary education of good quality and that gender disparities would be eliminated.

1.6 Cultural environment

1.6.1 Languages

Today, there are more than twenty different languages spoken in Pakistan. The national language of the country is . Other most common languages include: Punjabi, Sindhi, Balochi and Pushto, which all belong to the Indo-Aryan branch of the Indo-European language family; whereas some less spread languages, especially in the northern regions, go back to the Dravidian language family.

The distribution of different languages roughly corresponds to the provinces, with Punjabi and Saraiki, which is a variant of Punjabi, spoken in Punjab, Sindhi spoken in Sindh, Pushto spoken in NWFP and Balochi spoken in Balochistan.

Urdu, the mother tongue of a minority of 7.6% of the population, is the official national language. It is understood and spoken throughout the country. It is the native language mainly of Muslim immigrants from India (so-called Muhajirs) and has no regional connection in Pakistan. Urdu developed after the Muslim invasion during the Moghul period and is influenced by Persian and Arabic elements.

English plays a major role in Pakistan. Besides Urdu, it is the second official language predominating in administration and business. It is also the lingua franca in higher education although there are tendencies to replace it by Urdu.

1.6.2 Nationalities

The ethnic composition of Pakistan roughly corresponds to the linguistic distribution of the population, at least among the largest groups: 59.1% of Pakistanis identify themselves as Punjabis, 13.8% as Pashtuns, 12.1% as Sindhis, 7.7% as Muhajirs, 4.3% as Baloch, and 3% as members of other ethnic groups. Each group is primarily concentrated in its home province, with most Muhajirs located in urban Sindh.

1.6.3 Religion

As indicated in Pakistan's official name, the Islamic Republic of Pakistan, Islam is the state religion. About 97% of Pakistanis are Muslim forming two distinct major groups: Sunni (77%) and Shi’a (20%). The most visible groups of non-Muslim minorities are Hindus and Christians. Most Hindus are located in Sindh whereas Christians are found all over the country.

The central belief in Islam is that there is only one God, Allah, and that the Prophet Muhammad was his final messenger. The Koran, the holy script of Islam, plays a central role in Muslim social organisation and values. Believers recognise the Koran as the true word of God, and as such it is eternal, absolute, and irrevocable. The fact that Muhammad was the last of the prophets and that no further additions to "the word" are allowed is significant; it closes the door to new revelations.

Islam was the basis to form Pakistan as the partition of British India created two states separated by religion: a Muslim one (Pakistan) and a Hindu one (India). Hence, Islam played a crucial and unifying role in the foundation of modern Pakistan. However, Islam was not initially intended to serve as a model for Government. Islamisation of political life in Pakistan started in the 1970s, with the coming into existence of opposition Islamist parties.

In this context, the Sharia has had some influence on the legal environment in Pakistan, affecting mostly Civil law (primarily marriage and inheritance related matters). As far as commercial law is concerned, the Modarabas (Islamic way of banking) is a result of Islamic thought. The Sharia has not affected the criminal law so far.

Page 17 New Business Opportunities in Pakistan 1.6.4 Values

Islam widely influences social life in Pakistan. Religion, state and society are conjoined. For Muslims, religion is not a private affair but a law affecting all parts of life.

One basic principle of Muslim society is the brotherhood of man. The Muslim community conveys a sense of solidarity and security. To become member of the community, a Muslim has to obey certain duties. These “five pillars” contain the affirmation of faith, the obligation to pray at five fixed times a day, the obligation to provide alms for the poor, the obligation to fast during the month of Ramadan and the pilgrimage to Mecca once in a lifetime. In addition to these five pillars there are some other obligations, for example the prohibition of alcohol, pork and gambling.

The family is the centre of social organisation in Pakistan providing its members with both identity and protection. Rarely does one individual live separated from relatives. Children tend to live with their parents until marriage and sons often stay with their parents after marriage forming a joint family.

1.7 Physical infrastructure

Pakistan's economic infrastructure is a drawback for business productivity. The roads are not satisfactory in most parts of the country, including exporting industrial areas. However, expansive plans for improvements have been announced, and port and airport facilities are efficient while being expensive.

Electricity supply, while having excess capacity, is not reliable and necessitates investment in back up generation at the plant level. Telecommunication services are reliable and efficient. http://www.eac.gov.pk/webinfrastruct/WEBS/main/infrainvidx.htm

1.7.1 Road network

Pakistan's road network covers a total of 252,000 kilometres utilised by 4.4 million registered vehicles. It has grown rapidly (in 1990-91 there were only 170,000 kilometres) but still requires further improvement both in quality and quantity. The road network includes 8,845 kilometres of highways and one motorway of 367 kilometres, in addition to highway, connecting Lahore and Islamabad.

Being the most important way of transportation in Pakistan, the road network is being improved at present; the Government has dedicated a considerable budget to road building projects. One of these projects deals with the construction of a system of motorways connecting the south (Karachi) with the north (Peshawar) of the country. A total of over 2,000 kilometres are planned. The overall aim of the Government is to raise the national average road density from currently 0.23 to 0.3 kilometres per square mile. Involvement of the private sector in the road network expansion is being promoted through the implementation of Build Operate and Transfer (BOT) schemes for new highway construction.

1.7.2 Railway network

The railway network connects the country from north to south and from east to west. At the end of March 2003, it comprised 7,791 route kilometres, 577 locomotives, 1,901 passenger coaches and 23,939 freight wagons.

The railways system in Pakistan has recently experienced some structural as well as management changes. In the past, suffered from the traditional problems of public sector organisations. However, reforms initiated in 2002 have brought about various favourable changes including modernisation and better performance. Tracks were rebuilt, coaches and wagons refurbished and the quality of services improved. Traffic in terms of passengers and freight is now increasing. Nevertheless, the railways still play only a minor role compared to roads (see Table 1).

Page 18 New Business Opportunities in Pakistan Table 1: Pakistan Traffic volume, road vs. rail, 2002-03 Road Railways Passenger traffic (in million passenger km) 215,892 20,094 Freight traffic (in million ton km) 109,124 4,529 Source: Economic Survey

1.7.3 Ports

Pakistan has two major seaports, Karachi Port and Bin Qasim Port, handling over 40 million tonnes of in 2001-02. Another port is under construction at Gwadar.

Besides the seaports there are several dry ports throughout the country serving the needs of the local industries. All ports are connected to the road and railway networks. To meet future requirements the most important port, Karachi Port, is being modernised.

1.7.4 Airport and international links

Pakistan's is linked to the world through five international airports located in Karachi, Islamabad, Lahore, Quetta and Peshawar, with Lahore and Karachi International Airports being the most modern in the country. A new airport at Islamabad is under consideration with expected completion by end 2005.

Air transport, which has been deregulated by the Government, has grown significantly in recent years. 5.2 million passengers are carried yearly. The Government encourages the construction of new airports with the contribution of the private sector. Several private airlines took up services alongside the national flag carrier.

1.7.5 Energy

Pakistan's installed electricity capacity adds up to 18 Gw generating over 70,000 Gwh of power. Thermal plants using oil, natural gas and coal account for 70% of power production, with hydroelectricity making up 27% and nuclear power plants 3%. Although transmission losses due to bad quality and thefts amount to 25%, Pakistan has now some excess generation capacity, but significant power demand growth is expected in the long run since only one half of the population is connected to the national grid and much of the rural areas are yet to receive electric power.

The Government addresses the future challenges with an emphasis on water power, cheaper than thermal power, and through the private sector participation in power production.

Although there is no overall shortage in the availability of electricity for business, power cuts do occur mostly due to the problems in the distribution network. As a result, at present some 40% of firms have installed their own backup power generators; although this rate is low when compared to other countries in the region, such as Bangladesh and India, it is high by international comparison (see Figure 1).

Figure 1: Reliance on power generators

80

60

40

generators) 20 (% of firms using firms (% of

0 Bangladesh India Pakistan China

Source: World Bank, Investment Climate Surveys Page 19 New Business Opportunities in Pakistan 1.7.6 Telecommunications

The telecommunication sector is growing rapidly though it is still underdeveloped even in comparison to other South Asian economies. By end of March 2003, there were 4.6 million fixed telephone lines (June 2002: 3.6 million). The Government announced an aggressive deregulation programme which has come into operation by end of 2003 with a defined roll out plan to deregulate and privatise the telecommunication sector.

It should be noted, however, that despite the limited scope of the telephone network, businesses are quickly connected; the average waiting time for installation of a fixed line is approx. one week. Mobile telephone networks are well developed at least in the major business centres of the country.

Internet services are also growing fast. The number of Internet users in Pakistan increased from 100,000 in 1998 to 3 million in 2002 although the dispersion of personal computers with 4 for every 1000 Pakistani has been stable at this low level throughout the period.

Page 20 New Business Opportunities in Pakistan

ECONOMIC OUTLOOK

The macro economic situation of Pakistan has made a dramatic turnaround since 1999 when the country was on the verge of bankruptcy. Positive developments since then include improvements in the political process and the security situation, foreign debt renegotiations, the quasi disappearance of foreign exchange regulations, a significant increase in exports to more than USD 11 billion, a positive current account balance (overseas Pakistanis’ remittances), the opening of most sectors to foreign investment, increased Foreign Direct Investment of than USD 800 million, and an increase in foreign exchange reserves to more than USD 11 billion.

As a consequence, the financial markets are very liquid, providing cheap financing to entrepreneurs (ST interest rates for Government bonds of around 2% p.a.) and fuelling a consumption boom by the emerging middle class. Meanwhile, inflation remains subdued, further to the proper management of the incoming funds by the State Bank of Pakistan.

1.8 Economic structure

When Pakistan became independent in 1947 it was largely a farming state with very little industry; most of the industry was located in what was to be India. Thereafter, its economic managers have constantly endeavoured to promote the industrial sector. At present, there is a substantial industrial base producing goods for private as well as for industrial consumption.

However, agriculture (including forestry and fishing) has remained the single most important sector in the Pakistani economy accounting for nearly a quarter of total GDP and involving almost one half of the labour force. The industrial sectors contribution to total GDP represents another quarter and services about 50%. The most important sub-sectors besides agriculture are manufacturing (18.4%), wholesale and retail trade (15.5%) and transport and communication (9.9% - see Figure 2).

Figure 2: Pakistan Structure of GDP by sectors, 2002-2003 Construction (3.3) Electricity & Gas Distn. (3.4) Others (3.0)

Ownership of Dwellings (6.2) Agriculture (23.6)

Publin Admin. (6.6)

Transport & Storage (9.9) Manufacturing (18.4)

Services (10.1)

Wholesale & retail (15.5)

Source: Federal Bureau of Statistics

Pakistan’s labour force is still concentrated in agriculture (48.4%); only 17.4% are employed by the industrial sector with 11.5% in the manufacturing industry. This figure shows that albeit the success of the industrial sector, it has not been able to produce a comparable amount of jobs.

1.8.1 Agriculture

The main characteristic of the Pakistan agricultural sector is the persistence of huge domains owned by absentee landlords. No significant land reform has been implemented.

Page 21 New Business Opportunities in Pakistan Agriculture is the dominant sector in the Pakistan economy. Approximately 22 million hectares out of a total area of 79.6 million hectares are cultivated. The most important major crops are wheat, rice, cotton, and sugarcane, which account for 37% of the value added in agriculture. Among the minor crops, oilseed is the most important product, followed by the fruits and vegetables.

During the 1990’s the average annual growth rate was 4.5% but fluctuated widely from -5.3% (1993- 94) to 11.7% (1995-96). The performance of agriculture in the recent past has remained subdued owing to the drought, which engulfed the entire country for three consecutive years. Consequently, agriculture grew by 4.2% in 2002-03 as against an almost flat growth for the previous year. The improved growth performance of agriculture is attributable to the impressive recovery by the major crops.

The livestock sub-sector, which accounts for 39% of overall value added in agriculture (see Figure 3), witnessed a modest growth of 2.9% in the recent past. The production of milk, egg and mutton are estimated to have gone up by 2.9%, 2.3%, and 2.9% respectively. The fisheries sector, on the other hand, witnessed a growth of 16.6% against a decline of 12% the previous year. Components of fisheries such as marine fisheries and inland fishing contributed to an overall increase in the value added of the fisheries sub-sector.

Figure 3: Pakistan Composition of agriculture, 2002-03, in% of value added

Forestry; 1,3% Fishing; 3,4%

Major crops; 40,5% Livestock; 38,8%

Minor crops; 16,0%

Source: Economic Survey and PC&A calculations

The main issue affecting the agricultural sector concerns the supply of irrigation water, dependent on a vast network of irrigation canals which might not be able to accommodate increased demand in the future. The development of new water storage and the set up of drip irrigation are developments which the Government is tackling, to avoid bottle necks in the sector.

The second most important feature of the sector is the lack of infrastructure to achieve proper conservation of harvests, while the marketing/distribution of the products, as well as the financing of the small farms are also significant issues to be addressed.

1.8.2 Manufacturing

Within the manufacturing sector, the textile industry is the most important, accounting for about 46% of the manufacturing sector in terms of GNP.

Manufacturing is the second most important individual sector of the Pakistan’s economy. This sector performed reasonably well in recent years. Growth rates amounted to 4.0% in 2001-02 and 7.7% in 2002-03. Large scale manufacturing, which accounts for 71.2% of overall manufacturing, performed best, growing by 8.7%. This can be attributed to improving macroeconomic environment, sharp recovery in exports and the availability of consumer financing at reasonable rates.

Within the manufacturing sector the textile industry is the most important. In spite of the Government’s efforts to diversify the industrial base and exports, textile remains the backbone of the industrial activity in the country. Its share in the economy, in terms of GDP, exports, employment, foreign exchange

Page 22 New Business Opportunities in Pakistan earnings, investment, and contribution to the value added in industry makes it the single largest determinant of growth in the manufacturing sector.

The demand for textiles in the world is around USD 18 trillion. Pakistan has emerged as one of the major cotton textile product suppliers in the world market and its share in world yarn trade is about 30%. The share of textiles in Pakistan’s export earnings is 68% (USD 7 billion). Value added in the sector accounts for 9% of GDP; the sector's share in employment is 38% of the industrial workers. For the last three years, the Pakistan’s textile sector has been preparing to face the challenges of the post- quota regime in 2005.

The Textile Vision 2005 report, besides providing a road map to enhance exports, also sets benchmark investment requirements for the creation of new capacities and upgrading of the existing production base. Textile Vision 2005 maintains that during the initial phase, heavy investment would be needed to create additional capacity in the apparel industry. Meanwhile, the textile sector received USD 1.5 billion worth of investment during the last three years.

Textile production comprises cotton ginning, cotton yarn, cotton fabric, fabric processing (grey-dyed- printed), home textiles, towels, hosiery and knitwear, and readymade garments. The textile industry consists of large-scale organised sector and unorganised cottage/small and medium units. The performance of all these sectors in terms of production and exports has been exemplary during the last three years.

The automotive industry is one of the emerging industries in Pakistan. There are 18 automobile/motorcycle manufacturing units in assembling operations which are supported by 850 units manufacturing auto parts. The auto industry and downstream vendor industry employ more than 100,000 people. The performance of the automobile industry has been very good during the recent past. The impressive recovery touched almost every segment of the auto industry. The auto industry is the forerunner of growth in the large-scale industry.

The other industrial sectors worth noting are the oil exploration and production sector, facing a buoyant future, further to incoming privatisation. The power generation sector still requires investment despite the large recent increases in generation capacity.

Further to the privatisation of the cement plants, and the recent boom in the construction industry, cement manufacturing is performing very well. Similarly, the privatised fertiliser plants are fully operational.

The pharmaceutical sector with a large presence of the main international corporations is a major player now in the country.

The leather goods industry and, to a limited extent, the metal surgical instruments sector, mostly based in Sialkot, are impressive exporters.

On the negative side, the chemical industry as well as the steel production present deficiencies in the range of products manufactured, their quality as well as their price competitiveness. Large investments in these sectors will have to be considered to ensure the necessary base for downstream industries.

1.8.3 Services

Wholesale and retail trade has the highest share within the services sector (30.6% - see Figure 4)). Transport & communications and services together account for about 40% with equal shares of 20%. The public administration, defence and ownership of dwelling account for one-fourth of the total services sector and their share is 13% and 12% respectively.

The services sector has been growing at a faster pace than the other sectors of the economy for quite some time. The trend remained unchanged during 2002-03 as the services sector grew by 5.3% against 4.1% in 2001-02. Within the sector, the wholesale & retail, transport, storage and communication sub-sectors contributed positively to the overall development of the sector.

However, the finance and insurance sub-sector remained depressed as far as value addition is concerned. The sub-sector registered a decline of 1.4% in value added during 2002-03 against the target of 5.1% and the previous year’s achievement of 8.1%.

Page 23 New Business Opportunities in Pakistan Public administration and defence also contributed positively to the overall growth of the sector. Similarly, two minor sub-sectors, ownership of dwelling and social services, have maintained a positive contribution to the growth of the sector.

Figure 4: Pakistan Composition of Services sector, 2002-03, in% of value added

Finance & Insurance (4.7)

Ownership of Dwellings (12.2) Wholesale & Retail (30.6)

Public Admin. & Defence (13.0)

Transport & Communication Services (19.9) (19.5)

Source: Pakistan Federal Bureau of Statistics

1.9 Economic reforms and policies

Since 1999, the Government has initiated a number of reforms to address governance problems and long-standing structural challenges. The Government has been implementing reforms across a broad front, despite some problems at implementation stage due to capacity constraints, absence of technical know-how at critical levels and strong resistance in some areas.

Pakistan is assisted in many of its efforts by international financial institutions such as the European Union, the International Monetary Fund, the World Bank and the Asian Development Bank.

In the 1990s Pakistan suffered a number of political, economic, and financial shocks. Bad governance contributed to large non-performing loan portfolios at the public sector banks, poor delivery of social services, and major inefficiencies and financial losses at public enterprises. Despite efforts at tax reform, the tax-to-GDP ratio remained stuck at about 13% and the fiscal deficit remained above 6% causing a continuous increase in the already large public debt. Failure in governance and financing also adversely affected the strategy to narrow the social gap by improving basic education, health, and reduce gender imbalances through the Social Action Programme (SAP), which did not yield the expected results.

By the end of the 1990s, Pakistan faced a tough future. Low growth rates and large macroeconomic imbalances led to an unsustainable debt burden with debt indicators worst than those of many Highly Indebted Poor Countries (HIPC). A weakening economic growth along with weak progress on human development caused poverty to stagnate at around 33% throughout the 1990s.

The Government that came to power in October 1999 has initiated a number of reforms to address governance problems and long-standing structural challenges. The new Government showed awareness of the country’s difficult circumstances. Its response was the quick articulation of ambitious reforms aimed at modernising Pakistan, and its institutions. Many aspects of the reform agenda built on efforts of previous administrations, yet a salient feature was the Government’s attention to governance. Crosscutting measures to improve governance were made the centre of the reform programme so that Pakistan could gradually rebuild its severely eroded credibility, re-establish confidence in public institutions, and improve the investment climate to revive growth.

Progress in the implementation of reforms is unprecedented – both for the scope and the depth of reforms. In the short period of time leading to the fiscal year 2003-03 budget, the Government made significant progress in turning around the poor governance environment that was at the core of Pakistan’s deteriorating performance. It implemented measures to reform key institutions, reduce the

Page 24 New Business Opportunities in Pakistan fiscal deficit, encourage export-oriented growth, improve the climate for domestic and foreign investment, strengthen the banking system, improve public financial management and accountability, enhance transparency, and external oversight of Government actions, strengthen social safety nets, and improve the delivery of key public services in health, education, and family planning.

These reforms were actively supported by Stand-By Arrangements approved by the IMF, new short- term liquidity relief by the Paris Club, Structural Adjustment Credit approved by IDA, and new programme lending by the Asian Development Bank (ADB).

1.9.1 Budget and fiscal reform

The main characteristics of the Pakistan budget over the years have been: - The low%age of tax collection compared to GNP, presently at around 17.6%; - The persistence of a significant budget deficit (while reduced to 4.6% in 2002/03) with increased indebtedness as a consequence; - The cost of servicing the debt (despite much reduced rate of interest lately); - The cost of the armed forces; - the limited amount of funds available to invest in infrastructure development.

Like many other developing countries, fiscal profligacy has been the main underlying cause of macroeconomic instability in Pakistan during the 1990s, which in turn impeded the medium-to-long term economic growth prospects. Persistence of large fiscal deficits (on average 7% of GDP) resulted in sharp accumulation of public debt as it increased from 91.3% to 103% of GDP during the 1990s. In 1990-91, almost 38% of the total revenue was consumed to fund debt servicing and in 1999-2000 debt servicing increased to 64% of total revenues.

Furthermore, the total expenditure to GDP ratio exhibited a declining trend in the 1990s. This decline has occurred primarily at the cost of development expenditure. The development expenditure decreased from 6.5% of GDP in 1990-91 to just 3% in 1999-2000.

Various attempts were made in the past to achieve fiscal consolidation. Despite imposition of new taxes, additional tax measures, and curtailment of non-essential expenditures, these efforts could not achieve the desired goals. One cause of this was Pakistan’s tax structure which suffered suffered from several weaknesses, as it was complex, inelastic and inefficient.

Realising the weaknesses of Pakistan’s tax structure, a concerted effort was launched in 2000. The Government launched a series of wide-ranging tax and tariff reforms on the one hand and fiscal transparency on the other, with a view to reduce the tax rates, to broaden the tax bases to hitherto untaxed or under taxed sectors. The emphasis was on shifting the incidence of taxes from international trade and investment to consumption and income. In the course of reforms, the Government has abolished the wealth tax, the number of taxes at the federal and provincial level has been reduced and tariffs have been brought down to a maximum of 25% (except on automobile exports).

After three and a half years of extensive efforts, fiscal imbalances have been narrowed. The average fiscal deficit of almost 7.0% of GDP in the 1990s has been reduced to an average of 5.0% during the last three years (2000-03). The notable achievement of the fiscal year 2002/2003 has been a further reduction of the fiscal deficit to 4.6% of GDP. Revenue deficit (the difference between total revenue and total current expenditure), a measure of Government dis-saving, has been narrowed from an average of 3.0% to 1.0% of GDP in 2002-03. Primary balance (total revenue minus total non-interest expenditure) remained in surplus to the extent of 1.5% of GDP in 2002-03.

Reduction in fiscal deficit is the result of improvements in revenue and curtailment of expenditures. Total revenue as%age of GDP increased from 17.2% to 17.6% and total expenditure declined from 22.8% to 22.2% in fiscal year 2003. Current expenditure in fact declined sharply from 19.3% to 18.1%. The overall performance of tax collection remained encouraging as the Central Board of Revenue (CBR) collected 15% more revenues than the previous year.

The planned budget for 2003-04 is presented in Table 2.

Page 25 New Business Opportunities in Pakistan Table 2: Federal Budget 2003-2004

Source: Ministry of Finance of Pakistan

1.9.2 Liberalisation and privatisation

The Government is also striving hard to bring substantial deregulation and liberalisation so as to take the economy as close as possible to a fully market-oriented system. Accordingly there has been substantial reduction in direct intervention and steps are being taken to open up the economy to international competition.

Along with liberalisation, Pakistan has set up a privatisation programme in order to strengthen the private sector. Since the 1970s, Pakistan has relied on the public sector to provide nearly all infrastructure and financial services and to run industrial units. The Government nationalised many businesses and thus owned and operated services in banking, energy, telecommunications, transport and infrastructure. As in many developing countries these state-owned enterprises faced losses due to mismanagement, overstaffing, inappropriate investment, poor quality services and failure to tap the full potential.

Since 1991, privatisation has been promoted in order to relieve public finances, attract new investment and enhance the quality and quantity of goods and services. The Government has established a Privatisation Commission and entrusted it with selling federal Government property. By the end of May 2003, the Privatisation Commission completed 132 transactions amounting to 99.7 billion rupees. A

Page 26 New Business Opportunities in Pakistan recent landmark in the privatisation programme was the divestiture of the Government's minority interest in seven oil and gas concessions and the sale of Pak Saudi Fertilisers which was the largest industrial transaction in the 's privatisation programme. More details on privatisation are provided in section 1.25.

1.9.3 Financial sector reform

1.9.3.1 The banking sector Under the guidance of the World Bank and the IMF, the banking sector in Pakistan shall be nearly fully privatised by the end of 2004. The financial markets have increased in size and depth to levels never seen before, offering ample liquidity at very competitive rates.

Until recently, the Nationalised Commercial Banks (NCBs) accounted for more than 50% of the banking system’s assets and deposits. Long term financing was channelled through Government owned development finance institutions (DFIs). Due to politicisation and reliance on direct and subsidised credit, these institutions accumulated a large portfolio of non-performing loans (NPLs) which adversely affected their profitability and performance as financial intermediaries. Due to a weak legal and regulatory regime, limited competition and high explicit and implicit taxes, intermediation resulted in exceptionally high interest rate spreads.

The present Government has attached high priority to financial sector reform and restructuring. These priorities implied the privatisation of the NCBs and the closing of the DFIs. Meanwhile, considerable progress has been made in strengthening prudential regulations, supervision of the banks as well as improving corporate governance.

Changes in laws were made to allow both independent boards and management of public sector banks and DFIs. Corporate governance has been strengthened with amendments to the Banking Companies Ordinance and Banks Act, to allow professionals from the private sector into the board of directors as well as appointment of private sector professionals as bank managers. In addition, changes in the law protected the banks from interference.

The SBP Act was amended to provide greater autonomy to the State Bank for formulating and regulating the monetary and credit system. In addition, amendments in the Banking Ordinance allowed consolidation of SBP’s role as the sole regulator of the banking system. The State Bank has also undergone extensive reforms particularly for strengthening its human resource base and streamlining processes through investment in information technology.

The very core of Pakistan’s strategy for improving the performance of the banking sector is to privatise the nationalised banks and divest minority in the two partially privatised banks. The privatisation process started in 1991 with privatisation of two of the original five NCBs while the banking sector was steadily opened to domestic and foreign competition. In September 2002, the was sold to a foreign group, while Habib Bank is close to the point of sale.

A large portfolio of non-performing loans, serious shortage of new funding, low institutional efficiency and gross overstaffing led to the restructuring of the DFIs in 2000. Bankers Equity Limited (BEL) was liquidated, National Development Finance Corporation (NDFC) was amalgamated with National Bank of Pakistan (NBP), and The Small Business Finance Corporation and Regional Development Finance Corporations merged into a new SME Bank.

The Agriculture Development bank (ADBP) and the House Building Finance Corporation (HBFC) were subjected to continuing restructuring to make them more effective.

A gradual process of strengthening the Islamic Banking system in parallel with the conventional banking is underway. Various banks have introduced Islamic banking operations with Mezan Bank and Muslim Commercial Bank leading the way and various other banks applying for licenses to undertake Islamic banking.

1.9.3.2 The capital market Pakistan’s capital market comprises its stock market and the recently emerging commodities market. The stock market made up of the 3 stock exchanges: the Karachi Stock Exchange (KSE), the (LSE) and the recently established Islamabad Stock Exchange (ISE) with KSE in the

Page 27 New Business Opportunities in Pakistan lead. The Government’s capital market reform programme over the last three and a half years has significantly strengthened the capital markets and Pakistan is today largely compliant with the International Organisation of Securities Commission’s (IOSCO) 30 principles of securities regulation. Although equity issues have not picked up, there has been a significant increase in debt capital issues, the aggregate amount of new capital listed in the last two years being as much as Rs 30 billions.

During the fiscal year of 2003, Pakistan’s stock markets, recognising the relative macro economic and political stability of the country, witnessed positive buoyancy. The KSE-100 index, recording phenomenal growth, has been acclaimed as the best performing market in the world during the calendar year 2002 and onwards, recording for the fiscal year 2003 a share index increase of more than 70% in USD terms. A comparison of the regional market index for the year to June 2003 is given below.

Figure 5: Regional markets index

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 % Change in US $ 0 -5 -10 -15 -20 -25 Pakistan Srilanka Malaysia Indonesia Thailand India Philippine China Kong Hong Korea Taiwan Japan

The Central Depository Company of Pakistan (CDC) launched five years ago provides an efficient settlement method through a state-of-the-art settlement system. It is currently carrying 7,000 investor accounts, having more than 1.2 billion securities. This is one of the major achievements of the capital market development programme and has tremendously helped in promoting efficiency and transparency in the capital market. The National Clearing and Settlement System (NCSS) was launched on 24 December 2001, and the number of security trades at NCSS is being gradually increased. The CDC also has a comprehensive arrangement with NCSS. The CDC continues to diversify its operations by adding more features and functionalities, which are synergetic to its core activity such as handling its first electronic de-merger of ICI Pakistan into two entities. The implementation of T+3 settlement system has resulted in an increased settlement volume, despite a 20% reduction in transaction fees, effective from November 2001.

The capital market reform includes measures taken by the Securities & Exchange Commission of Pakistan (SECP) to strengthen the regulatory mechanisms, and to introduce an effective code of corporate governance, curtailing the “Undisclosed Trading System” where the identity of the buyers and sellers are not disclosed. Various regulations to strengthen the capital markets were brought in such as a new “take over law” promulgated on November 1, 2002, regulation on Futures Trading in provisionally Listed Companies and approval of the concept of an Over-the-Counter (OTC) market.

The Commission has approved the establishment of the National Commodities Exchange Limited (NCEL), for trading in future contract in commodities. The NCEL is the first de-mutualised exchange and will be sponsored by the three stock exchanges of Pakistan.

Page 28 New Business Opportunities in Pakistan 1.10 Short and medium-term economic performance

1.10.1 Economic growth trends

During the 1980s, Pakistan's economy increased by an average annual rate of 6.1%. Growth slowed down in the 1990s to 4.9% in the first half and 4% in the second half of the decade. In the period 2001 to 2005 economic growth in Pakistan was expected to be lower than in other countries in the region. Nevertheless, the growth rate is expected to improve continuously from 2.5% in 2001 to 5.5% in 2005, and to catch up with the average of Asian countries by 2005.

The Pakistani economy had to withstand several external problems in FY2001 and 2002, namely the shocks generated by the events of 11 September 2001 (see Box 3), tension on the border with India, slow growth in the global economy, and a severe drought affecting the agricultural sector. However, due to Pakistan's recent economic reforms and support from the major creditors, macroeconomic fundamentals have been able to recover significantly.

Stronger than anticipated pick up in growth is one of the important developments. Economic growth has been broad-based as all the three major components, namely, agriculture, manufacturing, and services staged a robust recovery. The GDP grew by 5.1% against the target of 4.5% in fiscal year 2003 and previous year's achievement of 3.4%.

While growth slowed in many countries as a result of rising uncertainties in 2002-03, Pakistan posted a relatively stronger growth, exceeding the average growth of developing countries (4.6%). When compared with the growth performance of Hong Kong, Singapore, Indonesia, Malaysia, Philippines, India, Bangladesh annd other countries, Pakistan's growth performance stands out clearly (Figure 6). Only very few countries - China (8.0%), Korea (6.1%), Thailand (5.2%) and Iran (6.0%) – have outperformed Pakistan.

Figure 6: Comparison of average growth rates of various countries with Pakistan 2002-2003 6

5

4

3

2

Average Growth rates (%) rates Growth Average 1

0

g re ia ia sh a o es dia e tan ays n d USA is tries ap l I la n g u ing ndon ri Lank Canada Pak o S I Ma S Hong Kon Pholippines Ban South Africa ing C Japan Germany

e. Develop Av

Source: Pakistan Federal Bureau of Statistics

The overall outlook for the years to come is positive. All indicators point to further growth of the economy and the targets are going to be outperformed in all probability. However, the Government has to continue the course of reforms it has pursued in the last years despite an improving fiscal and external balance situation.

Page 29 New Business Opportunities in Pakistan Box 3: The impact of 11 September 2001 on the Pakistani economy The events of 11 September 2001 adversely affected the Pakistani economy. In the aftermath of the terrorist attack, there were cancellations of export orders and obtaining new orders had become more difficult. Therefore, export earnings declined by 0.7% to approx. USD 9 billion in 2002. Additionally, exports became more expensive since international transport and shipping companies had to cater for increased risks resulting in a jump of freight costs and in a decline of cargo capacity. Economic growth was as well affected by a generally more reserved investment environment. 11 September 2001 had also negative implications on Pakistan's fiscal deficit as revenues were declining due to the drop in exports while expenditures, particularly on defence, were increasing. The fiscal deficit finally amounted to 5.2% of GDP; compared to projected 4.9%. Though there were immediate negative effects on the economy and external as well as fiscal balances, Pakistan could at the same time benefit from the new political environment, as it has become a front-line state in the war against terrorism. The lifting of nuclear-related sanctions, increased likelihood of economic assistance, debt rescheduling and better access to US and European markets contributed to a mid-term positive side-effect on the overall economy.

The growth rates of the individual sectors differ substantially (see Figure 7). Agriculture, the backbone of Pakistan's economy, experienced difficult times in FY2001 and 2002 due to a severe drought and successive dramatic water shortages. As a consequence, agricultural output dropped by 2.7% in 2001 and almost stabilised in 2002 owing entirely to the good performance of the livestock sub-sector, which increased by 3.7%. In FY 2003, the water availability improved as water conditions turned favourable. So did agriculture by managing to rise by 4.2%.

The manufacturing sector has grown by 7.7% in the last fiscal year after an increase of 5% the year before. The sector surpassed targets by far, enabled by improvements in the macroeconomic environment, a sharp recovery in exports and the availability of consumer credits at reasonable rates.

Services have been growing steadily even at a faster pace than the commodity producing sector. For FY 2003 the growth rate amounted to 5.3%.

Figure 7: Pakistan Growth rates of main economic sectors, 1998–2003, in%

10.0

8.0

6.0

4.0

2.0

0.0

-2.0 1998-99 1999-00 2000-01 2001-02 2002-03 -4.0

Agriculture Manufacturing Services Sector

Source: Federal Bureau of Statistics

1.10.2 Inflation

The inflation rate in Pakistan is presently low. In the first half of the 1990s Pakistan saw inflation rates fluctuating around 10%, measured by a consumer price index. Inflation combined with a large fiscal deficit was the major source of macroeconomic imbalances in this period. Causes for the inflation were attributed to an easy-going fiscal management resulting in an excessive money supply, imported inflation and inflationary expectations, among others.

Since monetary and fiscal reforms have been put into practice, through tight monetary policy and prudent fiscal management, inflationary pressures have diminished (see Figure 8). Since 1997 inflation has dropped significantly to 3% at present.

Page 30 New Business Opportunities in Pakistan Figure 8: Pakistan Annual rate of inflation, 1990-2003, in%

14

12

10

8

6

4

2

0

93 94 96 98 00 01 1-92 2- 3- 4-95 5- 6-97 7- 8-99 9- 0- 1-02 2-03 99 99 99 99 99 99 99 99 99 00 00 00 1990-911 1 1 1 1 1 1 1 1 2 2 2

Source: Federal Bureau of Statistics

1.10.3 Employment

Pakistan's labour force is made up of an estimated 42.75 million persons, corresponding to a labour participation rate of approximately 29%. The labour force is split between rural and urban areas at 70% and 30% respectively. Female participation in the labour force is very low amounting to 9.3% while the male participation rate is 47.6%. However, due consideration should be given to the female participation in the labour force in the agricultural sector.

Nearly half of Pakistan's labour force is employed in the agricultural sector (see Figure 9). 19 million persons are presently working in agriculture related activities. From 1998 to 2003 the employment share of the agriculture sector has increased from 47.2% to 48.4% and that of the manufacturing & mining sector from 10.1% to 11.5%. The share of financial & social services sector declined from 16.2% to 15.2%.

Figure 9: Pakistan Employment by sectors, 2003

Finance, Others; 0.7% Insurance, Community & Social Services; 15.0%

Transport; 5.0% Agriculture; 48.4% Wholesale & Retail Trade; 13.5%

Construction; 5.8% Manufacturing & Mining; 11.5% Source: Economic Survey

Unemployment has risen from 5.9% in 1998 to 8.1% in 2002 and 7.8% in June 2003. Furthermore, it has to be kept in mind that the definition of employment, as in many developing countries, is rather loose and hence the true rate of unemployment has to be adjusted upwards.

Nevertheless, the Government has taken steps to reduce unemployment. Many job opportunities are expected to be created by strengthening SMEs and self-employment. In addition to that, vocational

Page 31 New Business Opportunities in Pakistan and technical training facilities have been extended aiming to bring better skilled persons back to employment.

1.11 Foreign trade

2003 has witnessed a further strengthening of the country's external balance of payments despite the fact that the world economic environment remained difficult. Both exports and imports registered impressive growth, the current account posted a large surplus, the workers' remittances surged, while the strong build up in foreign exchange reserves further strengthened the rupee vs. the US dollar. A substantial increase in FDI was recorded. These developments have almost eliminated Pakistan's external account vulnerability. Now the challenge facing the country is to sustain these improvements.

1.11.1 Structure

Pakistan has traditionally been following a mix of both import substitution industrialisation and export promotion strategies. However, encouraging import substitution and protection of the local industry, primarily on the basis of the infant industry argument, had an overwhelming role in the formation of the overall economic policies of Pakistan.

The stress of the recent medium-term trade strategy was thus to revamp and overhaul the tariff regime in Pakistan. The objective was to reduce the inherent anti-export bias in the system and make Pakistani exports more competitive in the international markets. The Government removed most of the trade restrictions and anomalies by lowering and consolidating tariff. In 2002-03 the Government brought down the maximum tariff rate to 25%.

Figure 10: Pakistan import and export evolution (USD million)

14000

12000

10000

8000

6000

4000

2000

0 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 92 93 94 95 96 97 98 99 00 01 02 03

Exports Imports BOT

Source: Pakistan: Federal Bureau of Statistics

As shown in Figure 10 above, import levels have remained higher than exports over the years, however, the two have followed almost similar path. The reason for this similar pattern is that exports are fairly dependent on imports, especially import of textile machinery. The balance of trade as can be seen in the figure above has stagnated, during the past 5-7 years, at around USD 2 billion, coming down gradually to USD 1 billion in 2003.

The Government has shown its resolve to move towards a free trade regime by reducing the number of procedural restrictions for exports, including the removal of all the textile items from the negative list. In the Trade policy 1999-2000 and 2000-2001, 16 procedural restrictions on exports were simplified. Only 30 categories of items are on the negative list, banned due to health, safety/security, environment and international convention reasons.

Furthermore, to help SME exporters meet their collateral requirements in order to have access to export financing from the banks, a Pakistan Export Finance Guarantee Agency (PEFGA) was

Page 32 New Business Opportunities in Pakistan established and formally launched in July 2001. This Agency was designed and developed with the help of international consultants and with close collaboration of the private sector and the Government. With equity participation from 13 banks and ADB, PEFGA is now fully operational; it has started issuing pre-shipment guarantees, and is aggressively marketing its products and services to its SME clientele. During the period January to 31 December 2002, the PEFGA issued 102 financial guarantees valued at USD 3.9 million.

Another important element of the Government’s Medium Term Trade Strategy was the establishment of a Foreign Currency Export Finance Facility, which has complemented the reform of the Export Finance Scheme (EFS). This USD 150 million facility enables exporters to meet their import requirements by borrowing form this facility in US dollars. Under this scheme, market based export finance is available to Small and Medium sized direct and indirect exporters. This scheme runs parallel to the existing EFS as an additional and alternate facility.

Structural reforms in the trade regime and the steps taken by the Government during the past three years have helped Pakistan regain its share in the international market. Despite all the unfavourable circumstances for doing business, Pakistan’s exports have managed to cross the USD 9 billion mark in 2000-01 and 2001-02 and a record breaking USD 11 billion in 2002-03 (see Figure 11).

Figure 11: Pakistan Trend in Exports (1998-99 to 2002-03)

12 11 10 9 8 7 6 5

US $ Billion 4 3 2 1 0 1998-99 1999-00 2000-01 2001-02 2002-03

Source: Pakistan: Federal Bureau of Statistics

The major items that Pakistan has been traditionally exporting are presented in Table 3. The bulk of Pakistani exports consists of cotton and cotton based textile products. Other important exports include rice, carpets, leather and products, sports goods, and surgical items.

Table 3: Pakistan Major exports by Commodity (values in million USD) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Rice 346 416 317 242 454 504 469 562 534 540 526 441 N/A Yarn 1183 1173 1122 1259 1528 1540 1412 1160 945 1072 1074 942 953 Cloth 676 819 863 821 1081 1276 1262 1250 1115 1096 1032.5 1133 1380 Readymade Garments 497 614 618 612 642 649 736 747 651 772 827 882 N/A Made-ups 355 398 477 415 504 601 665 755 866 1018 1073 1270 N/A Towels 129 137 139 129 145 174 194 200 178 196 242 270 N/A Knitwear 334 425 464 509 689 703 689 697 742 887 911 842 N/A Carpets 222 230 174 151 198 209 199 200 203 264 289 233 223 Synthetic 347 418 503 648 575 457 512 618 399 458 545 410 N/A Leather 271 333 399 389 349 333 364 343 334 339 426 239 241 Sports 136 141 131 199 265 248 309 384 256 279 271 295 344 Surgical 83 91 102 93 114 127 126 125 112 120 124 138 N/A Others 2048 1379 1271 2445 1892 1240 1451 531 2056 1208 2139 1660 N/A Total 6904 6814 6803 8137 8707 8320 8628 7779 8569 8422 9202 9124 11160 Source: Pakistan: federal Bureau of Statistics

The USA and the European Union are the two main destinations for Pakistan’s exports (Table 4). More than 50% of Pakistan’s exports go to these two markets. The other important destinations include Hong Kong, Japan, and the Middle East.

Page 33 New Business Opportunities in Pakistan Table 4: Pakistan Direction of Exports (Share% of each country in total exports) 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 USA 12.8 13.9 14.4 16.2 15.7 17.7 20.5 21.8 24.8 24.3 25.4 23.5 Dubai 4.45.96.344.74.655.45.76.78.39 U.K 6.67.17.87.16.57.26.96.66.86.38.17.1 Germany 7.17.88 76.97.56.36.665.46.75.2 Hong Kong 7.36.67.36.69.29.47.17.16.15.55.24.6 Italy 3.22.62.72.92.82.92.72.72.42.53.23 France 3.94.34.13.33.12.92.93.13.32.93.62.6 Netherlands 2.22.63.13.23.13.33.23.12.72.53.32.6 Belgium 1.41.72.32.62.42.62.72.42.41.93.12.2 Japan 8.36.886.76.65.74.23.53.12.12.31.3 Others 21.3 22 20.2 23.6 23.7 22.4 23.9 23 23 24.8 30.8 38.9 Source: Federal Bureau of Statistics

The import trend over the years definitely points towards industrialisation. Growth in imports slowed down to about 5% per year in the 1980s and 1990s (Figure 12). The share of consumer goods decreased from 20% in the 1970s to 14% in the 1990s. On the other hand the share of raw material increased from 40% in the 1970s to 48% in the 1990s. The share of capital goods remained more or less the same across the three decades.

Figure 12: Pakistan Growth in Imports over the Years

35

30

25

20

15 Ave. Annual Ave. GR 10

5

0 1970s 1980s 1990s 2000-03

Source: Pakistan Federal Bureau of Statistics

Petroleum and derivative products constitute the single largest category of imports in Pakistan (see Table 5). Their share in total imports is almost one-fourth. The demand for petroleum products in the country has shown a steady growth since 1982-83.

Import of machinery constitutes the second largest category with a share of more than 16% of total imports of Pakistan. This category of imports also registered a sharp increase since the mid 1980s. Within the machinery group, textile machinery imports rose sharply during the 1980s and early 1990s. In the recent past, since 2000-01, the growth in import of textile machinery has once again increased very rapidly.

The composition of imports has undergone a significant change. The share of capital goods in total imports rose but the share of industrial raw material for capital goods, which was quite low in 1972-73, has since then declined further. This shows the country’s increasing dependence on imported machinery and other capital goods. The share of raw material declined form 56% to 50% between 1973 to 2001-02, while the share of capital goods was erratic but generally remained around 35% during the same period. The proportion of consumer goods in Pakistan’s total imports remained between 14 to 17%.

Page 34 New Business Opportunities in Pakistan Table 5: Pakistan Major Imports by Commodity (values in million USD) 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Iron & Steel 315 327 373 484 464 321 293 305 278 336 402 Medical Product 230 232 264 327 273 249 264 259 239 228 222 Fertiliser 250 267 128 345 387 208 265 198 171 176 240 Paper & Paper Board 138 124 127 156 128 121 113 118 125 137 132 Transport Equipment 1248 834 617 554 560 483 541 564 426 501 685 Edible Oil 584 488 997 856 612 768 824 414 327.6 393 587 Chemicals 1011 996 1195 1514 1310 1340 1303 1540 1740 1456 1825 Tea 207 187 188 170 134 227 223 210 206 157 173 POL & Products 1542 1400 1587 1988 2255 1572 1465 2804 3361 2807 3066 Machinery excl. Transport Equipm. 2417 1885 2371 2555 2742 1915 1683 1683 2068 1541 2257 Others 1961 2835 2549 2856 3030 2914 2458 2215 2668 2380 2871 Total 9902 9573 10394 11805 11894 10118 9432 10309 10729 10340 12220 Source: Pakistan Federal Bureau of Statistics

1.11.2 Foreign trade policy: recent developments

In the recent past, a number of steps were taken to improve export profitability.

Tax refunds: a delay in sales tax and custom duty refunds had become a serious problem for exporters as it created serious liquidity constraints. Special attention was given to resolve this issue. Sales tax and customs duty refund registered a growth of more than 37% during the year 2002-2003 over the previous year (2001-02), confirming efforts by the Government to reduce this burden.

Duty and Tax Remission for export (DTRE) rules were formulated and introduced in 2000-01. Introduction of DTRE rules and speedy refunds of sales tax and custom duties has minimised the need to get export finance that entails financial costs (now at market rates); this in turn has reduced the cost of doing exporting business and thereby made it more profitable and competitive.

Export finance is another area, which has been given special attention during the last three years. Although the subsidy on export refinance was withdrawn as part of a commitment agreed upon with the IMF under the Structural Adjustment Programme, new instruments to facilitate access to export finance were introduced such as the Pakistan Export Finance Guarantee Agency (PEFGA).

Realising the importance of quality control, the Government has encouraged exporters to go for better quality. In the Trade Policy 1999-2000 it was announced that exporters who are ISO 9000 and ISO 14000 series certified are no longer required to obtain Pakistan Standard Marks, as per provisions of the Pakistan Standards and Quality Control Authority Act of 1996, for exports of a number of manufactured goods. The Government of Pakistan hired the services of internationally recognised consultants to help establish a national accreditation infrastructure, focusing the National Accreditation Council (PNAC) and developing ISO 9000 and ISO 14000 schemes. The PNAC is now in place and fully active. Realising that a comprehensive quality policy is needed to address the emerging global requirements of trade, environment, health, and safety of the consumers, the Pakistan National Accreditation Council has initiated work on the formulation of a National Quality Policy. The objective of the policy is to enhance Pakistan’s image as a provider of quality products and services to the international markets.

In the Trade Policy 2001-02 it was announced that provision of unhindered access for exports to world markets would be the primary focus of the Government. To provide greater market access, the Ministry of Commerce compiled a comprehensive list of all kinds of barriers that Pakistani exports faced in various markets. Necessary remedial measures were accordingly initiated and with persistent efforts, Pakistan managed to achieve preferential and greater market access for most of its exports, including its textile products in the European markets, the single largest trading partner of Pakistan.

In addition to the successful negotiations with the EU some progress was also made in getting greater market shares in USA and Turkey. Similarly, talks on bi-lateral Free Trade Agreements (FTA) with countries in the region (Bangladesh and Sri Lanka) were also initiated. Free Trade Agreement with Sri Lanka has already been signed on August 01, 2002.

Page 35 New Business Opportunities in Pakistan 1.11.3 Trade balance

Pakistan’s trade performance over the last two decades (1983-2003) generally compares well with the dynamic East Asian countries. The volume of Pakistan’s export grew from 6% a year during 1973- 1983 to 10.2% during 1984-2002, while East Asian export volumes increased from 8.5% to 11.0% during the same period.

Because of this lower trade performance, Pakistan’s share in world trade has remained small. In addition, declining prices for Pakistan’s key exports have eroded dollar earnings. As a result, Pakistan’s share in global exports since 1972-73 has not exceeded 0.2% of total world trade. Moreover, Pakistan’s exports remained concentrated towards a limited number of markets and diversification of exports in terms of commodities exported remained minimal.

Figure 13: Pakistan Pattern of balance of trade

0

-0.5

-1

-1.5

-2

Trade balance in billion $ billion in balance Trade -2.5

-3

-3.5 1980-81 1990-91 1995-96 1999-00 2000-01 2001-02 2002-03

Source: Federal Bureau of Statistics

During 2000-01 Pakistan’s trade deficit has been recorded at an all time low of 2.58% of GDP. In 2002-03, the trade deficit in Pakistan was USD 1.1 billion.

As shown in Figure 13, Pakistan’s balance of trade deficit has been reducing regularly over the last few years. However, after the events of 11 September 2001, foreign remittances have experienced massive growth, as Pakistanis working abroad started using formal channels to send their remittances back home. For the first time in the history of Pakistan, its current account became positive– about USD 2.2 billion in 2002 and USD 4.3 billion in 2003.

1.11.4 Trade with EU countries

1.11.4.1 General trade pattern The secession of East Pakistan in 1971 created structural changes in Pakistan’s trade as part of the country’s internal trade was ‘externalised’ while Pakistan had to find markets for substantial portion of a number of commodities/products previously sold to East Pakistan. The country was able to diversify its trade relations and find new markets. The most significant development was the emergence of countries in Western Europe and the USA as markets for Pakistani exports. The USA and Europe also became a major source of imports for Pakistan while Japan became an important supplier of capital goods and industrial raw material.

The European Union (see Table 6 and Figure 14) is the single largest trading partner of Pakistan and during fiscal year 2003, the share of Pakistani exports to the EU markets was in excess of 30% of Pakistan’s total exports. The exports to the EU market this year grew by more than 22% over the previous year. Pakistan enjoys a reasonable trade surplus with the EU. This growth in exports to the EU was primarily due to the enhancement of 15% in the textile quota and therefore, an increased market access for Pakistani exports from January 2002.

Page 36 New Business Opportunities in Pakistan Table 6: Pakistan Pattern of trade with EU countries (1998-99 to 2002-03, values in million USD) Country 1998-99 1999-00 2000-01 2001-02 2002-03 Export Import BoT Export Import BoT Export Import BoT Export Import BoT Export Import BoT Austria 19.2 13.6 + 18.2 20.2 - 18.3 13.1 + 27.4 16.9 + 26.1 26.2 = Belgium 200.3 144.9 + 209.2 125.6 + 174.9 182.1 - 178.4 258.4 - 239.8 295.4 - Denmark 45.6 16.3 + 41.7 17.9 + 36.9 21.9 - 35.2 21.2 + 40.1 33.9 + Finland 17.2 13.8 + 16.2 20.2 - 15 14.6 + 17.6 20 - 20.3 33.3 - France 266.2 190.2 + 292.4 232.6 + 265.2 145,9 + 247.7 133.1 + 291.3 162.1 + Germany 550.7 411.4 - 530.3 437.8 + 494.6 382.9 + 452 440.2 + 579.3 562.3 + Greece 46.4 11.6 + 43.6 10.2 + 44.7 7.1 + 50.4 7.9 + 67.2 9.5 + Ireland 12.4 34.2 - 14.4 32.9 - 17.3 19.8 + 19.6 13.8 + 25.7 18 + Italy 221.6 275.5 - 216.5 177.1 + 231.3 179.4 - 256.3 213.7 + 348.8 257.8 + Lux’burg 1.2 0.81 + 1.5 0.6 + 2.1 0.8 + 1.66 1.8 - 0.6 3.3 - Neth’land 260.3 158.2 + 237 158.2 + 232.8 179.2 + 258.6 175 + 286.9 193.9 + Portugal 77.3 5.6 + 80 2.7 + 88 1.3 + 71.1 2.1 + 73 3.7 + Spain 157.1 49.8 + 155.5 49.8 + 162.4 46.8 + 173.8 58.3 + 228.7 56.1 + Sweden 69.1 42.2 - 63.4 51.2 + 61.4 47.7 + 60.8 33.8 + 58.4 39.4 + UK 553.9 433.1 + 599.5 367.9 + 576.4 351.9 + 661.9 356.6 + 788.3 356.2 + Total EU 2490 1801 + 2519 1705 + 2421 1595 + 2513 1753 + 3074 2051 + Source: Pakistan Federal Bureau of Statistics

Figure 14: Pakistan Trade with European Union Countries, USD million

3500 3000 2500 2000 1500 1000 500 0 1998-99 1999-00 2000-01 2001-02 2002-03

Export Import

Source: Pakistan Federal Bureau of Statistics

1.11.4.2 The EU Generalised Scheme of Tariff Preferences (GSP) Trade between Pakistan and the European Union is regulated through a bilateral agreement under which export of certain textile categories to the 15 Member States of the EU is under quota restraints. Pakistan achieved a major breakthrough on 15 October 2001 when a comprehensive package of trade measures aimed at improving access to each other’s markets was agreed upon between Pakistan and the EU. The main concession secured from the EU under this package was an increase in quota levels for import of Pakistani textile and clothing products by 15% which by 2004 will grow to 60%. However, from the 1 January 2005, the following sectors shall “graduate” and will revert to the normal tariff regime: XVII leather, raw hide and skins, XVIII leather articles, XXI textile and XXII clothing, as per the Commission regulation (EC) N° 2331/2003 of 23 December 2003.

In addition, Pakistan also succeeded in obtaining from the European Union, under special arrangements to combat drug production and trafficking, a zero tariff for all its products except where Pakistan has ‘graduated out’ by virtue of its high market share. Thus this tariff concession which came into force in 2001-02 covers about 75% of Pakistan’s exports to the European Union. See the Council Regulation (EC) N° 2501/2001 of 10 December 2001.

However, the improved quota and tariff for the Pakistan textiles are now subject to review by the European Union, further to complaint by India to the WTO, for undue preference (see Box 4).

Page 37 New Business Opportunities in Pakistan Box 4: Recent developments concerning the EU-GSP with Pakistan Pakistan is expected to be out of the drug window of the European Union’s generalised system of preferences (GSP) scheme with a World Trade Organisation (WTO) panel ruling against the provisions of the GSP. Though India will benefit from the ruling, Brussels is to determine whether or not Pakistani textile sector has graduated out of the scheme by issuing a notice for the purpose, say commerce and textiles ministry officials. They, however, avert that the exercise of issuing a notice to Islamabad will take some time, thereby delaying the benefits flowing from the panel’s recent ruling. Brussels had taken a “unilateral” decision to extend duty-free concession to the Pakistani textile industry under the drug window of its three-year GSP scheme from January 1, 2002. The panel, however, had upheld New Delhi’s contention that the decision had adversely affected India’s textile exports to the Union. To support their viewpoint, officials said the utilisation of quotas by the Pakistani textile sector had increased in 2002 over 2001— from 72.43% to 86.07% (knitted shirts), from 21% to 39.71% (blouses) and from 18.69% to 36.97% (gent’s shirts). Officials also pointed out that the compounded annual growth of Pakistani textile exports to the EU had increased during 2002, while that of India had declined. Source: World of Garment-Textile-Fashion, Fibre 2 fashion, News and Views, 21st October 2003

Another issue being presently discussed at the EU level is the imposition of an anti-dumping duty on Pakistan exports of bed linen.

1.11.5 WTO issues and developments

The last Round of the General Agreement on Tariff and Trade (GATT) successfully completed – the Uruguay Round (UR) – produced a rich array of accords that opened substantial new trading opportunities, strengthened international trading rules, and reinforced the institutional foundation of the world trading system. The main features of the UR are: – Greater market access including time-bound reduction in tariffs, tariffication and removal of non- tariff barriers (NTBs) – Improved rules in trade in agricultural goods, textiles, subsidies, anti-dumping, licensing, and custom’s valuation. – New areas such as General Agreement on Trade in Services (GATS), Trade-Related aspects of Intellectual Property Rights (TRIPS), and Trade-Related Investment Measures (TRIMS). – Better mechanism for enforcement of rules and dispute settlement.

As one of the founding members of GATT, Pakistan is a member of the WTO and consequently, a signatory to all of the major accords established under the aegis of the UR.

The results of the UR confront Pakistan with both an opportunity and a challenge. Greater market access to developed country markets due to lower tariff rates and more limited usage of non-tariff barriers offers a variety of opportunities for Pakistan to expand its export base and diversify its exports markets. The most rewarding opportunities for Pakistan are likely to materialise over the medium term as further trade liberalisation expands the world’s markets in those areas for which Pakistan has an advantage (e.g. agriculture, textiles, and labour intensive services).

The most significant positive impact of the WTO for Pakistan comes from the dismantling of the Multi- Fibre Arrangement (MFA) from the 31st December 2004 and a potential agreement on agriculture. The main objective of the WTO’s Agreement on Textile and Clothing (ATC) was the integration of the quota based MFA under the GATT rules. The ATC should allow increased market access for Pakistani textiles and clothing exports in restricted markets of the OECD countries. Improved market access means a potential increase in Pakistan’s exports due to easier access to its markets as a result of fewer quantitative restrictions.

Nevertheless, Pakistan will have to compete with other exporters from both developed and developing countries, especially in products currently under quantitative restrictions in an increasingly aggressive global market. Pakistan’s ability to succeed in this new environment is predicated, in part, on its capacity to improve the competitiveness of its own products, systematically expand and find new markets for these goods and remain committed to its global trading system obligations.

There are factors, which can counteract potential gains from ATC. For example, protectionist measures can be applied by the importing countries under the Safeguard clause, if they can prove serious damage to the local textile and clothing industries. Concessions on greater market access imply that Pakistan will have to open up the domestic textile and clothing market to imports. This would mean that Pakistani markets would get textiles, yarn, and garments from competitor nations like, India, Bangladesh, Sri Lanka and China. The quota restriction’s reduction and integration would also mean that Pakistan’s textile and clothing will face fiercer competition in the international market, especially, as the quota were not a binding constraint for Pakistan in many categories of textiles and clothing.

Page 38 New Business Opportunities in Pakistan The agreement on agriculture is the first attempt to bring agriculture under the WTO/GATT discipline. The main features of the agreement are: – Tariffication of non-tariff barriers. – Greater market access. – Reduction in exports subsidies and domestic support for agriculture.

The likely impact of the Agriculture Agreement would be that Pakistan would have to pay higher prices for future imports of wheat, dairy products and oilseeds. On the other hand the agreement can result in larger markets for Pakistan’s primary goods exports. The reduction in agriculture protection would create several market access opportunities for Pakistan: – The value of raw cotton export is expected to increase due to increased demand resulting from trade liberalisation in textiles and clothing. – Liberalisation in the Japanese and Korean rice markets will expand market access, but Pakistan will only be able to take advantage of this improvement if it can diversify its rice production in accordance with consumers taste in those markets. – Diversification of Pakistan’s export base with a greater focus on non-traditional agricultural exports, including flowers, fruits, and vegetables can take advantage of substantial tariff and/or subvention reduction in the developed country markets.

The TRIPS agreement is one of the new areas in which the WTO negotiations have made significant headway. It was recognised that trade-related aspect of intellectual property rights will be a major area of tension in international trade relations and hence a comprehensive agreement was needed. The WTO agreement on TRIPS covers issues of copyright laws, trade and service marks, patents, industrial designs, counterfeit goods and more. The implementation schedule was supposed to start after 5-year transition period for developed countries and after 11-year period for least developed countries by which time countries are expected to set in place necessary legislation to implement the TRIPS laws (see section 1.19.7 for more details).

The three-part GATS agreement consists of the basic obligations (which applies to all countries), the National Schedule of Commitment (country specific), and the Special annexes (service-specific). The basic aim is to expand market access and greater transparency in rules and regulations regarding trade in services. The scope of the agreement is broad. It covers trade in services such as transportation, storage, brokerage, communications, tourism, banking and insurance, construction and consultancy.

Compared to other developing countries, South Asian countries have made very few commitments on market access under GATS. Hence the impact of this agreement is likely to be limited in this region. However, one can expect greater role of multinational banks, financial firms and other foreign service providers in Pakistan as restrictions on number of service providers, total value of transactions and number of service operations are reduced over time.

The trade related investment measures (TRIMS) primarily aim at removing GATT inconsistent investment policies in individual countries within 2 years, for developed countries, 5 years for under developed countries, and 7 years for least developing countries. The agreement includes requirement on local content, trade balancing and foreign exchange. For example, the benefits to Pakistani firms under the Locally Manufactured Machinery (LMM) and local content exemption to exporters will have to be removed. This agreement will basically mean entry to trans-national corporations into the investment-restricted economies of developing countries. But as many developing countries, including Pakistan, had already liberalised the trade and financial sectors in terms of entry and operation of multinationals in recent years, the TRIMs agreement is unlikely to cause additional impact in these countries.

The above remarks cover the broad and most important areas of the WTO agreements and their likely impact on the Pakistani economy. There are many other aspects of the WTO agreements such as the new quality and environmental standards, which could have serious repercussions on Pakistan’s economy and its future trade relations. These are not yet well understood. In addition, clearly defined rules on anti-dumping, subsidies and countervailing duties, customs valuation, pre-shipment inspection, rules of origin and import licensing procedures are going to provide a new discipline in international trade, which will have important effects on how trade is done in Pakistan in the future.

Page 39 New Business Opportunities in Pakistan 1.11.6 Regional integration

The dispute between India and Pakistan over the Kashmir issue has so far not allowed any significant regional trade development and integration in South Asia. Neither SAARC nor ECO have been effective in promoting trade in the region. India which absorbed more than 50% of Pakistan exports just after independence barely accounts for 2% at the moment.

1.11.6.1 SAARC http://www.saarc-sec.org/ The South Asian Association for Regional Co-operation (SAARC) was established in 1985. The SAARC's member countries are India, Pakistan, Sri Lanka, Nepal, Bhutan, and the Maldives. The South Asian Preferential Trade Agreement (SAPTA) was drawn up in 1993, providing for bilateral reductions in tariff and non-tariff barriers on specified commodities on a reciprocal basis, but with special treatment given to the least developed states. The eventual objective is for SAPTA to become a South Asian Free Trade Area (SAFTA) from 1st January 2006, based on multilateral tariff reductions. On the whole, the achievements of SAARC and SAPTA have been limited. Although tariff concessions have not been negligible, they have been introduced on items that represent no more than 1% of the total trade of the seven-country grouping. The South Asian Association of Regional Cooperation comprises Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The basic aim of the Association is to accelerate the process of economic and social development in member states through joint action in agreed areas of co- operation.

The idea of regional co-operation in South Asia was first mooted in May 1980. Following consultations among the countries of the region in Sri Lanka in 1981, five broad areas (Agriculture, Rural development, Telecommunication, Metrology, Health and Population Activities) for regional co- operation were identified. Subsequently four additional areas (Scientific and Technological co- operation, Postal Services, Transport, and Sports, Art and Culture) were added.

The objectives of the Association were to promote the welfare of the peoples of South Asia and to improve their quality of life; to accelerate economic growth, social progress, and cultural development in the region and provide all individuals with the opportunity to live in dignity and to realise their full potential; to contribute to mutual trust, understanding and appreciation of one another’s problems ; to promote and strengthen collective self-reliance among the countries of South Asia.

The SA region has a low level of trade between its countries, trading among themselves less than 5% of what they trade with the outside world. This low level of trade between the countries of the region is the result of a lack of mutual trust, spill over effects of ethnic and religious conflicts, and most importantly the Kashmir dispute between India and Pakistan.

Political rhetoric impeding mutually advantageous intra-regional trade and myriads of import restrictions has prompted smuggling (unofficial intra-regional trade is estimated at 2 to 4 times the official trade). The only bi-lateral free trade agreement enforced in the region is the Indo-Lanka FTA.

Pakistan’s trade with the relatively large countries of SAARC (India, Sri Lanka, and Bangladesh) is very low and total trade (import plus export) is less than USD 300 million. Pakistan’s share is less than 2% in these markets of more than USD 14 billion all together. It is understood, however, that trade via third countries like Singapore or Dubai could reach up to US$ 1.5 billion.

Due to the limits of SAARC, bilateral trading arrangements were considered, such as a 2001 unilaterally announced duty concession on some of the important Bangladeshi exports to Pakistan, or the signing of a trade agreement between Pakistan and Sri Lanka, yet to be enforced.

In the later part of 2003, relations between India and Pakistan improved. Hopes are that the Kashmir situation shall not stand in the way of trade openings. Prior to the SAARC summit of 2004, a South Asia Free Trade Agreement (SAFTA) has been signed, to replace from the 1st January 2006, the present SAPTA. The aim of the agreement is to remove barriers to cross-border flow of goods.

Box 5: SAFTA main characteristics Safta's Trade Liberalisation Programme (TLP) includes:

Page 40 New Business Opportunities in Pakistan * Tariff reduction by the Non-Least Developed Countries (NLDCs) - primarily India and Pakistan - from the existing rates to 20 per cent. It is to be done within two years, starting January 1, 2006. "If the actual tariff rates on that date are already below 20 per cent, they will undertake an annual reduction on a Margin of Preference basis of 10 per cent on actual tariff rates for each of the two years.

* The subsequent tariff reduction by the NLDCs from 20 per cent, or below, to 0-5 per cent will be done within the next five years, starting January 1, 2008. The period of second tariff reduction by Sri Lanka will be six years.

* Tariff reduction by the Least Developed Countries (LDCs) from their existing rates will be to 30 per cent within two years. If the actual tariffs are below 30 per cent, there will be an annual reduction of 5 per cent "on actual tariff rates for each of the two years."

The subsequent tariff reduction by the LDCs from 30 per cent, or below, to 0-5 per cent will be done within a second time frame of eight years beginning January 1, 2008. But the LDCs are encouraged to adopt reduction in equal annual instalments, no less than 10 per cent annually. The above schedules of tariff cuts will not prevent member countries from immediately reducing their tariffs to 0-5 per cent, or from following an accelerated timeframe of tariff reduction. The LDCs and the NLDCs can have separate "Sensitive Lists." Higher tariffs, agreed between member countries, to protect their domestic products, will apply to these items.

The Safta Ministerial Council will review continuation, or otherwise, of "Sensitive Lists" after every four years, or earlier, to reduce the number of these items. Each member country will accord "national treatment" to the products of other members in accordance with the provisions of Article III of Gatt 1994. The LDCs will receive special considerations before any anti-dumping or countervailing measures are to be applied against them.”

For Pakistan, the main benefit expected from these negotiations will be increased access to the large Indian market. However, it also means that Indian exports will compete with Pakistani production, especially in the transport equipment, cotton yarn and fabrics, pharmaceuticals, machinery, iron and steel products, and food commodities, creating opportunities for economies of scale, as well as increased competition.

Box 6: SAFTA likely impact on regional trade The conclusion of two rounds of South Asian Preferential Trading Arrangements (SAPTA) in late 1990s are preliminary steps towards the objective of achieving duty free trade under South Asian Free Trading Arrangements (SAFTA). In this study, an estimate of the increase in the bilateral trade of SAARC countries under three alternate scenarios has been made: (a) SAPTA-I, (b) SAPTA-II, and (c) SAFTA, where tariffs will be completely eliminated. To analyse the likely increase in bilateral trade flows due to these scenarios, methodology based on gravity model is used. After tariff concessions under the SAPTA-I, the results of this study show that the likely increase in intra-regional trade will be insignificant. The tariff concessions of the SAPTA-I will generate an additional 5.01per cent to the existing level of intra-regional trade. The picture is quite disappointing for SAPTA-II. There would not be any perceptible change in intra-regional trade here. After implementation of SAPTA-II, the likely increase in the intra-regional trade would be only 0.6 per cent. By completely eliminating tariffs on all the products, under the SAFTA, the likely increase in intra-regional trade of SAARC would be substantial. The simulation results of this study show that the complete removal of tariffs would enhance intra-regional trade by 1.6 times or 160 per cent. In terms of total imports of the SAARC member countries (SMCs) (from the world), it is 25.0 per cent and 16 per cent for Bangladesh and Sri Lanka, respectively. The corresponding figures for Pakistan and India were 3.0 per cent and 1.5 per cent, respectively. The results also show that after the SAFTA, intra-SAARC trade would substantially increase in the manufacturing sector Source: Study published in the Asia Pacific Journal of Economics and Business, vol. 4, no. 1. by Rajesh Mehta : SAPTA to SAFTA : Impact on Intra-regional trade.

High tariff nations, including Pakistan, would lose import tariff revenues from any tariff reductions. However, unofficial trade between India and Pakistan could be converted to official trade resulting in significant government revenues.

1.11.6.2 Bilateral relations with India Relations between India and Pakistan have improved recently with tentative agreements to resume air, road and train links. If the situation was to normalise, it would definitely improve the business environment.

India has granted ‘most favoured nation’ (MFN) status to Pakistan but it is reported that non-tariff barriers (NTBs) hamper exports from Pakistan into India. Pakistan, on the other hand has not given, even on paper, the most favoured nation status to India.

In December 2003, Pakistan and India agreed to lower duties on a list of 500 products (see Box 7).

Apart from the official trade between India and Pakistan, a significant volume of exchange is going on via informal or indirect channel or smuggling. According to a crude estimate the illegal trade between the two countries is three to four times that of the legal formal trade.

Page 41 New Business Opportunities in Pakistan Figure 15: Pakistan Trade with India, 1997-2003 (USD million)

250

200

150

100

50

0 197-98 1998-99 1999-00 2000-01 2001-02 2002-03

Export Import

Source: Pakistan Federal Bureau of Statistics

Box 7: Pakistan, India to cut duties on 500 items Friday December 05, 2003-- Shawwal 10, 1424 A.H. NEW DELHI: India and Pakistan on Thursday agreed to lower duties on an expanded list of products traded between the two countries, a news report said, in what appeared to be another step forward in improving relations between the South Asian neighbours. The decision, as well as India’s confirmation to attend a trade summit next month, removes a major glitch in taking forward the process of regional trade cooperation in South Asia. Last year, a proposed summit of the South Asian Association for Regional Cooperation (SAARC), in Islamabad had to be postponed after India dropped out of it, citing Pakistan’s reluctance to extend lower duties to more Indian products. But Indian Prime Minister Atal Bihari Vajpayee sent a letter on Thursday to his Pakistani counterpart confirming his participation in the SAARC summit in Islamabad from Jan 4-6 next month, an official statement said. At a meeting at the SAARC secretariat in the Nepalese capital Kathmandu, India and Pakistani officials agreed to reduce duties by 10 to 25% on a list of some 500 tariff lines, Press Trust of India news agency reported. It did not elaborate on the goods covered under Thursday’s agreement, but said the concessions will be extended to other SAARC members, if they’re not already available to them. India already has a free trade pact with Sri Lanka and a preferential trade arrangement with Nepal. In Pakistan, the foreign ministry said that Prime Minister Zafarullah Jamali endorsed the idea of a meeting of SAARC commerce secretaries on the free trade accord ahead of the January 4-6 summit in Islamabad. South Asian leaders have long called for a free trade deal but the proposal has gone nowhere amid constant friction between India and Pakistan, the region’s two largest members.

A restrictive list of items allowed to be traded with India, available from the Federal Bureau of Statistics, covers mostly pharmaceuticals, chemicals and the food sector.

1.11.6.3 Trade with ECO countries The Economic Cooperation Organisation (ECO) established in 1985 was formally a trilateral organisation under the name of “Regional Co-operation for Development (RCD)” comprising of Iran Turkey and Pakistan as its members. In 1992, ECO was enlarged by the inclusion of Afghanistan and the six Central Asian States. Present members are Iran, Turkey, Pakistan, Afghanistan, Azerbaijan, Turkmenistan, Tajikistan, Kazakhstan, Kyrgyzstan, Uzbekistan. The organisation now unites more than 350 million people. The objective of the organisation is to contribute to the socio-economic development of its Member States.

Table 7 shows that Pakistan's only significant trade relations concerns Iran, Turkey and Afghanistan. Trade with the other ECO countries is very limited, with a combined value of less than USD 20 million.

Page 42 New Business Opportunities in Pakistan Table 7: Pakistan Trade with ECO Countries; (USD million) Country 1998-99 1999-00 2000-01 2001-02 2002-03 Export Import BoT Export Import BoT Export Import BoT Export Import BoT Export Import BoT Afghanistan 52.1 39.1 + 115.3 40.8 + 142.6 30.5 + 168.6 22.8 + 314 34.8 + Azerbaijan 2.1 0.6 + 1.6 0.8 + 0.9 0.8 + 0.8 0 + 1.9 0 + Iran 12.1 82.3 - 11.8 134.8 - 24 370.6 - 29.2 157.2 - 63.2 303 - Kazakhstan 13.6 0.3 + 12.2 0.3 + 9.5 0.44 + 8.9 0.3 + 10.3 0.1 = Kyrgyzstan 4.30+3.10.1+2.60+1.10+1.52- Tajikistan 4.5 1.3 + 1.8 0.5 + 2 0.6 + 1.6 0 + 0.2 0.2 + Turkey 37.5 140 - 63.2 110.2 - 100.2 47.5 + 98 34.7 + 146 126 + Turkmenistan 2.3 0.9 + 1.9 4.1 - 0.7 1.3 - 3.7 0.6 + 1.7 0.5 + Uzbekistan 12.8 68.2 - 10.7 26 - 9.9 5.3 + 5.2 5.3 - 6.3 1.8 + Total ECO 141.3 332.8 - 221.4 317.6 + 292.3 457 - 317.2 221.1 + 545.1 468.4 + Source: Pakistan Federal Bureau of Statistics

1.12 Balance of payments and exchange rate

The balance of payments for the last two years has recorded a surplus which has contributed to improved foreign exchange reserves and an appreciating Rs/USD exchange rate. The improved debt situation further to renegotiation with the main creditors has initiated this virtuous circle, amplified by overseas Pakistanis’ remittances and increased FDI.

Following the nuclear tests in May 1998 and a difficult balance of payments situation, cash margin requirements were imposed on imports, and the exchange rate regime underwent various changes.

In the financial year 2000, the managed exchange rate system was adopted, and during the year the nominal exchange rate was kept almost unchanged.

At the beginning of financial year 2001, the managed float was abandoned, and a market-based, free- floating exchange rate system was put in place. The currency came under several speculative attacks during the year, and in the financial year 2001, the rupee depreciated by 18.6% against the dollar. Because of the low rate of inflation, this resulted in a real depreciation of over 10% in that financial year, which provided a much needed boost for exports.

However, 2002 witnessed a sharp rise in workers' remittances, which played a critical role in strengthening the country's external balance of payments. As against the yearly target of USD 2.87 billion, workers' remittances stood at USD 4.3 billion during the fiscal year 2002-03. As compared with the last year, remittances grew by 90% in fiscal year 2003, an all time high in the country's history, with 30% coming from the US, 20% from the UAE, followed by Saudi Arabia and Kuwait. The monthly average remittances have increased more than four fold - rising from an average of USD 85 million during 1998-2000 to more than USD 350 million during 2002-03.

A strong build up of foreign exchange reserves has been the most important achievements of the fiscal year 2003. During July-May 2002-03, the country has added USD 4.28 billion in its reserves and at the end 2003 the total foreign exchange reserves stood at more than USD 11billion - sufficient to finance almost one full year of imports.

The strong build up in foreign exchange reserves have not only strengthened the viz. the US dollar but provided much needed stability in the exchange rate - a key element of macroeconomic stability. The Pakistani rupee has appreciated by almost 4.0% since the beginning of the 2002-2003 fiscal year and the average exchange rate for the fiscal year 2002-03 is Rs 58.5 per US dollar as against the average exchange rate of Rs 61.42 per US dollar in 2001-02, thus depicting an average appreciation of 5.0%. Since July 3, 2001 and until June 30, 2003 Pakistani rupee has appreciated by 11.4%.

Page 43 New Business Opportunities in Pakistan Figure 16: Exchange rate, Rupees per USD, average of period, 1996-2003

65 60 55 50 45 40 35 30

3 -03 -03 0 1996 1997 1998 1999 2000 2001 2002 nv Mar03 ja févr avr- May03

Source: IMF, International Financial Statistics, July 2003

Figure 17: Exchange rate, Rupees per USD and EURO, average of period, 2002-2003 70 68 66 64 62 60 58 56 54 PKR/$ PKR/EUR 52 50 Jul 02 Jul 03 Jul Oct02 Mar02 Mar03 Dec02 Jan 02 Jan 03 Jan Apr 02 Apr 02 Jun 03 Apr 03 Jun May02 Nov 02 May03 Feb 02 Feb 03 Feb Aug 02 Aug 02 Sep

Source: State Bank of Pakistan

1.13 Public finance and debt

Pakistan has developed a debt reduction and management strategy that focuses on continuing strong fiscal adjustment to limit public borrowing, boosting exports through structural reform, seeking new borrowing on concessional terms, and writing off or rescheduling debt. This strategy was the basis for its negotiations with the IMF for the Poverty Reduction and Growth Facility (PRGF), and the Paris Club for long term and significant debt rescheduling. Both negotiations were completed by the end of 2001.

Table 8: Pakistan – Debt servicing (Rs billion) 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Total Debt Servicing 278.3 343.1 353.9 325.0 431.2 306.1 Total interest payments 191.6 220.1 256.8 237.1 266.3 241.7 Domestic 160.1 178.9 206.3 178.8 189.5172.0 Foreign 28.7 38.0 44.9 50.5 61.140.3 Payments of Principal (foreign) 86.7 123.0 97.1 87.9 164.9 64.3 Source: Federal Bureau of Statistics, 2003

One of the most important achievements has been the decline in public debt in absolute terms: from a figure of Rs. 3695 billion in end June 2002 to Rs 3642 billion by end-March 2003, a decline of Rs 53 billion in nine months. As a%age of GDP, it reduced from 102% to 91%, and as a%age of total revenue: 592% to 516%. In fact, during the last two years (since end of June 2001), the stock of public debt has declined by Rs 112 billion which in terms of%age of GDP and revenue represents a decline by 19%age points and 163%age points respectively.

Page 44 New Business Opportunities in Pakistan Clearly in the overall reduction of debt, the containment of the domestic debt has been achieved primarily through reduction of the fiscal deficit and interest costs to finance such deficit along with prudent debt management. While such debt in the past recorded an annual average growth rate of 16% in the 1990s, in the 2002/2003, its growth has been Rs 13 billion only or 0.7%.

Regarding the foreign exchange debt, Pakistan has not only succeeded in arresting the rising trend in the stock of external debt and foreign exchange liabilities but also succeeded in reducing them. From a figure of USD 37.9 billion, this external debt has fallen to USD 35.6 billion while liabilities adjusted for SBP liquid reserves declined from USD 36.9 billion to USD 26.5 billion by end of fiscal year 2003.

At the end of 2002/2003, the medium and long term external debt has provisionally been estimated at USD 28.4 billion or about 42% of GDP, while debt service payments are projected at USD 1.4 billion or about 2.1% of GDP. The foreign aid commitments and disbursements during the 2003 fiscal year have represented USD 2.3 billion and USD 1.9 billion, respectively.

The Paris Club creditors, Denmark and the Commonwealth Development Corporation of U.K. have waived their entire outstanding debt of USD 18.4 million and USD 29.5 million respectively, while the Netherlands has given remission in debt service payments equivalent to USD 14.3 million; the USA has cancelled an amount of USD 1.0 billion of their debt. An amount of USD 11.5 billion has been rescheduled, as all the bilateral agreements have been signed except with the Republic of Korea and the Russian Federation which are under finalisation.

Box 8: Pakistan and the Paris Club Pakistan has the distinction of being the only country to conclude two agreements with Paris Club creditors in the course of one year. The agreement of January 2001 rescheduled USD 1.8 billion comprising arrears at end November 2000 and 100% of principal and interest falling due from December 1, 2000, to September 30, 2001, on loans contracted prior to September 30, 1997 (the cut-off date). The agreement was concluded under Houston terms: repayment of the rescheduled amount will be made over 20 years, including 10 years of grace for ODA loans, and over 18 years, including 3 years of grace, for the guaranteed commercial loans. The agreement concluded in December 2001 rescheduled USD 12.5 billion – the entire stock of debt outstanding on loans contracted prior to the cut-off date (September 30, 1997), including amounts owed under prior rescheduling agreements with Paris Club creditors. Repayment of the rescheduled amount will be over an extended period, and in addition, part of the moratorium interest will be capitalised and debt service due up to June 30, 2002, on debt contracted after the cut-off date, will be deferred. ODA loans will be repaid over 38 years, including 15 years of grace at a concessional interest rate. Guaranteed commercial loans will be repaid over 23 years, including 5 years of grace at market interest rates. The repayment schedule is graduated, rising from an initial payment equivalent to 0.67% of the total amount rescheduled to a final payment equivalent to 7.20% of the total amount rescheduled. In recognition of Pakistan’s particularly acute balance of payments situation, Paris Club creditors agreed to capitalise 100% of moratorium interest accrued from December 1, 2001, to June 30, 2002, and 20% of the amount accrued from July 1, 2002, to June 30, 2004, including the rescheduled debt. These amounts will be repaid in four equal semi-annual instalments beginning May 31, 2005, and ending November 30, 2008. They also deferred 100% of principal and interest falling due from December 1, 2001, to June 30, 2002, inclusive of post cut-off date debt (that is, loans contracted after September 30, 1997). These amounts will be repaid in four equal semi-annual instalments beginning May 31, 2005, and ending November 30, 2006. Source: Global Development Finance 2002

1.14 Foreign investment

Foreign Direct Investment into Pakistan has achieved a high USD 800 million in fiscal 2003, a figure significantly higher than during the previous years. This good performance was helped by foreign investment into large privatisation operations. The good performance shall be maintained during fiscal 2004, if the privatisation process continues. Thereafter, FDI into Pakistan shall more directly reflect the current opportunities for development. It then shall be an appropriate measure of investors’ perception.

1.14.1 FDI flows and portfolio investment

World total FDI flows have experienced massive contraction globally since 2000, declining from almost USD 1.2 trillion to about USD 500 billion in 2002. Both developed and developing countries have been affected by the reduction in FDI flows with the exception of China and Central/Eastern European countries where they have continued to rise.

In such a difficult external environment Pakistan succeeded to attract USD 800 million in FDI during the 2002-03 fiscal year as against USD 484 million in the previous year. Oil and gas, financial sector (include the privatisation proceeds of the UBL), chemicals and transport together account for nearly three-fourth of FDI. Almost 30% of FDI have come from the UK followed by the US (25.0%), and the UAE (16.3%).

Page 45 New Business Opportunities in Pakistan Pakistan has one of the most attractive foreign investment regimes in South Asia. Foreign companies can invest in all three key sectors of the economy namely Agriculture, Industry and Services. The industry sector where foreign equity investment up to 100% is permitted in most cases is the most open. Pakistan’s aim is to attract USD 1.4 billion in net FDI in 2004 in a bid to lift its low investment to GDP ratio.

Table 9: FDI Inflows to South and East Asian countries, USD million Average Average Average Average 1981-1985 1986-1990 1991-1995 1996-2000 2001 China 849.6 2,852.6 22,534.6 41,851.8 46,846.0 Singapore 1,348.9 3,332.5 5,823.1 8,590.6 8,608.8 Thailand 282.3 1,211.9 1,876.2 3,482.8 3,759.0 India 59.0 182.0 796.8 2,652.8 3,403.0 Korea, Republic of 116.6 799.3 1,016.2 5,839.7 3,198.0 Philippines 62.8 496.6 1,124.0 1,268.0 1,792.0 Viet Nam 11.0 39.3 1,100.0 1,772.6 1,300.0 Malaysia 1,082.9 1,182.0 5,063.8 4,803.4 553.9 Pakistan 60.9 154.1 417.0 594.6 385.4 Sri Lanka 41.9 39.6 123.1 230.2 172.0 Cambodia 0.0 0.0 63.6 239.0 113.0 Bangladesh 1.1 2.2 6.4 160.2 78.1 Mongolia 0.0 0.0 7.5 28.8 63.0 Nepal 0.1 1.9 5.4 11.6 19.3 Afghanistan 0.1 0.1 0.0 1.1 2.1 Indonesia 236.4 598.6 2,343.2 644.0 -3,277.0 Source: UNCTAD Division on Investment, Technology and Enterprise Development

The year 2001 was disappointing with investment less than the average of the previous 5 years. However, in 2002 the figure improved to reach USD 486 million, but falling short of the target. In 2003 direct foreign investment almost doubled to reach USD 800 million as detailed in Table 11.

The rate of return on FDI in various countries seems to single Pakistan as an attractive destination with a yearly return of 7.0% in 2001 as can be seen from Table 10.

Table 10: Rate of return on FDI (in%) 1999 2000 2001 World average 7.1 6.8 5.5 Developing countries average 4.6 4.3 4.2 Pakistan 3.4 6.1 7.0 China 5.6 6.2 5.8 Indonesia 5.5 5.7 5.4 Korea 3.0 3.1 3.3 Source: UNCTAD, World Investment Report, 2003

1.14.2 Structure of the FDI flows and stock per country of origin

As far as the inflows of foreign direct investment into Pakistan are concerned, the USA, the UK, and the UAE are the three major sources of foreign direct investment (FDI) in the country. The inflow of foreign direct investment from the USA over the last 8-10 years has remained more or less consistent. The USA is also the single largest direct investor in Pakistan. In 2002-03 foreign direct investment from the EU was to the tune of USD 229 million of which UK has the largest share: USD 219.4. Incidentally, the UK is the only country except Korea which has disinvested in portfolio investment in Pakistan. As shown in Table 11, UK took away more than USD 34 million of portfolio investment from Pakistan in fiscal year 2003.

Page 46 New Business Opportunities in Pakistan Table 11: Inflows of Direct and Portfolio Investment to Pakistan, 1995-2003 (USD million) Country 1995-96 2000-2001 2001-2002 2002-03 Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total USA 319.8 35.9 355.7 92.7 -37.8 54.9 326.4 -1.7 324.7 211.5 15.1 226.6 U.K 331.7 68.1 399.8 90.5 -33.8 56.7 30.3 -32.4 -2.1 219.4 -34.6 184.8 UAE 52.8 -22.3 30.5 5.2 -10.9 -5.7 21.5 -4.2 17.3 119.7 0.7 120.4 Germany 26 3.3 29.3 15.5 0 15.5 11.2 0 11.2 3.7 0.1 3.8 France 14 0 14 0.7 0 0.7 -6.9 0.3 -6.6 2.6 0 2.6 Hong Kong 33.9 -4.3 29.6 3.6 -16.3 -12.7 2.8 20.6 23.4 5.6 -0.4 5.2 Italy 0.500.51.301.30.100.10.20.20.4 Japan 82.1 13.3 95.4 9.1 0 9.1 6.4 0.2 6.6 14.1 0 14.1 Saudi Arabia 26.9 -1.1 25.8 56.6 -1.7 54.9 1.3 0.1 1.4 43.5 0.1 43.6 Canada 0.800.80.10.50.63.52.76.20.500.5 Netherlands11.9011.94.8-1.33.5-5.1-0.8-5.9303 Korea 31.5 0 31.5 3.7 0 3.7 0.4 0 0.4 0.2 -6.8 -6.6 Other 169.8 112.3 282.1 38.6 -39.1 -0.5 92.8 5.1 97.9 174 47.7 221.7 Total 1101.7 205.2 1306.9 322.4 -140.4 182 484.7 -10.1 474.6 798 22.1 820.1 Source: State Bank of Pakistan

1.14.3 Structure of FDI flows and stock per sector of investment

Pakistan is a rich country in terms of mineral resources. It has vast deposits of oil, natural gas, various kinds of ores, marbles etc. Therefore mining and quarrying, especially oil and gas exploration attracts the highest volume of foreign direct investment in Pakistan. From 1996 to date this sector alone has got foreign direct investment worth USD 877 million or one-fourth of the total foreign direct investment. The promising thing about foreign direct investment in the mining and quarrying sector is that it has remained consistent and over the last two years it has grown many folds, primarily due to the liberal policy adopted by the Government especially in the oil exploration sector.

Power generation is another sector which has attracted important foreign direct investment. Investment in this sector however, has shown a declining trend and over the past few years it has stagnated at around USD 30-35 million from a high in the mid-1990s. The primary reason for this evolution comes from the then severe shortage of energy in the country while the industrial sector was growing at a reasonable pace. In order to bridge the gap between the demand and supply for power, the Government of that time decided to open this sector to private investment. The estimated shortage of electric power by the mid 90’s was estimated at 3000 megawatts. As a result, during 1996-98 the power sector alone attracted more than USD 600 million.

In addition to sectors advised for future investment, the other important sectors in terms of foreign direct investment have been the chemicals, the pharmaceutical, the fertiliser, the financial and the transport, storage and communication sectors (Table 12).

Table 12: Sector breakdown of FDI Inflows to Pakistan, 1990-2003 (USD million) Sector 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002 - 03 Cum 96-03 Share (%) Mining & Quarrying – Oil explor. 37.7 99.1 112.8 79.7 84.7 274.8 188.2 877.0 25.0 Power 244.8 239.5 131.4 67.4 40.3 36.4 32.8 792.6 22.6 Chemical, Pharm. & Fertilizer 51.7 72.1 54.1 119.9 26.3 17.8 92.4 434.3 12.4 Financial Business 106.5 20.4 24.4 29.6 -34.9 3.5 207.5 357.0 10.2 Transport and Storage & Comm. IT 6.4 10.2 33.3 31.0 81.5 35.2 114.1 311.7 8.9 Food, Beverages & Tobacco 51.5 19.1 7.4 49.9 45.1 -5.1 7.0 174.9 5.0 Construction 14.5 21.5 13.9 21.1 12.5 12.8 17.6 113.9 3.2 Trade - 12.6 5.5 7.6 13.2 34.2 39.1 112.2 3.2 Textile 12.4 27.3 1.7 4.4 4.6 18.4 26.1 94.9 2.7 Cement / Sugar 49.4 3.0 2.0 6.1 15.2 0.5 1.3 77.5 2.2 Petro-Chemical & Refining 1.5 1.6 38.8 12.0 8.7 5.0 3.0 70.6 2.0 Electrical Machinery 4.1 8.7 1.9 1.5 2.1 10.5 10.5 39.3 1.1 Electronics - 2.7 1.2 2.3 2.8 15.9 6.7 31.6 0.9 Tourism / Paper & Pulp 7.4 5.7 - 0.7 1.4 0.8 1.5 17.5 0.5 Machinery other than electrical 2.0 - 0.9 3.1 0.3 0.1 0.4 6.8 0.2 Others 92.2 57.8 43.0 33.6 18.6 23.9 49.8 318.9 9.1 Total 589.9 543.5 429.3 436.3 303.8 460.8 748.2 3,511.8 100.0 Source: State Bank of Pakistan

Page 47 New Business Opportunities in Pakistan 1.14.4 Activities of EU enterprises in Pakistan, a success story

Box 9: ICI PAKISTAN Imperial Chemical Industries (ICI) Plc and its predecessors have been operating in Pakistan for over 100 years. Its first manufacturing operations commenced at Khewra with 18,000 tons per annum plant to manufacture soda ash. The company became public in 1952. From a modest 18,000 tons per annum (18Ktpa) Soda Ash Plant, the company has diversified into a number of Businesses, details of which are provided below: Soda Ash Business: The Soda Ash Business has been the formative Business of the Company & ICI Pakistan currently commands a market share of around 85% of the local ash market. From an original plant of 18Ktpa, the current capacity of the plant stands close to 200Ktpa. Soda Ash is used in the manufacture of products including glass, soaps, detergents, paper and chemicals. Polyester Fibre Business: The Company entered the polyester staple fibre industry in 1982, with the commissioning of a 12Ktpa plant at , which has been periodically expanded & today has a polymerisation capacity of 90Ktpa & a staple fibre capacity of 60Ktpa. Staple fibre is used to manufacture blended yarns. Paints Business: ICI Pakistan's Paints Business is one of the largest in the country, which started with the acquisition of Fuller Paints (Pakistan) Limited. The business manufactures paint for the Decorative, Refinish and Industrial segments. PTA Business: In 1995, ICI Pakistan made its single largest investment in Pakistan, a USD 490 Million Pure Terephthalic Acid Plant with a capacity of 400Ktpa of PTA, the main raw material used to manufacture polyester staple fibre. At full plant capacity, this business will save the National Exchequer valuable foreign exchange of approximately Rs. 100 Million annually. Agrochemicals & Seeds Business: The Agrochemicals & Seeds Business operates under an agency agreement with Zeneca Plc (UK) and other overseas agrochemical companies. It is amongst the leading providers of products for plant protection, particularly insecticides for cotton. ICI Pakistan also operates an agrochemical formulation plant which provides toll manufacturing facilities to outside parties.

Major Achievements for the Year Ending 2002 Manpower productivity, as measured by turnover per employee, increased by almost 27% over 2001. This ratio has, on average, annually increased by over 21 over the last five years, supported by improved processes and a shared culture of performance excellence across all levels of the organisation. The Polyester Fibre Plant achieved record fibre production of 92,678 tones for the fourth successive year inclusive of product toll-manufactured by Fayzan Manufacturing Modaraba. Man power productivity, as measured by units per employee, was 33% higher than 2001. The Soda Ash Business completed 5.24 million man-hours without a Reportable Injury Accident (RIA) for permanent staff and 10.34 million man-hours for contractor staff by the end of 2002. The Paints Business achieved a RIA and Classified Injury Accident (CIA) free year for permanent staff. The Business was also commended by the Asia Pacific Region for its painter product stewardship initiative. The Pharmaceuticals Business maintained its RIA free record since November 1997. The Chemicals Business successfully completed 1.6 million RIA free man-hours by the end of 2002. Source: BOI

1.14.5 Profitability

The Pakistan authorities are eager to demonstrate the opportunities to operate a business profitably in Pakistan, as shown in the following table prepared by the BOI.

Page 48 New Business Opportunities in Pakistan Table 13: Corporate Performance of Major Companies-Return on Equity (ROE), in% Company Sector 1996 1997 1998 1999 2000 2001 Average

Shell Pakistan Oil Distribution 22 30 16 22 27 20 23

Rafhan Maize Food 24 33 33 34 34 29 31

Hub Power Co. Ltd. Power - 39 50 24 - 39 38

National Refinery Oil refining 28 36 31 33 30 27 31

BOC Industrial Gases 46 44 37 27 25 11 32

Gilette Pakistan Consumer items 4 6 26 33 33 - 20

Knoll Pharma-ceutical Pharma-ceutical 27 16 19 19 26 - 21

Glaxo Welcome -do- 11 15 20 19 22 8 16

Lever Brothers Consumer items 60 44 50 52 106 45 60

Colgate Pakistan -do- 25 17 13 18 21 - 19

Nestle Milkpak Food 20 17 24 33 32 25 25

General Tyre Tyres 2 1 17 21 29 - 14

Siemens Engg. Engineering 30 23 19 10 20 17 20 Source: BOI Pakistan

The significant increase in profitability is mainly due to the recent improved financial position of the country and the resulting favourable interest rate for highly leveraged borrowers. Aggregate profits of the 202 quoted companies showed an increase of 30% over the previous year performance by mid 2003.

1.15 Investment climate and sector policies

The GOP has liberalised the investment policy by reducing bureaucratic discretion and offering tax and other incentives in the infrastructure, services and agriculture sectors. The Government decided to give "priority industry" status (see section 1.26.7) to tourism, housing and construction sectors, approved a new industries list for "value added" status, and allowed the non manufacturing sector to remit royalties, technical and franchise fees.

As part of an integrated investment promotion strategy, a comprehensive programme of radical economic reforms including liberalisation, privatisation and deregulation to bring the economy into a fully market-oriented system has also been introduced.

Page 49 New Business Opportunities in Pakistan Figure 18: How do general constraints differ?

General Constraints, Cambodia, China, Bangladesh and Pakistan

Corruption

Electricity

Regulatory Policy Uncertainty

Tax administration

Tax rates Bangladesh Pakistan Crime, theft and disorder Cambodia Macroeconomic Instability China

Customs and Trade Regulations

Anti-competitive or informal practices

0 1020304050607080 % identifying constraint as "major" or "very severe"

Source: World Bank, Investment Climate Surveys

The privatisation process has been redesigned to make it more transparent. Power generation, telecommunication, highway construction, port development and operations, the oil and gas, services/infrastructure, and social and agriculture sectors have now been opened to foreign investment. Pakistan's legal framework and economic strategy do not discriminate against potential foreign investors. Foreign investment is generally subject to the same rules as domestic investment, with the exception of certain sensitive areas such as defence production, banking, and broadcasting.

Various sector specific policies have been announced with substantial incentives as follows: (i) The Fertiliser Policy provides substantial incentives including committed supply of gas at controlled price for existing and new investments, concessionary import duties on certain essential raw materials and permission to import second hand plant. Similarly the Engineering Policy defined as Engineering Vision – 2010, or the Textile Policy defined as Textile Vision 2005 aim at the development of these sectors through higher production and exports so as to place Pakistan amongst the top 5 exporters of textile in Asia. (ii) The Petroleum Policy 1997 defines incentive packages for upstream and downstream activities, provides incentive for offshore drilling as well as other incentives and production enhancement initiatives. Similarly the policy for power generation projects 2002 looks at promoting investment in this sector through further liberalisation and financial incentives as well as certain fiscal incentives so as to cover the energy gap forecasted by the year 2005. (iii) The Pakistan Merchant Marine Policy 2001 aims at facilitating investment in shipping and its development by expanding Pakistan’s merchant fleet, increasing cargo capacity, revival of ship building and expansion of maritime training and support. Various incentives such as exemption of import duties and reduced berthing rates have been defined. (iv) The Government’s Information Technology Policy 2002 identifies special efforts for the development of this sector with increased budget allocation and expectation to reach software export of USD 1 billion by 2005. Various incentives for the development of this sector have been provided including substantial reduction in bandwidth cost, major training initiatives, tax exemption on software export business up to 2016 as well as various other direct and indirect tax concessions. (v) The Government’s Tourism Policy 2001 sets out its target to promote and increase tourism and targets an increase of its 0.5 million foreign visitors by 6.5% annually over the next 5 years and increased foreign earnings to USD 500 million per year over next 5 years. To achieve these targets, various incentives have been designed, including reduced customs duty on import of the hospitality industry, 50% tax rebate on income of tour operators who bring in at least 500 inbound tourists and provision of land for tourist activity on non-commercial rates and long lease basis.

Page 50 New Business Opportunities in Pakistan (vi) The National Mineral Policy targets development through investment in small scale mining, provision of grants, reduction in customs duties and provincial levies and exemption on exports

The Foreign Private Investment (Promotion and Protection) Act 1976 provides that foreign investment shall not be subject to more taxation on income than investment made in similar circumstances by Pakistani citizens. The new Investment Policy provides equal investment opportunities for both domestic and foreign investors. Foreign investment on a repatriable basis has now been allowed in manufacturing, infrastructure, hotel/tourism, agriculture, services, and social sectors.

Detailed analysis of these incentives is conducted in Part II of this Guide.

1.16 Investor perceptions

Box 10 presents the opinion of the Pakistan-Britain Advisory Group (British companies being the major EU investors in Pakistan), as resumed by the press, further to the publication of their report, mid 2002. Most of their conclusions remain valid to day.

Box 10: Opinion of the Pakistan-Britain Advisory Group on the Pakistan Investment Climate KARACHI, April 30: Pakistan remains behind the more progressive developing countries, its direct competitors for investment, in creating a climate attractive to "new businesses". The British companies, operating in the country, see "existing investments as safe and worthwhile" but rule out new investment as "very unlikely." Well-established multinationals, used to the country's environment, continue to invest but new-comers are not encouraged because of poor policy implementation. This is the feedback that Pakistan-Britain Advisory Group (PBAG) got from British companies while compiling its recommendations for promotion of investment and trade. Foreign companies, operating in Pakistan, are of the considered view that "a Government structure that attaches scant importance to the implementation of ministerial and cabinet decisions" has slowed down the investment inflows. The attitudes towards private sector and deregulation and the culture has not changed in lower levels of civil service that pays lip service to policy and is a big snag in execution of strategic decisions. Brain-drain has resulted in shortage of quality educated and trained people, particularly in the civil service. While fully backing the Government's reform agenda and applauding the President's initiative to remove irritants, the PBAG report has stressed the need of improving the record of policy execution to release the full potential of deregulation and reforms agenda. For this to happen, it has suggested creation of an Implementation Cell within the Presidency designed to ensure that strategic decisions, particularly those with cross-cutting impact across a number of ministries, are put into effect. The cell should work with a single focus not on policy creation but policy implementation. Similar small cells should be created within the ministries and should be responsible to the Cabinet Minister. "It is like a simple business practice. If the company's board decisions are not implemented, the businesses, the COEs and MDs do not survive. The Government should be no different." The PBAG report was submitted by the British High Commissioner Hilary Synnott to federal minister for commerce Razzak Dawood on Friday. In its recommendations, the report suggests that Pakistan should match the appeal of Korea and Malaysia for large investments to flow in and warns that this will not happen while the Government machine remains resistant to change. "Radical overhaul is clearly necessary," it emphasises. A representative sample of the view of the British companies currently operating in Pakistan has been summed up as follows: Pakistan is perceived as multinational "bashers." Investors consider it as a high risk country, with poor policing and high security risk costs. The attitude towards creation of profits is looked down on by society and civil servants. The country suffers from continuous political instability with no track record of political consistency and social stability leading to gross uncertainty among UK investors. Pakistan has a poor law and order image with UK investors. It is perceived to have weak laws and even poorer implementation. It enjoys a reputation for lack of detection of perpetrators, and is seen as lawless society that harbours terrorists and criminal factions. Similarly, the country is perceived to have iniquitous taxation systems, too many presumptive taxes and advancement payments system. The CBR demonstrates irrational attitude. The UK investments into Pakistan are eroded by negative perception, says PBAG report and stresses that the Governments of the two countries can create the right political atmosphere, stimulate fresh thinking and redress false media perception and in other proactive ways provide a lead for increased investment and trade. The report acknowledges that times are changing and with the prospects of better and more consistent policy making and a friendlier business environment, the opportunities are growing for trade and investment. It, however, calls for clarity and continuity in policy formulation, a total commitment to business friendly policies and rigorous implementation. Source: The Dawn, 01 May 2002

Contacts made with a number of overseas Pakistanis in London confirmed the above vision, especially as far as the smaller investors are concerned. The larger ones took a more positive view of the opportunities offered by the country.

1.17 Country risk assessment

Within the global context, the political and macro economic situation of Pakistan has dramatically improved during the last three years. The effect of such satisfactory features is translating into micro economic improvements at the firms’ level, and is already improving the living standards of the population.

Page 51 New Business Opportunities in Pakistan 1.17.1 Moody’s Investor Service http://www.moodys.com/cust/default.asp

Moody's Investor Service raised Pakistan's rating for external debt and bank deposits from Caa1 to B3 in February 2002 as a consequence of the country's agreement with the Paris Club of inter- governmental lenders. A further increase from B3 to B2 intervened in October 2003 to reflect the narrowing fiscal deficit, the rapid decline in debt ratios, and the ongoing strength of the external position. The outlook is stable across the rating.

The upgrade reflects the improved macro economic position and is additionally backed by the Government's reform policy as well as the IMF assistance.

1.17.2 Standard & Poor’s http://www.standardandpoors.com

Standard & Poor's currently assigned Pakistan's external debt in local currency a stable but speculative rating of BB- and in foreign currency a speculative rating of B, with a stable outlook until very recently. However, Standard & Poor’s Ratings Services on Tuesday, December 2nd 2003, revised the outlook on its long-term sovereign credit ratings on Pakistan to positive from stable. The ‘B/B’ foreign currency and ‘BB-/B’ local currency sovereign ratings on Pakistan were affirmed.

The outlook revision reflects improved fiscal and macroeconomic performance, growing external liquidity and continued structural reforms under Prime Minister Jamali’s Government.

Box 11: Rating spectrum Each business day, issues that are included or have the potential to be included in the U.S. Investment Grade Credit Index must have a Standard & Poor’s rating within one of the rating designations below. The issue must also have had a Moody’s Investors Service rating, within one of the designations below, on the previous day. Issues that are split-rated at the ‘crossover’ rating spectrum—covering issues rated within an investment grade rating category by Standard & Poor’s but speculative grade by Moody’s Investors Service or vice versa—are not included in either the U.S. Investment Grade Credit Index or the U.S. Speculative Grade Credit Index. Each business day, issues that are included or have the potential to be included in the U.S. Speculative Grade Credit Index must have a Standard & Poor’s rating within one of the rating designations below. The issue must also have had a Moody’s Investors Service rating, within one of the designations below, on the previous day.

1.17.3 Export Credit Agencies http://www.cofacerating.com/ http://www.ecgd.gov.uk/home/cir_cc.htm?frmchk=y&cID=153 www.hermes-kredit.com/

Page 52 New Business Opportunities in Pakistan The main export credit agencies of Europe such as the Export Credit Guarantee Department (ECGD), the Compagnie Française d’Assurance du Commerce Extérieur (COFACE) or the Istituto per i Servizi Assicurativi del credito all’Esportazione (SACE) will consider the Pakistani risk only on a case per case basis. Box 12 preents COFACE's opinion on Pakistan as per October 2003.

It is worthwhile to note that Hermes from Germany has a limit of Euro 50 million for medium term risk, and an open limit for short term commitments.

Similarly, China is considering the Pakistani risk as acceptable, having recently authorised among others, a 10 year delayed payment of USD 120 million covering the delivery of pipe related equipment by the Sino Petroleum Import Export Company (Sipec).

Box 12: Coface Pakistan review, October 2003 Assets: - International aid received after Pakistan joined the antiterrorist alliance has consolidated the country's financial situation. - The country's nuclear-power status and the risk of it switching to an anti-Western camp have given it a central position among American strategic priorities. - Several structural reforms, like banking sector consolidation, have been progressing under IMF auspices. - Private remittances by expatriate workers have been underpinning the country's foreign currency position. Liabilities: - Very dependent on farming, the economy is vulnerable to weather conditions. - Political risk could impede investment. - The country's financial situation is dependent on relief granted by creditors and on financial aid flows. - India's persistent problems tend to create substantial risk of regional destabilisation. - Public opinion is far from unanimous on external political options. Risk assessment: Pursuing its policy of cooperation with the United States in combating terrorism, Pakistan has been benefiting from international financial assistance that bolsters the economy. The September 2001 Paris Club agreement and continued IMF support have been contributing to improvement of Government solvency. Furthermore, an export increase has reduced the external financing need and improved the currency liquidity situation. Finally, the growth and inflation rates reflect the country's relative dynamism. However, the good performance's durability is uncertain since it is partially attributable to exogenous factors notwithstanding progress made on implementing some reforms like a tax system overhaul. Structural impediments continue to hamper growth. Sectors that dominate the economy are weak. With textiles representing 60% of exports and agriculture 26% of GDP, the economy's health is dependent on the weather. The country has fallen far behind on health and education and the demographic constraint is substantial. Moreover, political risk is high. The influence of Islamist movements opposed to pro-American policy has been growing, spurred by increasingly widespread anti-American sentiment. Externally, Indo-Pakistani relations continue to be tense with the two countries' official positions having remained somewhat unchanged on the Kashmir issue and uncompromising despite recent declarations favourable to opening talks

1.17.4 Bretton Woods institutions http://lnweb18.worldbank.org/SAR/sa.nsf/Countries/Pakistan/E446D9087F72838E85256B02006CBFF 4?OpenDocument http://www.imf.org/external/np/vc/2003/092303.htm

Extracts from the World Bank assessment of Pakistan in its country paper 2003 are presented in Box 13, and a summary of the most recent IMF assessment in Box 14.

Box 13: World Bank Country Paper Pakistan, 2003 Pakistan has turned around a deteriorating macroeconomic situation to a rapidly improving one. In 2002/03, GDP grew by an estimated 5.1% while inflation remained low at 3.3%. The budget deficit was contained at 4.6% of GDP. However, despite these favourable developments, Pakistan still lags behind countries with comparable per capita income in most social indicators. Only 44% of Pakistan's population is literate, compared to an average of 64% of the population in countries with similar income per capita. The Government of Pakistan's economic reform programme, now in its fourth year, has renewed hope that these development challenges can be tackled seriously. But this will not be achieved without fully developing human capital, improving the investment climate, and increasing productivity growth to sustain the 5 or 6% annual growth rate needed to significantly reduce poverty. In addition, a greater challenge faces Pakistan: that of its transformation—politically, economically, socially, and with respect to gender—to a modern state. Despite the recent economic improvements, Pakistan's external and public debt is both quite large, and there are concerns over the fragility of the country's external position and future growth prospects. Moreover, perceptions about security risks and political instability continue to dampen investor interest and prospects for exports and Foreign Direct Investments (FDI) in the country.

Page 53 New Business Opportunities in Pakistan Box 14: Pakistan no more on list of ‘high-risk’ economies ISLAMABAD: The IMF has removed Pakistan from the list of ‘high-risk’ economies but is expected to negotiate for another programme for fiscal reforms. Sources told The News here on Saturday that the removal of Pakistan from the list would mean an end to the practice of quarterly scrutiny of the country’s fiscal performance, and now there would be only half-yearly appraisal. However, there could be a mid term communication for pointing out major drifts from the planned course in reform implementation as well as exchange of new ideas on how to run fiscal administration more prudently. During such overtures, the IMF is also expected to launch negotiations for an altogether new programme of reform assistance, the sources added. Primarily, the removal of Pakistan from the list of countries at highest-risk has been taken on the basis of plugging of slippage in resources and spending; improvement in the situation in bank borrowing for meeting budgetary requirements; reduction in fiscal deficit and stability in inflow-spending scenario on account of batter revenue collection during the past five months. Chairman Central Board of Revenue Riaz Malik, when contacted, said, the revenue situation has been a major irritant in the past while dealing with the IMF on performance review, but the stability now appears to have come to stay, providing ground enough to indicate stability in overall fiscal course. He refrained from putting a claim on revenue-collection play a decisive role in achieving up-gradation in fiscal administration, but pointed out that measures put in place worked in accordance with requirements of improved tax deposits. That was why the Fund officials agreed with Islamabad on the country having crossed the barrier for de-listing from the high-risked economies. Since the targets agreed between Pakistan and the Fund for Budget-2004-05 have been offered enough backing to meet the terms in fiscal administration, the two sides would only be discussing matters that might impede the run on course toward putting in place of additional measures for securing the targets Source: The News, 28 September 2003

Page 54 New Business Opportunities in Pakistan

BUSINESS ENVIRONMENT

The business environment has been profoundly liberalised in recent years. Most barriers to the flow of capital and international direct investment have been removed. Tariffs have been reduced an average rate of 16%, with a maximum of 25% (except for the car industry). The privatisation’ process, which started in the early 1990s, has gained momentum, with most of the banking system already in private hands, and the oil sector targeted to be the next big privatisation operation.

The foreign investment regime has been liberalised and most sectors have been opened to foreign investors without any restrictions. Unlimited remittance of profits, dividends, service fees or capital is now the rule. Business regulations have been streamlined and are now among the most liberal in the region.

One of the main issues confronting FDI in Pakistan is the obtention of an unbiased treatment of claims in court, as well as the lengthy delays it may imply. While Pakistan has signed the New York convention on International Arbitration, this agreement has not been ratified yet and is therefore not readily enforceable in the country. Protection of patents and copyrights while being the subject of a satisfactory legal framework is not yet enforced easily.

1.18 Legal framework

Pakistan's legal system is based on British law, with a more recent overlay of Islamic law. Statutes are a mixture of laws carried over from British rule and updating amendments and laws enacted since partition. Pakistan's commercial laws largely follow common law principles.

Civil or criminal claims are brought in the first tier to local court on a sub-district level and from there it may move up through the District Court and High Court to the Supreme Court. The Supreme Court, based in Islamabad, hears appeals from the four provincial High Courts and the Federal Sharia (i.e. Islamic) Court. It also deals with cases involving disputes between provinces or between provinces and the federal Government.

Each province has a High Court (the Islamabad Capital Territory falls within the jurisdiction of the Punjab High Court at Lahore) which hears appeals from judgments and orders of the District Courts (for civil cases) and Sessions Courts (for criminal cases) and have original jurisdiction in certain other matters.

The Federal Sharia Court examines and determines whether or not certain provision is repugnant to the injunctions of the Islam. There are also a number of special courts and tribunals to deal with specific types of cases such as customs, banking, environment and labour.

A shortage of judges continues to slow down litigation in Pakistan and therefore cases can often take years to be resolved (see Table 14). However, Pakistan is assisted with legal and judicial reforms by the Asian Development Bank which dedicated a considerable financial package to reform the judiciary and strengthen legal protection for all in Pakistan.

Table 14: Court case statistics Number of Duration Cost (% GNI Procedural Economy Procedures (days) per capita) Complexity Index East Asia & Pacific 19 193 66.3 55 OECD: High income 17 233 7.1 49 South Asia 19 358 92.6 55 Bangladesh 15 270 270.3 51 India 11 365 95 50 Nepal 24 350 44.2 63 Pakistan 30 365 45.8 53 Sri Lanka 17 440 7.6 59 Source: World Bank, Investment Climate and Regulation

Page 55 New Business Opportunities in Pakistan 1.19 Business regulations

Pakistan business regulations cover aspect corporate regulation, trade, industry, taxes, foreign exchange, competition, intellectual property, social security and labour laws.

1.19.1 Corporate regulation

The Corporate Law, in line with the general legal framework, derives its basis from English law and is made up of regulations directed towards the various corporate activities including legal structures, operating mechanisms, fiscal and legal transactions, regulatory arrangements as well as covering the working of companies, financial and other corporate sector institutions such as stock exchanges, non banking financial institutions, insurance companies etc. While the main regulation is that of the Companies Ordinance of 1984 and the Companies Rules of 1985 there are various other statutes and rules.

The Securities and Exchange Commission of Pakistan (SECP) is the corporate law regulator. It was formed under the Securities and Exchange of Pakistan Act, 1997 (the "SECP Act"), and became operational by 1999.

The SECP issues approvals and permissions for the setting up of companies including those involving foreign investment, foreign branch offices as well as issuance of approvals for listings on the stock exchanges. As a regulator its role extends to ensuring implementation of corporate regulation and carrying out investigation under the SECP Act.

As of 30 June 2003 there were a total of 41,665 companies registered with SECP, of which 37,914 were private limited, 2,690 were public limited, and 536 foreign companies.

1.19.2 Legal entities status

A foreign company can have its representation in Pakistan established through various legal forms such as (i) a partnership, (ii) a privately or closely held limited liability company or (iii) a public limited company which may or may not be quoted on the stock exchange. A variation in the form of limited companies is that of Companies Limited by Guarantee. In case a foreign investment is in a non- commercial or charitable venture then choice of a Foundation or a Trust is also available.

The main legislation governing incorporated companies is the Companies Ordinance of 1984 and the Companies Rules of 1985. These two statutes provide the law and regulation which deals with private or public limited companies including foreign controlled companies. Partnerships and proprietorships are governed by the Partnership Act of 1932.

Incorporated companies provide the most effective and recognised legal framework for corporate and commercial activity including foreign investment. In these, private limited companies are subject to least regulation while public quoted companies are subject to maximum regulation and reporting. Non commercial activities and non-profit ventures are best accommodated through not-for-profit companies limited by guarantee.

Foreign companies operating temporarily in Pakistan, e.g. executing construction contracts, usually do so through by setting a branch office; for liaison activity a liaison office can be established (see 1.24.4.3). However, foreign contractors who work in joint venture with local entities can establish operations under a partnership arrangement.

For setting up of a company the procedure extends from getting approval of the companies name right up to getting the company registered through filing of its Charter (Articles and Memorandum of Association) along with other information concerning its business objectives, capital, registered office, directors, etc. In case of requirement to set up a partnership firm or any other legal entity such as a Trust or a Foundation or a Society, the requirements of registration follow a similar path with the designated registration authority such as the Registrar of Firm for partnerships or the Registrar of Societies for societies.

Practical information on Companies registration are described in more details in 1.24.

Page 56 New Business Opportunities in Pakistan 1.19.3 Foreign exchange regulations

The banking system provides repatriation and remittance facilities permitted in accordance with the financial regulations, defined by the State Bank of Pakistan. Accordingly, full repatriation of capital, profits and dividends is allowed from all activities. For royalties, technical fees and franchise fees, remittance payments have been permitted for all sectors in accordance with the levels of payment permitted.

Foreign investors can contract foreign private loans without restriction subject to registration with the State Bank of Pakistan. While foreign controlled manufacturing concerns can undertake unlimited domestic borrowing for working capital, others are only entitled to borrow up to 50% or 75% of their paid up capital.

Foreign Exchange regulations are principally contained in the Foreign Exchange Regulation Act of 1947 with the State Bank of Pakistan having the main responsibility for the administration, management and implementation of the foreign exchange policy much of which is defined in the State Bank’s Foreign Exchange Manual.

The foreign exchange regime has been liberalised substantially, and foreign exchange transactions are subject to a limited number of conditions. For Pakistani business entities, the Rupee is convertible as far as current account transactions covering trade, travel, tourism and services are concerned. However, specific permissions have to be obtained for capital account transactions.

Pakistani companies can raise borrowings and equity funds in foreign currency from abroad without prior permission within specific ceiling and in accordance with guidelines. The ceilings relate to those placed by reference to prudential regulations where debt has to be within defined financial parameters with reference to equity. These guidelines are contained within prudential regulations. Working capital financing raised from abroad is also subject to certain restrictions referred to as the “L Form” category.

Some of the important foreign exchange regulations relating to foreign entities and persons resident outside of Pakistan include the following: - Individuals, companies and other business entities including foreign controlled companies are permitted to maintain foreign currency accounts with banks in Pakistan. Business income received in foreign currency is required to be converted into Rupees on receipt with certain exemptions permitting such receipts to be retained in foreign currency. (At times some of the manufacturers / exporters such as textile and foods etc. who have recurring foreign currency cost for marketing promotion and imports are allowed through special permission to retain part of their export proceeds in foreign currency to meet such costs). - Business expenditure for authorised transactions is permitted to be undertaken while in some cases prior approval of State Bank is required (Most business transactions involving foreign currency are undertaken through normal banking process, however, certain transactions such as interest, royalties etc. require clearance from SBP before being implemented.) - Payments for imports of goods and services are required to be effected through banking channels along defined codes for each transaction. Remittances for management fees, royalties, fee for technical services and the like are permitted against contracts which should be pre registered with the State Bank. - Profit earnings, dividends and capital can be remitted subject to fulfilment of declaration and clearance of taxes. - Salaries earned by expatriates working in Pakistan are fully repatriable subject to certain formalities (State Bank regulations permit remittance of salaries earned by expatriates in Rupees provided it can be demonstrated that such remittance is for maintenance of dependents outside of Pakistan). - Foreign investment is required to be made in foreign currency or assets and converted into Rupees or Rupees worth after receipt into Pakistan. Repatriation against such investment both for capital and profits can be made subject to clearance of all taxes due. - Business entities which have undertaken foreign currency denominated debt are permitted to make repayment of principal and interest in foreign currency provided the loan agreement has been registered with State Bank of Pakistan. - Borrowings by foreign controlled companies can be undertaken only after specific permissions have been obtained from the State Bank as well as compliance with other regulations relating to borrowings such as those contained in the prudential regulations. (Foreign controlled companies’ borrowings are subject to prior clearance from the State Bank. On working capital loans, manufacturing companies are exempted from such requirement while others can only borrow up to

Page 57 New Business Opportunities in Pakistan 50% to 75% of their equity. In addition certain specific debt equity ratio and specific current ratio have to be maintained in accordance with prudential regulation).

1.19.4 Investment regulations

The Board of Investment (BOI) is the central investment promotion and facilitation agency of the Government. It is headed by the Prime Minister and overseen by the Minister of Industries. A Cabinet Committee on Investment (CCOI) headed by the Finance Minister has been formed and is concerned exclusively with matters relating to private sector investment.

Various regulations regarding licensing, approvals for investment in the negative list of industries, regulations on minimum equity requirements, and extent of foreign investment in specific sectors as well as conditions with regard to royalty, technical fees and franchising are principally determined through the BOI which provides for the first point of approval wherever necessary.

1.19.4.1 The Foreign Private Investment (Promotion & Protection) Act of 1976 (FPIA) This Act has been enacted to promote and protect foreign private investments in the country. FPIA1 provides protection to foreign investors with respect to their industrial establishments in Pakistan, precludes the Government from acquiring foreign capital or foreign investments in an industrial undertaking except under due process of law with adequate compensation. It upholds the principle of equal treatment to foreign owned industrial undertakings with regard to laws, rules and regulations. Furthermore, it confirms the availability of permission for repatriation of capital and profits in foreign exchange as well as remittance by foreign employees for maintenance of their dependents abroad.

1.19.4.2 The Protection of Economic Reforms Act, 1992 This Act was subsequently enacted mainly to provide legal cover for economic reforms related to privatisation and deregulation and other fiscal incentives introduced on and after 07 November 1990, through various policies, programmes and regulations of the Government. The Act allows all Pakistani and foreign nationals to bring in and take out of the country foreign exchange without any restrictions. Foreign currency account holders in Pakistan are assured that no restrictions will be placed on their deposits by the central bank. The law assures the investors that the fiscal incentives allowed to them through rules and regulations shall continue for the term specified therein and shall not be altered to their disadvantage. Contrary to the FPIA, which allows the federal Government a take-over under due process of law, this law clearly lays down that no industrial or commercial enterprise or any equity investment in a company or financial institution shall be compulsorily acquired or taken over by the Government.

1.19.5 Labour law

Pakistan has an extensively regulated system for protecting the interests of industrial workers and employees in Government controlled sectors. However, regulations are less strict for management and administration, non-manufacturing enterprises, casual workers and domestic help. Labour disputes are handled by Labour Courts. A more detailed and hands-on analysis of the labour environment for operating a business is given in section 1.29.

1.19.5.1 Wage regulations The Minimum Wages Ordinance of 1961 as well as various others laws provide for a federal minimum wage for unskilled workers (2,500 rupees or about USD 41 per month) which are subject to periodical review. In addition, various other payments including a minimum bonus for industrial workers, certain cost of living and support allowances, gratuity on leaving employment etc. are also available and covered by different wage regulations.

1.19.5.2 Social security Various regulations cover the social security primarily of industrial and public sector employees. The Employees Old Age Benefit Act, the Employee Social Security Ordinance, the Workers Participation In Profits Act, or the Workmen Compensation and Liability Regulations are but a few of these. Through these acts, various contributory funding arrangements have been set up through which employers contribute towards the cost of such social requirements including retirement and pension as well as

1 Industrial undertakings are defined in FPIA as entities involved in the production, distribution or processing of goods. Page 58 New Business Opportunities in Pakistan provide for payment of compensation to workmen and their dependents in case of injury, accident, disablement or death in course of employment.

1.19.5.3 Working conditions The Factories Act of 1934 as well as the Workmen Compensation Act and regulations concerning employment of children as well as disabled persons mainly provide for the framework on working conditions. It provides for a maximum workweek of 48 hours (54 hours for seasonal factories) with rest periods during the workday and paid annual holidays.

In general, foreign owned enterprises do better than most employers in fulfilling their legal obligations and dealing responsibly with unions. The constitution and national law prohibit slavery and forced labour, including forced labour by children. In Pakistan child labour as well as bonded labour is still an issue. However, there is a conscious effort by the Government to overcome this through social reform measures. The Constitution prohibits employing children aged 14 years and under in factories, mines and hazardous occupations. No child can work overtime or at night.

1.19.5.4 Trade unions and workers' rights There are various regulations on trade unions and industrial relations through which a number of workers’ rights are granted. The right of association includes the right to form trade unions. Workers are permitted to organise and to freely elect representatives to act as collective bargaining agents. The right to strike is constrained by the Government's authority to ban any strike that may cause serious hardship to the community or prejudice the national interest, as well as any strike that lasts for more than 30 days.

1.19.6 Competition law

Enforcement of competition law in Pakistan is under the jurisdiction of the Monopoly Control Authority, an independent regulatory authority. The Competition law is governed by the Monopolies and Restrictive Trade Practices Ordinance of 1970.

The Government subscribes to principles of international competitive bidding, but it has been reported that political influence on procurement decisions has been common in the past, and that decisions were not always made on price and technical quality alone. There has been a greater degree of transparency in procurement practices since the current Government took office in October 1999. The present Government has also promulgated the Public Procurement Regulatory Authority Ordinance of 2001, under which a procurement regulatory agency has been set up.

The issue of private competition with public enterprises is complicated by the fact that many of the entities that remain in the public sector are chronic loss-makers. The Government has not adopted visibly unfair competitive practices in these public-private matters, but the situation varies from industry to industry.

1.19.7 Industrial and intellectual property

Despite having a set of laws covering most aspects of patents, trade marks, intellectual property and industrial property, as well as being a signatory to the WTO rules on the subject, legal protection from copy infringement is not easy to enforce in Pakistan. Local production of copies of expensive foreign equipment is often considered normal by industrialists who do not appear conscious of the property rights issues implied.

Intellectual property used to be protected by nearly a century-old Pakistani law. As a member of the WTO, Pakistan has signed the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and committed to adopt international standards. In compliance with its obligation Pakistan has amended its legislation since 2000.

Protection of literary work including works on humanity, religion, social and physical sciences, compilation of data, computer programmes and artistic work including phonograms is granted. The period of copyright of a literary, dramatic, musical or artistic work is the life of the author and 50 years thereafter. In case of a cinematographic work or a photograph, copyright exists for 50 years from the beginning of the calendar year of the publication of the work.

Page 59 New Business Opportunities in Pakistan Patents are granted by the Patent Office, a department of the Ministry of Industries and Production, on new inventions for up to 20 years from the date of application. An invention is meant to be any new and useful product including chemical products, art, process, method or manner of manufacture, machine, apparatus or other article. It also incorporates substances, articles and manufactured products, and includes any new and useful improvement on any of them. The Patent office is also responsible for registering industrial designs. Legal remedies such as injunctions are available in case of patent infringement.

Trademarks are registered through the Trademark Registry, a department affiliated to the Ministry of Commerce. Trademarks can be registered for a period of ten years from the date of registration and the registration may be renewed for a further period of ten years. Civil and criminal remedies are available in case of trespassing of trademark rights.

Pakistan has met the requirements of the WTO and also became a member of the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention and the World Intellectual Property Organisation. However, it is not a member of the Paris Convention for the Protection of Industrial Property. Despite being a member to these conventions, the enforcement of intellectual property laws has been rather weak (see Figure 19).

Figure 19: Contracts, property rights and rule of law

7 6 5 4 3 2 1 Score (scale 1 to 7) 0 USA India China Korea Finland Thailand Pakistan Malaysia Sri LankaSri

Bangladesh Source: World Economic Forum; Global Competitiveness, Report 2003/04- Contracts and law sub-index

Box 15: Application for registration of copyright The author or publisher or other person interested in the copyrighting any work has to file an application for registration of the copyright. According to the Copyright Rules, 1967 ("the Rules") for each work a separate application has to be filed. The application procedure is as follows: Form II, available from the Registrar of Copyrights, has to be filled out in three copies. Two copies of the actual work to be copyrighted. Submission of a registration fee of Rs. 500/- by Challan to State Bank of Pakistan/ National Bank of Pakistan or by bank draft/pay order in favour of Registrar of copyrights. Affidavit. Copy of all the above documents are to be then submitted to the Registrar of Copyrights – Karachi. Placement of advertisement in the newspaper of the artistic work and submit two copies of this advertisement to the registrar copyrights. Provided the Registrar has no objections, a Certificate of Copyrights is issued to the author on first come first serve basis.

Copyright for Computer Programmes In Pakistan: In Pakistan, computer programmes are excluded from patent protection under the patent laws. Protection under the copyright laws is the only safeguard available for the computer software industry. The Ordinance provides that copyright subsists in original, literary, dramatic, musical and artistic works. With regard to the computer programmes, the definition of `literary work' is amended by the Copyright (Amendment) Act, 1992 ("the Amendment Act") to include computer programmes. The Ordinance defines literary work to include work, on complications and computer programmes. "That is to say programmes recorded on any disc, tape, perforated media or other information storage devices, which, if fed into or located in a computer or computer based equipment is capable of reproducing any information".

1.19.8 Environmental law

New environmental rules are expected to generate important investments in various industries to improve their treatment of gas and water residues. The textile sector, due to its size, should be one of

Page 60 New Business Opportunities in Pakistan the sectors targeted by foreign suppliers of environmental technology, especially for the treatment of wastewater. Soda ash and various chemical dyeing products are the main effluents needing treatment.

In order to prescribe the use and check the abuse of environmental resources, the Government of Pakistan has laid down National Environmental Quality Standards (NEQS) for municipal and industrial liquid effluent and industrial gaseous emissions, motor vehicle exhaust and noise. The NEQS in respect of municipal waste, industrial units and vehicular emissions were notified on and enforced from 24 August 1993. With regard to new industrial units, the NEQS have been enforced from 01 July 1996.

The Pakistan Environmental Protection Act 1997 and other regulatory rules and regulations clearly demonstrate the progress that has been made in the environmental arena.

1.20 Foreign investment policy

Foreign investment conditions have been defined by reference to various sectors of the economy. The investment policy regime has been liberalised with most economic sectors open for foreign involvement.

The Government has announced that the main objective of the present investment policy is to enhance the level of foreign investment in order to improve competitiveness and contribute to economic and social development. This indicates the high level of importance that is attached to foreign investment in Pakistan.

The Government has therefore liberalised its investment policy, promoted a stronger and faster enabling framework and opened up almost all sectors for foreign investment while offering tax and other incentives for investment as well as enabling 100% ownership for foreign investment in many areas. The new Investment Policy provides equal investment opportunities for both domestic and foreign investors.

The Government has decided to give "priority industry" status for foreign investment into information technology, oil and gas exploration, mining, leather production, corporate farming, livestock and dairy, financial business and trade, infrastructure, tourism, housing and construction sectors. Complete freedom of choice has been provided on where to locate an activity.

The Government has entered into double taxation agreement with 51 countries and has committed to the principle for equal treatment under its investment laws. It has also entered into bilateral agreements on promotion and protection of investment with 40 countries.

Detailed analysis of these regulations is presented in Part II of this guide (chapters 0 and 0).

1.21 Transparency of the business environment

The World Bank is actively involved with the Government to improve the general economic environment with a view to reduce corruption prone regulations. Improved salary of civil servants and amendments to regulation bottlenecks are part of a comprehensive programme being presently undertaken.

With a Corruption Perception Index of 2.5 (on a 0 to 10 scale), Transparency International ranked Pakistan Number 92 out of 133 countries worldwide in the year 2003. In 2002, the CPI was 2.6, ranking Pakistan 77 out of 102 countries.

Pakistan has laws to combat corruption such as the Prevention of Corruption Act, 1947, the Efficiency and Discipline Rules, 1973, and, most recently, the National Accountability Bureau Ordinance, 1999. Giving and accepting bribes is a criminal act and entails punishments such as confiscation of property, imprisonment, recovery of ill-gotten money, dismissal from service and reduction in rank. However, further progress need to be made. Consequently, the current Government has made accountability one of its major priorities, and has brought cases against former Prime Minister Nawaz Sharif and other members of the National and Provincial Assemblies as well as other organisations, officials or individuals involved in corrupt practices. In June 2000, 1,000 officials in the Central Board of Revenue were fired for corruption and inefficiency. The National Accountability Bureau (NAB), which is responsible for fighting corruption, has also targeted loan defaulters and recovered huge sums of money from them as in the past many Pakistani have used political connections and influence to

Page 61 New Business Opportunities in Pakistan borrow large sums of money without any intention of ever paying it back. There is a clear talk that this area is on the mend showing considerable improvement, and the World Bank is highly involved in supporting the reform of the country in this area, notably through reform of the CBR.

1.22 The banking and financial system

The banking system is now mostly privatised with about 60% of banks in private hands (2003), and probably 85% by the end of 2004, when the Habib Bank shall be privatised.

Although it is difficult to assess the financial situation of the banks the State Bank of Pakistan (SBP) has stated that “non performing loans are satisfactorily covered, up to 60%”2. The SBP is reinforcing its control requirements, such as the compulsory increase of banks’ equity from Rs 30 million initially to Rs 1 billion.

The depth of the financial market has improved further to the satisfactory foreign exchange reserve situation of the country, allowing for a diversification of the banks’ activities into capital market operations through private bond issues, medium term lending and leasing, as well as strong consumer finance development.

Foreign banks although present in limited number but are involved in major corporate and investment transactions with private sector. The foreign banks present are ABN Amro, Deutsche Bank, HSBC and Standard Chartered. Societe General and Credit Agricole Indosuez have recently wound up their operations in Pakistan

Pakistan's financial sector faced some critical issues in the mid-1990s. The security law was outdated and the regulatory framework was weak. High interest rates and after tax yields on National Saving Schemes (NSS) were retarding long-term financial intermediation and crowding out private sector investment. With the financial sector liberalisation programme, which has been put into effect since 1991 but has not made an impact until 1997, both the banking sector and the capital market have been strengthened and have improved coniderably.

1.22.1 Banking sector

Pakistan's banking system is headed by the State Bank of Pakistan (SBP), which is the central bank of the country. One of its core functions is the regulation and supervision of the financial system except for non-bank financial institutions and leasing companies which are monitored by the Securities and Exchange Commission of Pakistan.

Other duties of the SBP are the issuance of banknotes, banking services for the Government, foreign exchange control and the management of foreign exchange reserves. It also conducts the monetary and credit policy, which is done in accordance with the Government's targets for growth and inflation.

The commercial banking sector of Pakistan comprises public sector scheduled banks, private sector banks, specialised banks, foreign banks and various other financial institutions. The state-owned banks, of which the largest were the and the United Bank Limited, have been privatised (the Habib bank is expected to be privatised before the end of 2004). They are still dominating the sector in terms of total deposits and number of branches. The National Bank of Pakistan (NBP) has not been privatised and the State Bank is quite clear that it will not be privatised as NBP performs the treasury functions for the State Bank.

There remain several other public sector banks including special purpose banks, regional banks and cooperatives.

With the amendment of the regulatory framework it has been possible to open private sector banks since 1991. Today, 12 domestic and 17 foreign private commercial banks have branches in Pakistan. Table 15 presents a list of all commercial banks operating in Pakistan.

2 Comment from the State Bank of Pakistan’s Governor. Page 62 New Business Opportunities in Pakistan Table 15: Pakistan - Commercial banks NATIONALIZED COMMERCIAL BANKS PRIVATE SCHEDULED BANKS FOREIGN BANKS First Women Bank Ltd Askari Commercial Bank Ltd ABN Amro Bank N.V. Habib Bank Limited Limited Al-Baraka Islamic Bank B.S.C.(E.C.) National Bank of Pakistan Bank Al-Habib Limited American Express Bank Limited United Bank Limited Bolan Bank Limited Bank of Cylon DE-NATIONALIZED BANKS Limited Credit Agricole Indosuez Allied Bank of Pakistan Ltd Limited Citibank N.A. Muslim Commercial Bank Ltd Metropolitan Bank Limited Deutsche Bank AG SPECIALIZED SCHEDULED BANKS PICIC Commercial Bank Ltd Doha Bank Agricultural Development Bank of Pakistan Platinum Commercial Bank Ltd Habib Bank A.G. Zurich Federal Bank for Co-operatives Prime Commercial Bank Ltd International Finance Investment & Commerce Bank Limited (IFIC) Industrial Development Bank of Pakistan Limited Mashraq Bank psc Punjab Provincial Co-operative Bank Ltd Union Bank Limited Oman International Bank S.O.A.G. PROVINCIAL BANKS Rupali Bank Limited The Bank of Khyber Standard Chartered Bank The Standard Chartered Grindlays Bank Limited MICRO FINANCE BANKS The Bank of Tokyo-Mitsubishi Limited The First Micro Finance Bank Limited The Hongkong and Shanghai Banking Corporation Limited Source: State Bank of Pakistan

Although, as of March 2003, foreign banks are operating only 75 branches as compared to 7150 branches of domestic banks, they are very important in trade finance, with 30% of total trade being transacted through them. Moreover, they play a significant role by introducing new technologies and providing better quality services.

One of the main developments in the banking sector in FY 2002 was the considerable increase in deposits. The growth of deposits by14%, corresponding to Rs 173.3 billion, would have been even higher if the foreign currency accounts had not dropped by 13.7%. The surge in Rupees’ deposits resulted from the State Bank purchasing foreign currencies and thus injecting Rupee liquidity into the market as well as higher remittances from overseas. The fall in foreign currency accounts was the result of the appreciation of the Rupee during the year and hence reflects the disappointment of depreciation speculation. The deposits are still growing at a good pace. In the first three quarters of FY 2003 they went up by 11.6%.

Pakistan's Government has also encouraged the creation of special financial institutions concentrating on small and medium sized enterprises (SMEs). This policy has led to the foundation of the SME Bank, the Khushali Bank and the First Micro Finance Bank Limited; the latter two providing loans to the micro sector and individual business enterprises.

Among the non-banking financial institutions are the development financial institutions which provide project financing and deal with underwriting equity and debt issues. These institutions presently face major problems due to a large amount of non performing loans and defaults after non performing loans increased by 9.4% during 2002-03, hindering growth and profitability.

Another major group of non-banking financial institutions comprises investment banks. There are 14 investment banks in Pakistan which are primarily active in corporate and trade finance as well as securities underwriting and merchant banking. Table 16 presents an overview of non-banking financial institutions in Pakistan.

Table 16: Pakistan – Non-banking financial institutions DEVELOPMENT FINANCIAL INSTITUTIONS VENTURE CAPITAL Investment Corporation of Pakistan Pakistan Venture Capital Limited National Investment Trust Limited Pak Emerging Venture Limited Pak Kuwait Investment Company(Pvt) Limited INVESTMENT BANKS Pak Libya Holding Company (Pvt) Limited First Standard Investment Bank Limited Pak Oman Investment Company (Pvt) Limited Asset Investment Bank Limited Pakistan Industrial Credit & Investment Corp. Ltd. Atlas Investment Bank Limited Saudi Pak Industrial & Agricultural Investment Company (Pvt) Limited Crescent Investment Bank Limited SME Bank Limited Escorts Investment Bank Limited DISCOUNT HOUSES Fidelity Investment Bank Limited First Credit & Discount Corporation (Pvt) Limited First International Investment Bank Limited National Discounting Services Limited Franklin Investment Bank Limited Prudential Discount & Guarantee House Limited Islamic Investment Bank Limited Speedway Fondmetal (Pak) Limited Jehangir Siddiqui Investment Bank Limited HOUSING FINANCE COMPANIES Orix Investment Bank (Pak) Limited Asian Housing Finance Limited Prudential Investment Bank Limited Citibank Housing Finance Co. Limited* Security Investment Bank Limited House Building Finance Corporation Trust Investment Bank Limited International Housing Finance Limited Source: State Bank of Pakistan Page 63 New Business Opportunities in Pakistan

Liability of non performing loans of the whole banking system amounted to 106.13 billion Rupees in December 2002.

1.22.2 Other financial institutions

Besides the banking system, there are some other institutions which provide funding especially for SMEs, such as leasing which has become a very popular way of financing operations. Leasing Companies finance a wide range of equipment, products and appliances such as machinery, motor vehicles, office and computer equipment. In mid-2002 there were 30 leasing companies in Pakistan and investment in leases increased by 9% to 37.5 billion rupees in 2001-02.

A very specific way of financing is facilitated by Modarabas. The Modaraba is basically the Islamic version of a mutual fund (also see Box 16). One party, the Modaraba management company, contributes its skill and efforts while the other party, the Modaraba certificate holder, provides the required funds. The profits earned in the project are shared between the management company and the certificate holders on a predetermined basis. Modarabas may be for a specific purpose or multi- purpose and may be perpetual or floated for a specified period. At the end of June 2002, 46 Modarabas existed in Pakistan with a total of 8.3 billion rupees of paid-up capital. The authors have not been able to estimate accurately the extent of Islamic banking in the country, deemed to be less than 10% of the total.

Box 16: Islamic banking and financing As a Muslim country, Pakistan's banking system is also influenced by regulations contained in the Islamic Code of Operation including guidance from the Koran. The Sharia, which is the guideline or set of doctrines a Muslim has to obey, imposes certain rules on banking and financing, which has become generally known as Islamic Banking. The most influential of these rules is the prohibition of interest. Under the Koran it is forbidden to pay or charge interest on deposits or loans. Money is seen as a medium of exchange but has no value in itself. Therefore making money out of money (for example via interest payments) is not acceptable. Islam rather encourages Muslims to invest their money and become partner in order to share profits and risks in the business instead of becoming creditors. Hence, the ideal mode of financing under the Islamic banking system is financing on a profit and loss basis. There are several financial instruments which are in line with the Sharia and are therefore available to Muslims. The above described participation financing (Modaraba) and leasing (Ijarah) are such allowed financial means. Another widely used instrument is called Murabaha. In this mode, the bank, at the request of its client, purchases the specified goods from a third party against payment. Immediately on the transfer of ownership of the goods, the bank sells these goods to the client at cost plus an agreed fixed profit margin. The client then takes physical possession of the goods and undertakes to pay the price to the bank either in instalments or in lump sum, at an agreed later date. This technique is usually used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling, its profit derives from a real service that entails a certain risk, and is thus seen as legitimate. Musharaka is another form of finance under the rule of Islamic Banking. It is a partnership, normally of limited duration, formed to carry out a specific project. It is therefore similar to a western-style joint venture, and is also regarded by some as the purest form of Islamic financial instrument, since it conforms to the underlying partnership principles of sharing in, and benefiting from, risk. Profits are divided on a pre-determined basis, and any losses shared in proportion to the capital contribution. Islamic banking is dominated by equity financing and consequentially mainly deals with small to medium scale financing. Therefore, it is one important feature of funding SMEs.

1.22.3 Capital market

Capital market reforms were also an integral part of the overall financial sector liberalisation programme. The objective was to facilitate the channelling of investment funds to the most productive uses since the efficient allocation of capital is the main purpose of a capital market. Governance, institutions, regulations and supervision were strengthened leading to more transparency. Moreover, market infrastructure have been modernised and improved. All these steps resulted in a growing capital market.

Pakistan has three stock exchanges located in Karachi, Lahore and Islamabad with Karachi being the most important, accounting for 65% of the total shares traded and listing more than 700 companies. The trend of the Pakistani stock market can be extracted from the KSE-100 Index, which is displayed below. The KSE-100 Index is the most widely followed measure of stock performance in Pakistan. It was launched in November 1991 as a capital weighted index and represents more than 80% of the total market capitalisation.

As can be seen from Figure 20, Pakistan's stock market experienced an impressive performance since 2001, which is the result of a significant turnaround in the economy in general and external account in particular. In fact Pakistan was declared the best performing market in the world in 2002. In the period August 2002 to August 2003 the market soared by 125%.

Page 64 New Business Opportunities in Pakistan

Figure 20: Pakistan: Turnover of shares at KSE and KSE-100 index

14000 5000 12000 4000 10000 8000 3000 6000 2000

Turnover 4000 1000 2000 IndexKSE-100 0 0

2 3 01 02 0 02 03 0 03 y-02 p r- y- Jul 01 ov Jul an a a Jul 03 Sep 01N Jan Mar-02Ma Se Nov 02J M M

Turnover (in million shares) KSE-100 Index

Source: State Bank of Pakistan

Besides equity, corporate debt is also traded at Pakistani stock exchanges. With the issuance of corporate bonds of which were listed on the stock exchange in February 1995, the corporate debt market came into existence. Since then, over 60 different bonds have been issued. Accordingly, the volume has increased from 2 billion Rupees in 1999 to 10 million Rupees in 2002.

The country has already achieved a moderate level of capital mobilisation through the bond and the equity markets at 25 and 11% of GDP respectively, at the end of FY2002. However, bond markets are driven by governmental issues with the corporate bond market accounting only for 0.6% of GDP. Additionally, several risk management tools like options and futures have been successfully developed, providing business with the necessary tools for efficient financial management.

1.23 Market and distribution channels

Despite the large number of inhabitants and a growing middle class, the size of the domestic consumer market remains relatively small. It is difficult to gauge its actual size, but indications tend to concur on about seven million people with an estimated income of USD 7000 or more, on a Purchasing Power Parity basis. On similar criteria, the middle class from China is presently estimated at about 290 million people while India’s middle class would number about 90 millions.

1.23.1 Distribution structure

Pakistan has a well-established distribution network in most parts of the country, especially for non- perishable products. The network consists of C & F agents, stockist/ warehouses, regional , wholesalers, and retail sellers. It is common to find many companies in unrelated/non conflicting product lines sharing the network in a territory.

Typically, the larger cities and metros have up to four levels in the distribution network until the final point of sale. Distributors often work for more than one brand, but rarely in the same or competing product lines.

1.23.2 Retailer profile

The average size of retail outlets even in cities is 40 sqm. Generally, retailers receive supplies from distributors appointed by companies. However, as a means of direct contact with the outlets, companies also depute their own sales persons to book orders from retail outlets, which are then supplied by distributors.

1.23.3 Commercial terms

The average margin is reported to be between 14-18% for all products. Payment terms vary considerably between companies/suppliers, depending on the brand strength and market standing of

Page 65 New Business Opportunities in Pakistan the products. However, most commonly, the supplier collects payment at the time of next supply, which is equivalent to an average 1-2 week’s credit. The most popular promotional schemes are in the form of cash discounts/incentives linked with sales quantity, attractiveness of display, shelf space etc. Increasingly, companies are adopting different distribution networks for rural and urban areas given the stark differences in logistical needs and the off take levels.

Rural distribution sees coverage through rural super distributors or super stockists in charge of several stockists, including mobile ones that carry products in vans to all villages in their territories, and leverage a large product range (including several brands) over the circuit costs.

1.23.4 Organised retail

Pakistan has a highly fragmented retail industry; however there appears to be some development towards more modern types of retailing, targeting the emerging middle class, especially in Karachi, such as the Park Tower, The Forum or The Plaza Shopping Malls. The fact that Carrefour, the French retail distribution chain is contemplating a sizable investment in Karachi points to the importance of this new market segment.

The driving factors behind the emergence of retail as a new social phenomenon are: growing incomes, the changing role of women and a demand for ‘shop entertainment’. It must be stressed however that this phenomena is still limited and very recent.

Investments of overseas Pakistanis seem to target the retail sector.

1.23.5 Government intervention

In retail food sales, the Government has used pricing in its several hundreds-unit Utility Stores Corporation chain to nominally subsidise prices of essential foodstuffs. Utility Stores are under the administrative control of the Utility Stores Corporation under the Ministry of Industries. Utility Stores are spread all over Pakistan and the prices of almost all the items are lower than the normal market prices.

SUMMARY: INTERNATIONAL COMPETITIVENESS OF PAKISTAN

The main drawback affecting Pakistan’s attraction of foreign investments arises from the negative security perception by westerners due to the Kashmir conflict, the Afghan situation as well as the internal sectarian violence. However reality has been improving fast on all three fronts recently.

The present political situation should comfort investors as to the sustainability of the political process and the democratic commitments of the Government.

The macro-economic and financial “miracle” of the last three years, due for a significant part to the financial support offered by the international finance community, mostly through debt rescheduling and soft loans appears now to favourably impact on micro economic development.

The streamlining of the regulations is already alleviating a still bureaucratic environment, while the commitment of the Government should improve in due course the still weak enforcement of litigation, arbitration and property rights and the contentious enforcement of the tax regulation. Poor infrastructure which adds to the cost of doing business is being improved.

Time should confirm hopefully the recent good performance on all above points which still has to translate into micro-economic successes and poverty alleviation.

The main positive points cover the very liberal business regulations, the recent booming performance of the country as well as the improved profitability of the companies in most sectors.

For the last three years, the International competitiveness of Pakistan, based on its macro economic situation has improved dramatically. It now stands in a very competitive situation compared to the countries in the region.

Its competitiveness based on business regulation and administrative environment, appears progressing, while implementation through the Government administration might not yet have reached

Page 66 New Business Opportunities in Pakistan a satisfactory level. Cost of finance which was mentioned as a drawback for business as recently as a year ago, is now very reasonable, with bank interest rates on corporate loans in single digits.

Table 17: Pakistan's investment climate compared to India and China Investment Climate at a glance

China, India and Pakistan

GNI per cap, PPP $ Macro environment China India Pakistan 1995 2000 /1 1995 2000/ 1 1995 2000/1 4000 GNI per capita (US$, PPP) 2650 3920 1850 2340 1730 1860 Population, mid year (millions) 1205 1262 929 1016 122 138 3000 GDP growth (1991-95 and 1996-2000, avg %) 12.1 8.2 5.2 5.7 4.8 3.1 2000 Openness (Imports+Exports/GDP) 45.7 49.1 25.7 30.5 37.1 34.6 Private Investment (% GDP) 18.6 17.3 18.2 17 9.4 10.1 1000 Public Investment (% GDP) 22.2 19.9 8.4 7.3 9 5.5 1995 1996 1997 1998 1999 2000 FDI inflows (net, % GDP) 5.1 3.6 0.6 0.5 1.2 0.5 China India Pakistan

Micro environment Inputs Labor force education (avg years educ, manufact.) 10 10 9 Excess labor force, % 17.3 3.6 Suppliers availability (used for main input), median 20 4 Stock of inventories of inputs (days of production) 28 R&D (% sales) 2.0 0.2

Governance Control of corruption2 -0 .3 -0. 39 -0.7 9 Rule of law2 -0.19 0.23 -0.74 Political Stability2 0.39 -0.05 -0.39 Number of visits by gvnt officials, avg per year % of senior manager time with gvnt officials

Infrastructure PC per 1,000 people Share of firms with own generator, % 30 69 42 20 Excess cost of private electricity, % of public Days to clear imports, longest in last year 12 21 30 15 3 Cost of shipping, % 5.4 8.5 5.0 10 Telephone lines in largest city (per 1000 people) 294 131 62 Personal computers (per 1000 people) 16 5 4 5 Paved roads, % of total 22 46 43 0 1995 1996 1997 1998 1999 2000 China India Pakistan

Finance Credit to Priv. Sector (% gdp) Cost of capital (lending interest rate, %) 5.85 12.29 14.8 150 Share of credit from financial institutions, % Credit to private sector (stock, % of GDP) 125 29 29 100

50

0 1995 1996 1997 1998 1999 2000 China India Pakistan

Source: WDI, ICU firm surveys 1/ or most recent available year 2 Scale of -2.5 to 2.5. Higher values correspond to better outcomes 3 Transport cost as share of value of export to US, textiles, 1998. 4 Ratio of average wage to average value added, median value 5 % variation of avg expectations Source: http://rru.worldbank.org/doingbusiness/SnapshotReports/Country.aspx?regionid=147

Page 67 New Business Opportunities in Pakistan

PART II: PRACTICAL BUSINESS INFORMATION

SETTING UP A BUSINESS IN PAKISTAN

In recent years, the Government of Pakistan has substantially simplified the regulatory environment for the setting up of a business operation. Although the one-stop-shop approach is not yet a reality the Board of Investment (BOI) and the Security and Exchange Commission of Pakistan (SECP) have strict guidelines to process applications within set time limits. Delays in the provision of fixed line telecommunication, power and water supply depend on the location, but have been improving substantially over the years. Mobile communication and internet access is efficient.

Incentives for investment are limited to high front end depreciation of equipment, holiday income tax as well as duty drawbacks on imported equipment.

1.24 Business regulatory environment

In the past, investment in Pakistan was the subject of numerous approvals, permits and licenses which have been thoroughly streamlined recently. Administration of investment is now concentrated with the BOI and the SECP in a kind of one stop shop system. Requirements such as the registration of foreign investors with the BOI have been removed, no more screening from the Government on foreign investment is required, unless special incentives are involved, and no requirement to obtain provincial Government clearing for project location other than for a few specified sensitive areas of operation.

The recent reduction in the number of days to set up a business in Pakistan is significant and ranks the country among the best in this regard in Asia (see Table 18).

Furthermore, the 1976 Foreign Private Investment Promotion and Protection Act, as well as the 1992 Economic Reforms Act offer statutory safeguards for the rights of the foreign investor, on the basis of non discriminatory treatment. However, enforcement of such rights through the legal system can sometimes be problematic (see Box 22 further below).

Table 18: Starting a business in Pakistan and selected other countries, 2002 Country Number of Time (N° of Cost -% per capita Minimum capital (% Procedures days) income per capita income Pakistan (2002) 10 53 70 0 Pakistan (2003) 10 27 47 0 India 10 88 55 458 Bangladesh 7 29 75 0 Sri Lanka 8 73 15 323 Nepal 8 25 189 0 China 12 55 13 4,330 Thailand 8 45 7 0 Malaysia 7 56 27 0 United Kingdom 5 4 1 0 Australia 2 6 2 0 Source: World Bank 2003

1.24.1 Types of investment and foreign shares allowed http://www.pakboi.gov.pk/html/investment_policies.html

Although investment in all sectors is open, certain sectors require approvals. Table 19 presents an overview of the foreign investment allowed per sector.

Page 68 New Business Opportunities in Pakistan Table 19: Summary of foreign investment regulations Manufacturing Sector Non-Manufacturing Sectors Priority Industries V.A + Hi-Tech Engg+ Chem, Agri Other Agriculture Infrastructure Services including

Export & IT business, housing & Indus- & Social IT & Telecom Cat (A) Cat(B) construction, tourism tries Services Cat(C&D) Govt. Permission Not required except 4 specified industries * Not required except specific licenses from concerned agencies. Remittance of Allowed Allowed capital, profits, dividends, etc. Upper Limit of 100% 60% 100% Initially 100% but to foreign equity be diluted to 60% allowed within five years. Minimum No 0.3 0.3 0.3 Investment Amount (M $) Customs duty on 5% ** 5%** 10%** 5-25% 0% *** 10%*** 0-10%*** import of PME Tax relief (IDA,% 50% 50% of PME cost) Royalty & No restriction for payment of royalty & technical fee. Allowed as per guidelines - Initial lump-sum up to Technical Fee $100,000 - Max Rate 5% of net sales - Initial period 5 years * Specified Industries: Arms and ammunitions; High Explosives; Radioactive substances; Security Printing, Currency and Mint. No new unit for the manufacturing of alcohol, except, industrial alcohol PME= Plant, Machinery and Equipment IDA= Initial Depreciation Allowance V.A. = Value Added ** Special Regulatory Order (SRO): 439(I)/2001 dated 18-6-2001 ***SRO: 358(I)/2002 dated 15-6-2002 Source: BOI

1.24.2 Types of legal forms for doing business

There are three main forms of business in Pakistan, defined as follows:

– Sole Proprietorship. In a sole proprietorship, an individual on his/her own account carries out the business or profession. No formal procedure or formality is required for setting up a sole proprietary concern.

– Partnership. A partnership is a business relationship entered into by a formal agreement between two or more persons or corporations carrying on a business in common. The capital and profit sharing and other terms of partnership including liability for debts of the firm are usually contained in the partnership agreement. Partnerships (other than banking companies) are generally limited in size to twenty partners. The interest of a partner is transferable only with the prior consent of the other partner(s). However, a partner's right to a share of the partnership income may be received in trust for another person. Such partnerships are created under the Partnership Act of 1932 and if needed is registered with the Registrar of Firms.

– Company. A company is a legal entity formed under the Companies Ordinance, 1984. It can have share capital or can be formed without share capital.

1.24.3 Type of companies

A company having share capital may be formed as: - unlimited company. a company having unlimited liability of its members. - company limited by guarantee. a company having the liability of its members limited by memorandum to such amounts guaranteed in the event of the company winding up. A company limited by guarantee is usually formed on a 'non profit basis'. Companies limited by guarantee use the words (Guarantee) Limited" as the last words of their name. - company limited by shares. The liability of its members is limited to the extent of their shares in the paid-up capital of the company

Companies limited by shares may further be classified as public limited and private limited companies: – Public Limited Companies can be formed by at least three persons by subscribing their names to the 'Memorandum and Articles of Association' of the company. The word 'Limited' is used as the last word of its name. Public Companies may be listed and unlisted with the Stock Exchanges.

Page 69 New Business Opportunities in Pakistan – Private Limited Companies may be formed by at least two persons by subscribing their names to the 'Memorandum and Articles of Association' of the company. A private limited company is required to use the words "(Private) Limited" as the last words of its name. A private limited company, by its Articles of Association: - Restricts the right to transfer its shares; - Limits the number of its members to fifty; - Prohibits any invitation to the public to subscribe for shares or debentures of the company.

With effect from late 2003, a new provision for setting up of a Single Member Company (SMC) has been introduced. This is a private company with only one shareholder. All provision of the Companies Ordinance or rules, which apply to a private company limited by share, apply to a single member company. Such entities have been permitted to enable single owners to incorporate into a company. SMCs need to register with the registrar through a form identifying the one or more persons who have the right to inherit the shares of the SMC in the event of death of the owner. A single member company is required to use the words "(Private) Limited - SMC" as the last words of its name.

1.24.4 Business regulations for company registration http://www.pakboi.gov.pk/html/company_registration.html http://www.secp.gov.pk/ns/index.asp Companies are formed under the Companies Ordinance. Any three or more persons associated for any lawful purpose may, by subscribing their names to the Memorandum of Association form a public company, and any two or more persons may form a private company, while for SMCs only one person can register a company.

Prior approval of the authorities is required for the following types of companies: 1) Banking Company: Ministry of Finance/State Bank of Pakistan. 2) Insurance Company: Ministry of Commerce. 3) Investment Finance Company (Investment-Bank): (i) Ministry of Finance, (ii) State Bank of Pakistan. 4) Leasing Company: Securities and Exchange Commission of Pakistan. 5) Venture Capital Company: Securities and Exchange Commission of Pakistan. 6) Asset Management Company: Securities and Exchange Commission of Pakistan.

The following sectors require clearance at a higher level from the Ministry of Industries and the Board of Investment. Before such permission is granted no application for registration can be filed: – Arms and Ammunition – Security Printing, Currency and Mint – High Explosives – Radio Active Substances

For the convenience of the general public, promoters and directors of companies, SECP has established eight regional offices in Islamabad, Karachi, Lahore, Peshawar, Faisalabad, Multan, and Quetta. Besides support in setting up operations, these offices provide services and guidance in other compliance requirements as well. The records of companies maintained by these offices are public. Investors, shareholders, creditors and other stakeholders may inspect them record of any company whenever they need and they may also obtain certified copies of any specific document.

The procedures involved in registering either a private or public company are relatively similar. However there are visible differences after incorporation.

1.24.4.1 Availability of name of the company http://www.secp.gov.pk/ns/index.asp

The first step in the incorporation of a company is to confirm the availability of the name of the proposed company from the SECP on payment of a fee of Rs 100. The name should not be inappropriate, deceptive or designed to offend religious feelings, and it should neither be identical nor have a close resemblance to the name of any existing company.

Page 70 New Business Opportunities in Pakistan 1.24.4.2 Required documents Most forms required for the registration are available on the BOI web site at http://www.pakboi.gov.pk/html/required_documents.html.

A foreign company incorporated outside Pakistan is required to submit the following documents to the concerned agencies within 30 days of establishing presence in Pakistan: - A certified copy of the charter, statute or Memorandum and Articles of the company, in English or Urdu, accompanied by prescribed Form 38; - Address of the registered or principal office of the company on Form 39; - A list of Directors, the Chief Executive and Secretaries (if any) of the company on Form 40; - Particulars of the principal officer of the company in Pakistan on Form 41; - Particulars of person (s) resident in Pakistan authorised to accept services on behalf of the foreign company on Form 42; - Address of the principal place of business in Pakistan of the foreign company on Form 43 (Section 451)

Any change or alteration with regard to the above data must be filed on Form 44 with the registrar concerned within 30 days of such change or alteration (section 452). Furthermore, a foreign company is required to file annually with the registrar concerned annual accounts in respect of its operations within Pakistan as well as its global accounts together with the list of Pakistani members and debenture holders and particulars of places of business of the company in Pakistan within the prescribed period (Section 453).

A foreign company is required to give notice on Form 46 to the registrar concerned at least 30 days before it intends to cease to have a place of business in Pakistan and to publish a notice of such intention at least in two daily newspapers circulating in the province or provinces in which such place or places of business are situated.

1.24.4.3 Liaison / branch offices A foreign company can establish a place of business in Pakistan (which includes a branch, share transfer or registration office, factory, mine or other fixed place of business) without formally creating a separate legal entity.

A liaison office can be established by a foreign company for the purpose of marketing activities in Pakistan and to acquire contracts from Government and private the private sector. A liaison office is converted into a branch office whenever the foreign company gets a contract in Pakistan in any field of economy.

Permission for opening of branch/ liaison office may be granted by the BOI for a period of 3 to 5 years. Further extension will be granted by the BOI after reviewing and examining the past performance of foreign companies. Request for renewal or extension will be processed by the BOI with two weeks provided the requests are supported with complete documentation.

Companies who wish to open their branch / liaison or representative offices in Pakistan may apply to BOI for permission on prescribed forms. The BOI will process and decide such cases within 2 to 3 weeks. Once the permission is granted by BOI, the foreign entities are required to register with the Securities and Exchange Commission of Pakistan under the Companies Ordinance 1984. The following documents must be submitted with the BOI and SECP for permission and registration of Branch/Liaison Offices of a foreign company in Pakistan: i. Application on a prescribed form duly completed and signed by the Principal Officer of the proposed branch/liaison office in Pakistan ii. Minutes of the meeting of the Board of Directors of company regarding the opening of office in Pakistan iii. Article of Association of Company iv. Certificate of Incorporation of the Company in the country of origin. v. Letter of appointment of Branch Manager/Principal Officer of Company for Pakistan Office. vi. Letter of acceptance by Branch Manager/Principal Officer for accepting his position as Branch Manager/ Principal Officer of Pakistan Office of foreign company. vii. Power of attorney in favour of an individual or firm to act as consultant for providing such professional services. viii. Copy of the contract awarded (in case of Branch/Project Office)

Page 71 New Business Opportunities in Pakistan All the aforementioned documents are required to be filed in original and if these are in any language other than English then they should be translated into English and duly attested by the Pakistani Embassy in the country in which the Foreign Company is originally incorporated.

Foreign company branch and liaison offices are required to file annually with the Registrar concerned annual accounts in respect of its operations within Pakistan as well as its global accounts together with the list of Pakistani members and debenture holders and particulars of places of business of the company in Pakistan within a prescribed period.

Foreign company branches and / or liaison offices are required to give notice to the Registrar concerned at least 30 days before it intends to cease to have a place of business in Pakistan and to publish a notice of such intention at least in two daily newspapers circulating in the province or provinces in which such place or places of business are situated.

1.24.4.4 Modaraba Companies Apart from companies incorporated in the Companies Ordinance, there is also the facility of setting up an incorporated entity under the Islamic modes of business conduct called the Modaraba for which the regulation is contained in the Modaraba Companies Ordinance. Such Modarabas are structured to enable business in which a person participates with his money and another with his efforts and / or skill. Modarabas can be set up for a multipurpose requirement or a specific purpose. This is a two tier set up having a Modaraba Company which carries out the business and a Modaraba Management Company which is engaged in the business of floating and managing the Modaraba.

To register the Modaraba, the essential requirements are the same as that of a company but with certain specific differences which are defined in the Modaraba regulations.

1.24.4.5 Other permission to be obtained Besides the general approvals required by foreign companies to invest in Pakistan, including the registration processes, the following other clearances and permissions are required for setting up commercial ventures: - Tax registration – a tax registration number for registration with the Income Tax Authorities is to be obtained. - Import export registration – a registration as an importer and in case exports are involved as an Exporter, is required to be made with the Export Promotion Bureau. - Sales tax registration – a sales tax registration has to be obtained in case the business entity is involved in activity involving sales tax. - Registration under various labour regulations – in certain cases, certain labour and manpower related registrations need to be obtained. - For foreign companies participating in engineering / contract execution, there is a requirement to register with the Pakistan Engineering Council.

1.24.5 Acquisition of a Pakistani company

Foreign investment in an existing Pakistani company essentially follows the same regulations as that for new ventures. Any purchase of shares by a foreign investor would require such investment to be registered with the State Bank of Pakistan so as to enable the entitlement of foreign investment similar to that of a new venture.

1.24.6 Dealing in shares http://www.secp.gov.pk/stockbrokers.htm

There are no minimum or maximum limits imposed on the%age of individual investor ownership in a public limited company. However, in accordance with the Companies (Issue of Capital) Rules 1996, the sponsors shall at all times retain 25% of the capital of the company. In addition, the listing regulations of the Karachi Stock Exchange impose the following conditions for listing: - Allocation of share capital to overseas Pakistanis shall not exceed 20% of the public offer. - Allocation of share capital to employees of a company shall not exceed 5% of the public offer. - Minimum number of subscribers to the issue will be 500.

Furthermore, Section 67 of the Insurance Ordinance, 2000 imposes that acquisition of more than 10% in an insurance company should get prior approval from the SECP. Similarly, in case of transfer of 5% Page 72 New Business Opportunities in Pakistan or more shares of any bank or financial institution by foreign investors, the permission of the State Bank of Pakistan is required.

1.24.7 Protection of investor interest

The SECP has successfully implemented broad based market reforms in the fields of risk management, governance, transparency and investor protection. Furthermore, the observance of enhanced accounting standards, reliable audits, as well as institutional strengthening and capacity building of the SECP, have been critical features of the capital market reform programme. The stock exchanges in Pakistan are now largely compliant with the 30 IOSCO principles of Securities Regulation that constitute the International Standards adopted by the Financial Stability Forum. In this regard, the Commission has been actively co-operating with regulators across the globe in pursuit of a safe, transparent and dynamic international financial environment.

Some of the significant reform measures introduced by the SECP to safeguard the investor interests are: - The Investor Protection Fund (IPF) and Clearing House Protection Fund (CHPF) have been set up to ensure effective risk management in the secondary market and to protect investors’ interests in case of default by the members of the exchange. The Commission observed that these funds were not fully funded by the exchanges and therefore directed the stock exchanges to ensure that their IPF and CHPF are fully funded by June 30, 2007. By June 30, 2002, the exchanges shall fund at least 50% of the actual contribution towards the IPF and CHPF. This%age will increase to 75% in 2003 and 100% from 2004 onwards. By June 2007, both funds should be fully funded.

- The SECP promulgated the Brokers and Agents Registration Rules in May 2001 to establish a direct regulatory nexus with brokers and agents for ensuring investor protection. Section 5-A of the Securities and Exchange Ordinance, 1969 provides that no person can act as a broker or agent to deal in the business of effecting transactions in securities market unless registered with the Commission. The registration of brokers and agents has brought about a positive impact in stock market by creating awareness among brokers to exercise high standards of integrity and to exercise skill and care in the conduct of business.

- The implementation of new two-tier Arbitration Procedure at KSE and ISE for the expeditious resolution of investor complaints provides for swift redress of investor complaints. Under the new procedure, all claims/disputes over Rs. 0.5 million arising out of transactions made subject to the Rules and Regulations of the exchange, which are not otherwise amicably settled, shall be referred to the Advisory & Arbitration Committee for their resolution/decision. However, claims/disputes up to Rs. 0.5 million shall be referred for arbitration to the Managing Director of the exchange. All claims/disputes exceeding Rs. 0.5 million forwarded to the Advisory and Arbitration Committee will be referred to a panel of arbitrators appointed for arbitration proceedings. Also, all claims and disputes referred to the panel of arbitrators shall be resolved / decided by majority and such decisions shall be deemed to be the award in the arbitration.

The primary objective of the SECP is to have a fair, transparent and efficient stock market to attract capital and restore investor confidence.

The Commission has granted approval for registration of the National Commodity Exchange Limited (NCEL). In this regard it may be noted that single stock futures have already been introduced on June 9, 2001. The NCEL will be dealing in derivative products, mainly in futures contracts in commodities and the specific approval of the Commission will be required for each type of futures contract traded on the Exchange. Promoting the growth of new products such as options, futures and other derivatives, will provide the necessary means to hedge risk and deepen the stock market. Hence, the emergence of trading in futures contracts in commodities in Pakistan would add greater depth to the capital market, providing investors/stakeholders with basic hedging instruments as well as enabling economic players to lock in costs, and would provide stimulus to the investment climate of the country. The Rules governing trading of futures contracts in commodities are in the process of being drafted by the SECP.

1.24.8 Other standards

Pakistani nationals, firms and companies generally do not require any prior approval for purchase of property unless its use is for a restricted purpose involving specific approvals such as setting up of infrastructure projects etc. However, there are restrictions on foreign nationals and foreign companies registered outside Pakistan on acquiring immovable property in Pakistan.

Page 73 New Business Opportunities in Pakistan

The broad provisions in this regard are that foreign banks operating as branch offices in Pakistan are allowed to acquire immovable property in accordance with specific provisions under the banking regulations. Similarly foreign oil exploration companies can acquire land but to the extent and the manner permitted under their concession agreement.

1.25 Business opportunities

1.25.1 Privatisation to date http://www.privatisation.gov.pk/Adds/News.htm

Privatisation efforts began in earnest after the creation of the Privatisation Commission (PC) in 1991. Although the PC’s mandate was initially restricted to industrial transactions, by 1993 it had expanded to also include power, oil and gas, transport (aviation, railways, ports and shipping), telecommunications, and banking and insurance.

In the financial year 2002/2003 the PC sold 51% of the Government of Pakistan stake in UBL, 28% of Bank Alfalah, additional 10% shares of Pak Saudi Fertiliser Limited and has concluded eight Capital Market Transactions, amounting to Rs. 20.65 billion. By the end of May 2003, the Government of Pakistan had completed or approved 132 transactions at gross proceeds of Rs 99.71 billion. The sources of the proceeds are presented in Figure 21.

Figure 21: Privatisation proceeds

Industrial & other Finance & Banking 22% 26%

Energy Telecom 21% 31%

Source: State Bank of Pakistan Report

While almost all transactions were settled in local currency, about 60% of the proceeds were received in foreign exchange from transactions pertaining to the 2nd tranche of PTCL vouchers, Kot Addu Power Company (KAPCO), six Oil & Gas concessions, Habib Credit & Exchange Bank, and United Bank Limited. Table 20 provides the number and amount of transactions.

Page 74 New Business Opportunities in Pakistan Table 20: Summary of privatisation transactions by sector, 1991- June 2003 (values in RS million) 1991 to Jun 2001 Jul 2001 to Jun 2002 Jul 2002 to Mar 2003 Total to date Sector No. Amount No. Amount No. Amount No. Amount Banking 4 5,644 2 12,970 6 18,614 Capital Market Transaction 1 563 2 737 8 6,866 11 9,721 Energy 4 9,549 8 11,349 12 20,904 Telecom 2 30,558 2 30,558 Automobile 7 1,102 7 1,102 Cement 11 7,790 11 7,790 Chemical / Fertiliser 14 2,045 2 7,338 1 815 17 10,197 Engineering 7 187 7 187 Ghee Mills 19 646 2 122 21 768 Rice / Roti Plants 23 326 23 326 Textile 2 87 2 87 Newspapers 5 270 5 270 Tourism 3 594 3 594 Others 4 44 1 110 5 154 Total 106 59,405 15 19,656 11 20,651 132 101,272 Source: Privatisation commission

1.25.2 Privatisation plans

The Government is pursuing the privatisation process with a flexible approach, using all types of opportunities to reduce the Government involvement in the public companies, i.e. selling regularly small stakes through the stock market, selling significant minority of majority portions, or full equity as per the circumstances.

Among the upcoming transactions, a further divestiture of the Habib bank, the Pakistan Telecom Co Ltd. and the are scheduled. Despite the ambitious goals, the privatisation process has generally been slow, which might be attributed to the lack of investor confidence and of a substantive regulatory framework, opposition of those with vested interests and public misconceptions of the objectives and processes of privatisation. However, the Government is addressing these barriers and tries to improve the environment for further privatisation, for instance by introducing more transparency and the development of a responsive regulatory framework such as the setting up of the National Electricity Regulatory Authority (NEPRA), the Pakistan Electronic Media Regulatory Authority (PEMRA) and the Oil and Gas Regulatory Authority (OGRA) with others to follow.

Table 21: List of Upcoming Major Transactions (as of December 2003) Sector/Company Type of Sale Envisaged Expected Bidding Date Telecommunications Pakistan Telecom Co Ltd (PTCL) 26% strategic sale 1st qtr 2004 Oil and Gas Oil and Gas Development Corp Ltd (OGDCL) 2.5% Initial Public Offering November 2003 51% strategic sale 1st qtr 2004 Pakistan State Oil (PSO) 51% strategic sale 4th qtr 2003 Sui Southern Gas Corp Ltd (SSGCL) 5% Public Offer December 2003 Ltd (PPL) 51% strategic sale 2nd qtr 2004 National Refinery Ltd. (NRL) 51% strategic sale 4th qtr 2004 Banking and Finance Habib Bank Limited (HBL) 51% strategic sale December 2003 National Investment Trust (NIT) 58% shares 1st qtr 2004 Power Karachi Electric Supply Corp (KESC) 51-74% shares 2nd qtr 2004 Faisalabad Electric Supply Co (FESCO) 56% shares 4th qtr 2003 Genco 1 (Jamshoro) 51% strategic sale 4th qtr 2003 Industry and Real Estate Pakarab Fertiliser Ltd. 90% sale 1st qtr 2004 Pakamerican Fertiliser Ltd. 90% sale 3rd qtr 2004 Faletti’s Hotel To be determined 2nd qtr 2004 Malam Jabba To be determined 2nd qtr 2004 Karachi Shipyard & Engineering Works Ltd To be determined 3rd qtr 2004 National Construction Ltd. (NCL) To be determined 1st qtr 2004 Koh-e-Noor Oil Mills Asset sale 4th qtr 2003 Source: Privatisation Commission Page 75 New Business Opportunities in Pakistan 1.26 Foreign investment conditions

Previously only the manufacturing sector was open to foreign investment. Now, the policy regime is much more liberal with most other economic sectors open for foreign involvement. http://www.pakboi.gov.pk/html/investment_policies.html

1.26.1 Manufacturing/industrial sector

Foreign Investors are permitted to hold 100% of the equity of industrial projects without any permission of the Government. No Government sanction is required for setting up any industry, in terms of field of activity, location, and size, except for the following: - Arms and Ammunitions - High Explosives - Radioactive Substances - Security Printing, Currency and Mint - Alcoholic beverages or liquors

There is no requirement for obtaining No Objection Certificates (NOC) from the provincial Governments for locating the project anywhere in the country, except in areas that are notified as negative areas.

1.26.2 Services sector

Investment in the Services Sector is allowed subject to the license of the operation prior to investment for those areas which warrant such requirement, such as the telecommunications or the banking sectors.

This requirement is also applicable to local investors. However the following conditions need to be adhered to: - The amount of foreign equity investment in the company/project shall be at least USD 0.3 million. - Foreign investors are allowed to hold 100% of the equity subject to the condition that the repatriation of profits will be restricted to a maximum of 60% of total equity or profits and that a minimum of 40% of the equity is held by Pakistani investors (including sale of shares in stock exchange) within five years

1.26.3 Infrastructure sector

Foreign investment in infrastructure projects is permitted with up 100% equity on repatriable basis, including the development of industrial zones. However, investment is subject to a minimum equity of USD 0.3 million.

1.26.4 Social sector

Foreign investment in Education, Technical/Vocational Training, Human Resource Development (HRD), Hospitals, Medical and Diagnostic Services are permitted with permission to hold 100% equity provided initial investment is at least USD 0.3 million.

1.26.5 Agriculture sector

Foreign investment in agricultural activities (including land development and reclamation, crop farming, development of irrigation facilities, forestry, horticulture, dairy, small ruminants and livestock breeding, farming and fisheries) is permitted with up to 100% of the equity. However the repatriation of profits will be restricted to a maximum of 60% of total equity or profits and a minimum of 40% of the equity is to be held by Pakistani investors (including sale of shares in stock exchange) within five years.

Page 76 New Business Opportunities in Pakistan 1.26.6 Others

Tourism has been given the status of Industry in accordance with Ministry of Industries and Production Circular No. 1-129/99-INV-IV dated 2nd August, 1999. It has been designated as a priority industry (Category "C" of the Investment Policy).

Housing and Construction has also been declared as an Industry and has been designated as a priority industry. Local and foreign companies involved in real estate projects will not be allowed to market these projects unless the title of the property is transferred in the name of a locally incorporated company and the "Commencement of Business" certificate is issued by the SECP.

Information Technology has been declared as Industry. Foreign investment in IT sector is permitted with up 100% equity on repatriable basis. Custom duty exemption is available on import of machinery & equipment used in the field of IT. Computers software and other items related to IT can also be imported at zero rate of import duty.

1.26.7 Investment incentives

Since 2000, Pakistan has liberalised its investment code and created various incentives for investors. A number of priority industries (added value, high tech, agro-based and export sectors) benefit from significant concessions, mostly based on low import duties and a high front end depreciation of assets.

1.26.7.1 Incentives for priority industries Incentives are granted to enterprises in defined priority industries. Priority Manufacturing / Industrial activities have been designated as follows: - Category A: Value Added or Export Industries; - Category B: Hi-Tech Industries; - Category C: Priority Industries; and - Category D: Agro-based Industries.

Units that annually export a minimum average 50% of their production or more in the first ten years are classified as Export or Value Added Industries. In case of expansion of existing units they should export at least 50% of the additional capacity created under expansion, to avail the incentives of export industries.

The lists giving details of the industries falling in Categories A, B, C and D are available on the BOI web site http://www.pakboi.gov.pk/html/policies_incentives.html.

Government policies strongly favour investment in the priority industries, with a provision for increased local content, as per the Government “deletion policy”. In exchange for favourable tax treatment, this policy requires assembly industries to substitute, over time, local materials or semi-processed local components for imported parts. Such programmes are determined by the Pakistan Engineering Board’s Indigenisation Committee, in consultation with concerned industries.

Also the deletion policy was to have ended by 2000 under the WTO Trade Related Investment (TRIMS) agreement. Pakistan obtained an extension to 31 December 2003. The Government’s deletion phasing out is apparently on track, except for the car industry for which Pakistan might request a further extension from the WTO.

The incentives offered to priority industries are concessional tariffs and tax relief. Table 22 presents the concessional tariffs for priority industries.

Page 77 New Business Opportunities in Pakistan Table 22: Concessional tariffs Sector Customs Duty Customs duty on imported raw materials used in producing for exports. Zero Rated Customs duty leviable on imports of plant, machinery and equipment (which is not 5% manufactured locally) for the industries falling under Categories 'A' and 'B', i.e. Value- Added Export and Hi-Tech Industries. Customs duty leviable on imports of plant, machinery and equipment (which is not 10% manufactured locally) for industries falling under Categories 'C' and 'D'. Other Sectors (Non-manufacturing) Imported plant, machinery and equipment (not manufactured locally). 10%---25% The Custom duty on import of agriculture machinery (not manufactured locally) as per Zero% the list of specific machinery and equipment notified vide SRO No.358(I)/2001, dated 15-6-2002. (Annex VII) Source: Pakistan Board of Investment

First year tax relief is available on plant and machinery, up to 90%, for value added, export and high tech industries, 75% for other priority industry, infrastructure and agriculture, and 50% for the services and social sector.

1.26.7.2 Other incentives for companies investing in Pakistan In order to attract foreign investment, the Government of Pakistan grants tax exemptions in the following areas: - Interest income on foreign currency accounts; - Profit from educational institutes; - Profit from computer training and educational centres; - Capital gains on sales of shares of listed companies; - Income from pioneer industrial undertakings; - Income from manufacture of electronics; - Income from manufacture of solar energy equipment; - Income from industrial undertaking in Export Processing / Special Industrial Zones ; - Income from fruit processing; - Income from manufactures of soft and stuffed toys.

1.26.7.3 Technology transfer The investment regime has been liberalised to ease the transfer of technology as follows: - No restriction on payment of royalty and / or technical services fees for the manufacturing sector, subject to registration of agreement with the State Bank and compliance with the withholding tax requirements; - The payment of franchise, royalty or technical fees for the non-manufacturing sector is allowed subject to the following conditions:- o In case of lump sum fee, fees should not exceed USD 100,000; o A maximum cap of 5% of net sales is allowable as franchise fees; o Agreements are permitted for 5 years initially, extendable subsequently; o Agreements need to be registered with the State Bank of Pakistan.

1.27 Location decision

1.27.1 Regional strengths and weaknesses

Pakistan has a diversified potential for investment both geographically and economically. On the one hand, it has an abundance of raw materials: mineral, oil & gas, coal, precious and semi-precious stones, and other natural resource deposits and on the other hand, a manufacturing industrial base spread all over the country. Pakistan also has a fairly reasonable network of industrial estates/zones spread in all the four provinces. However, the quality and standing of the Industrial zones is unequal, as well as the quality of the transport network.

Punjab stands out as the best province for industrial manufacturing, despite its distance from the ports and the state of the road network to be improved.

Page 78 New Business Opportunities in Pakistan 1.27.1.1 The port city of Karachi Karachi (14 million inhabitants) is the industrial and commercial centre of the country with the biggest export processing zone, two sea ports, and more than 4 industrial estates. The industrial units situated in Karachi cover the whole range of industrial activities, from automotive parts, textile and food processing to the large Pakistan Steel Mills. The city has the highest literacy rate in the country and stands out in the availability of skilled labour and good management expertise. Being a port city, transportation costs of imports or exports are minimal compared to other industrial centres of the country.

However, the main negative point of doing business in Karachi comes from a deteriorated law and order situation which implies the (costly) need to set up specific security arrangements when establishing a venture.

The second issue is the bad management of the city with a very poor garbage collection system and a deteriorated road network (Access to the KEPZ is very poor, while the fishing port environment, outside the guarded area, is particularly filthy). Noise and air pollution is touching limits. Public transport and traffic congestions are problematic.

It is worth noting however, the developments being implemented to improve the situation, such as the construction of important road by-passes to alleviate traffic congestion. Also, there has been notable progress in the development in the western part of the city, to facilitate access of this very important industrial area to the port or the rest of the country. If and when these improvements are achieved, Karachi should regain its attractiveness, being a very concentrated and large industrial base with easy access to the main port of the country and an efficient service sector namely in finance and insurance.

1.27.1.2 Punjab (Lahore, Faisalabad, Sialkot, Gugrat, Gugeranwala etc.) Lahore is the second largest city of Pakistan (8 million inhabitants) with a wide variety of industries. The city appears organised and clean compared to Karachi. It is a livelier city with business activities continuing late in the evening. It has a new international airport and a dry port which is extensively used by international traders. Skilled labour and management expertise are easily available. The majority of the industry in Lahore is either agro-based or textile.

Punjab has the largest number of industrial zones and is host to the “export triangle” Sialkot- Gujeranwala-Gujrat. Sialkot is known for its exports: more than 95% of the goods manufactured in Sialkot are exported. Major items include sports goods, especially footballs, surgical goods, leather goods (especially gloves), sports wear, and some textile value-added products.

Gurat and Gujeranwala are known for light engineering goods, light agriculture machinery, electric fans, washing machines, ceramics, and sanitary wares.

There is no shortage of skilled labour or management skills in the region. The infrastructure is of reasonable quality, but the road link with Lahore and the port city of Karachi is long, perilous and expensive. Indeed, the main problem faced by the export triangle is the poor maintenance of roads that link these cities with the capital of the province. Transport costs of a full container from Lahore to Karachi port is Euro 800; return empty is Euro 200.

Following extensive discussions with Government, the Sialkot business community has started construction of their own airport which is planned to be functional in 2004. Sialkot also has its own dry port. A projected motorway linking the north of the country to Karachi is at the planning stage.

The industry in Punjab, especially in Sialkot, has successfully overcome the issue of child labour with the help of the donor countries and agencies, particularly UNICEF. Child labour, which was extensively used in the sports goods industry, has been substantially reduced if not eliminated, through education programmes.

Faisalabad is the textile city of Pakistan, contributing 65% of the total textile exports. Very recently, a motorway has been opened linking Faisalabad to Lahore and Islamabad. The city itself can be very congested, while the infrastructure appeared in good shape.

1.27.1.3 NWFP and Balochistan NWFP and Balochistan are less developed in terms of volume of business and industrial activities. Both NWFP and Balochistan have the advantage of geographical proximity to Afghanistan.

Page 79 New Business Opportunities in Pakistan

NWFP has vast deposits of natural/mineral resources, like marble and granite, gems and semi- precious stones (except for diamonds, it is claimed that the NWFP has deposits of most gemstones in abundance). Other notable industrial activities are the production of wooden furniture, small scale hydel power generation, dry fruits, and fresh fruits and vegetables.

The infrastructure within the Peshawar city is of reasonable quality. The city is also linked by air, rail and road to the other major industrial cities of Pakistan (Lahore, Islamabad, Karachi etc). The road link to Lahore is satisfactory, with a dual carriage way and motorway.

Since Peshawar is bordering Afghanistan (Jalalabad), some security and law and order issues exist. Although Government is doing its best to keep things under control the long border with Afghanistan and the more than 2 million Afghan refugees presently staying in NWFP make it difficult to maintain an acceptable level of security in the province at all times.

Balochistan is the least developed province of Pakistan with very little industry or even agriculture because of the lack of water. The only notable products from the province are fruits and vegetables. The province though have a good industrial estate with good number of industries in the city of Hub, but since that city is very close to Karachi (only 40 minutes drive), it is for all practical purposes considered as part of Karachi.

1.27.2 Cost of industrial land

Table 23 presents an overview of the cost of industrial land in various locations of Pakistan.

Table 23: Cost of Industrial Land Province Location Cost of Land Rupees per sq.ft. EUR* per sqm from to from to Federal territory Islamabad 35 135 5.28 20.35 Punjab Lahore (Sheikhupora Road) 80 140 12.06 21.11 Gujrat 35 80 5.28 12.06 Sialkot 45 90 6.78 13.57 25 30 3.77 4.52 Faisalabad 45 90 6.78 13.57 Sindh Karachi 50 150 7.54 22.62 Hyderabad 62 100 9.35 15.08 NWFP Peshawar 25 35 3.77 5.28 Hattar 20 25 3.02 3.77 Balochistan Quetta 20 25 3.02 3.77 * Exchange rate of December 2003: 66.327 Source: Pakistan Board of Investment

1.27.3 Industrial zones http://www.pakboi.gov.pk/html/industrial_zones1.html http://www.eac.gov.pk/webinfrastruct/WEBS/main/infrainvidx.htm

To promote industry, the Provincial Governments have established a total of 69 Industrial Estates based on the model of the Trading Estates in the United Kingdom. The objective was to establish planned industrial areas, where prospective industrialists could obtain all required facilities and infrastructure.

There are three categories of industrial estates in Pakistan: industrial estates, medium industrial estates, and small industrial estates. These industrial estates are spread over all the four provinces of the country. Punjab has the highest number (26) of industrial estates, followed by Sindh (21), NWFP (13) and Balochistan (9 industrial estates).

Sindh Industrial Trading Estates Ltd. situated in Karachi is the largest industrial estate of the country. Federal ‘B’ industrial Area, Korangi Industrial Area, Landi Industrial Area, and Bin Qasim Industrial Area are the major industrial areas operating in Karachi.

Page 80 New Business Opportunities in Pakistan

The quality of services provided in the industrial estates across Pakistan varies considerably and each estate needs to be thoroughly checked and evaluated before taking any location decision.

In addition to the industrial estates small industrial corporation zones exist in Sindh and Punjab.

1.27.4 Export processing zones (EPZ)

The Government of Pakistan has been developing EPZ in addition to the existing Karachi EPZ (KEPZ) as a means to increase exports.

However, it appears that the rationale for EPZ has become less convincing as a result of the rationalisation of import and export regulations, the improved efficiency of the dry ports (import and export facilities extended in special area inland), as well as the improved efficiency to collect drawbacks on import tariff paid on goods/components re-exported. Furthermore, operating in an EPZ creates some hurdles to sell in the domestic market.

The Export Processing Zones Authority (EPZA) was established in 1980 with the mandate to plan, develop and operate Export Processing Zones in Pakistan.

Despite plans to expand EPZ throughout country, at present only Karachi EPZ is operational. The EPZ in Sialkot and Rialpur, both in Punjab, are expected to be operational soon. A number of other EPZ are at the planning stage (see Figure 22).

Figure 22: EPZ location map

Source: EPZA http://www.epza.gov.pk/

1.27.4.1 Incentives for investors in EPZs 1. 100% ownership rights. 2. 100% Repatriation of capital & profits.

Page 81 New Business Opportunities in Pakistan 3. No minimum or maximum limit for investment. 4. Duty free imports of machinery, equipment & material 5. No sales tax on input goods including electricity & gas bills 6. Obsolete/old machinery can be sold in domestic market of Pakistan after payment of applicable duties & taxes. 7. No excise duty, no Custom duty on cement, steel & any other material used in construction of buildings. 8. Freedom from National import restrictions. 9. Foreign Exchange control regulations of Pakistan not applicable. 10. Defective goods/waste can be sold in domestic market after payment of applicable duties, maximum up to 3% of total value of export. 11. Duty free vehicles allowed under certain conditions. After 5 years of use, vehicles can be disposed off in domestic market on payment of duty. 12. Domestic market of Pakistan available on same conditions as for imports from other countries. 13. Units operating in EPZs can undertake sub-contracting for units of tariff area subject to payment of duty and taxes on value addition only. 14. Only the EPZA is authorised to collect the Presumptive and Development Taxes (1.25 to 1.75% of turnover) at the time of export of the goods which would be the final tax liability. There shall be no other tax, such as income tax. 15. EPZ units are allowed to supply goods to Custom manufacturing bonded areas. 16. Production oriented labour laws to be solely regulated by the Authority. 17. EPZ manufacturers shall be treated at par with bonded manufacturers in tariff area for any future incentives to be announced for exporters. 18. Relief from double taxation subject to bilateral agreement.

1.27.4.2 Eligibility for investment Any investment in an EPZ is made in convertible foreign currency. A foreign investor and a non- resident Pakistani can invest up to 100% of the equity. A joint venture between a foreigner or foreign company and a non-resident or resident Pakistani is possible in any proportion. However, not more than 40% of equity of a resident Pakistani would be covered by SBP for providing foreign exchange.

1.27.4.3 Karachi EPZ The Karachi Export Processing Zone (KEPZ) is located adjacent to the Landhi Industrial Area (Extension) within a distance of 18 kilometers from the Quaid-e-Azam International Airport, 20 kilometers from and 35 kilometres from the Karachi Seaport. The Zone is linked with the National Highway network. It offers effective and convenient approach to the markets of the Middle East, Far East, Africa, Europe, America and to the new markets of the Central Asian Republics.

KEPZ has been planned on 500 acres of land, out of which 211 acres have been developed. Additional 100 acres are being considered for development as Phase-II programme. Further 200 acres are being acquired from the Government of Sindh for KEPZ future expansion programme. The 211 acres of land developed for industrialisation have full infrastructure facilities, providing all necessary utility services like electricity, gas water and telephone etc (Box 17). There are 330 industrial plots, 70 plots for the commercial sector (warehousing and trading) and 33 plots for the financial sector. Presently the industrial sector is reaching saturation point and very few plots are available in this sector.

Page 82 New Business Opportunities in Pakistan Box 17: Available Infrastructure and conditions at KEPZ Telecommunication Digital electronic exchange of 3000 lines international subscribers dialling (ISD), linked with communication satellite. *Gas: Availability: 600,000 cu ft/day; Charges: Commercial – USD 9.52 per 100 cbm; Industrial – USD 8.43 per 100 cbm *Electricity: Availability: 11 KV and 400 v (3 PHASE 50 HZ AC SYSTEM); 132 KV Grid Station with a capacity of 40 MW of Electricity built in the Zone. Charges: Approximately 10 Cents per unit of connected load at 100 KW (Low tension Industrial B). The unit rate would differ in case of high tension & low tension connected load & would depend on consumption. *Water: Availability: 500,000 gallons per day. In addition, two underground reservoirs of 0.65 million imperial gallons each and a water tower 30 meters high (capacity: 0.125 million imperial gallons) and an underground water pumping station are in operation. Charges: USD1.26 per 1000 gallons * The above rate payable as per prevailing Rs-USD conversion rate. Rate effective October 2000.

Land initial sublease for a period of 30 years (renewable by mutual agreement). Developed land is available as: * Plots of 1000 sqr. meters each in the industrial sector and warehousing/trading sector. * Plots of 96 to 216 sqr. meters each in the financial sector. Payment for land is to be made at the following rates before execution of agreement: USD 12.00/sqm for industrial plots and USD 35.00/sqm for warehousing/trading sector plots and financial/insurance sector plots. Annual Ground Rent: USD 2.5/sqm/year for industrial plot and USD 3.0/sqm/year for trading and commercial plots. (Registration fee of USD 1000/- is to be paid along with the payment for land).

EPZA Charges: Development surcharge @ 0.5% of FOB value of exports Presumptive Tax EPZA itself collects income tax on behalf of Income Tax department at the following rates specified in the Eighth Schedule in Part – I of the first schedule of income Tax Ordinance. Part – I 0.75% of exports Part – II 1.00% of exports Part – III 1.25% of exports Source: Karachi Export Processing Zone

The total export value of goods produced in KEPZ in fiscal year 2003 was USD 130 million, which low by international comparison: the EPZ of Bangladesh export about USD 1 billion per year, while the Zhenzen EPZ, created at the same time as KEPZ, exports about USD 30 billion annually. Competition comes also from the Santa Cruz EPZ in Bombay, as well as the Jordan EPZ facilities and Dubai industrial area.

At present, there is no significant international investor in the KEPZ.

1.27.4.4 EPZ under development Sialkot EPZ, comprising 238 acres, is located at Sambrial at a distance of 20 km to Sialkot-Wazirabad road. Out of 900 plots about 95% already stand booked. Enterprises in the EPZ will mainly come from the surgical instruments, sports and leather garments sectors.

At present, 149 project proposals involving an envisaged investment of USD 122 million, estimated annual exports of USD 193 million and an expected employment of 15904 persons have been sanctioned by EPZA.

Risalpur EPZ, comprising 200 acres, (100 acres in phase 1 fully developed) is located about 50 km from Peshawar near the interchange on the Islamabad-Peshawar motorway section. The area has potential for trading and warehousing business, mineral, fruits & vegetable processing, carpet and furniture industry due to availability of respective raw material and cheap skilled labour. Out of 100 acres fully developed (phase one) about 30% of plots have been booked.

1.27.4.5 Planned zones The following zones are presently at the planning stage: – The Saindak zone (Dist. Chagai): The project has a capacity to produce 20,000 tons of blister copper per annum containing about 1.5 tons of gold from indigenous ores, generating foreign exchange revenue to the tune of USD 40 to 45 million / year. Activities are due to commence shortly. – The Rawalpindi zone: A joint venture between EPZA and the Rawalpindi Chamber of Commerce and Industry (RCCI). The EPZ Rawalpindi, comprising 200 acres (semi developed), is located in Rawat. – The Reckodek EPZ: The Saindak gold & copper mine and the Reko Dek copper mine area in Chaghai (Balochistan) and Rawalpindi have also been notified as EPZs. – Finally, the EPZA plans to open a special Gem EPZ at Karachi airport, along lines similar to Indian Gem EPZ.

Page 83 New Business Opportunities in Pakistan 1.28 Business support institutions

1.28.1 The Small and Medium Enterprise Development Authority (SMEDA) http://www.smeda.org.pk/fsmeda.html

The Small and Medium Enterprise Development Authorities (SMEDAs) were created under the Act of the provincial legislature. The tasks of the Punjab, Sindh, Balochistan and NWFP SMEDAs are to defend the interests of SMEs and lobby for the improvement of regulations and promote technical and market research and development for SMEs. To achieve these objectives SMEDA’s work plan is based on the following major activities: 1. Remove all regulatory barriers; 2. Assist SMEs with: - Technical up-gradation ; - Marketing support, especially in export markets; - Human Resource development through training & organisation structure development; - Access to capital.

1.28.2 The Board of Investment http://www.pakboi.gov.pk

In order to streamline and co-ordinate the process of investment and to create an investor friendly culture in Pakistan, the Government established the Board of Investment (BOI) as the central investment promotion and facilitation agency. The Board of Investment is chaired by the Head of the Government, and overseen by the Minister for Industries and Production (see Figure 23).

The main functions of the BOI are to promote investment opportunities in all sectors of the economy and to provide investment facilitation services to local, foreign and investors. The BOI acts as the focal point of contact between potential investors and all the agencies of the Government concerned with investment proposals and responsible for providing infrastructure and other facilities. To strengthen the leverage and effectiveness of the BOI and to benefit from their experience, Ministers and Secretaries of critical Economic Ministries are actively associated with all activities of the BOI.

Figure 23: Organisation Chart of The Board of Investment.

Source: BOI

Page 84 New Business Opportunities in Pakistan 1.28.3 The Export Promotion Bureau http://www.epb.gov.pk

The Export Promotion Bureau (EPB) is the primary agency of the Government of Pakistan engaged in the promotion of the country's exports. Since its inception in 1963 as an attached department of the Ministry of Commerce, the EPB continues to facilitate the exporters in overcoming difficulties on the supply and demand side of exports.

On the demand side, the EPB helps exporters to participate in exhibitions abroad and sends delegations to explore new markets and develop the traditional markets. On the supply side, the EPB has established over 32 training institutes and projects in various export sectors to train the necessary manpower to manage the export trade and industry, professionally, meeting the requirements of the export markets. Export promotional activities are carried out in co-ordination with trade bodies at home and Pakistan's trade missions abroad. The EPB has its head office in Karachi.

OPERATING A BUSINESS IN PAKISTAN

The main difficulties of operating a business in Pakistan have been largely streamlined over the last few years, through the dynamic involvement of the administration. Business regulations have been simplified and the Government agencies tend to be supportive of foreign investments. The legal situation, arbitration schemes and protection of rights issues are being improved. Labour is usually very cooperative while skills depend a lot on sectors concerned. The banking system is efficient and liquidity is not presently a problem. There are practically no foreign exchange controls on capital and dividend repatriation. The main issue which usually affects entrepreneurs and investors is excessive bureaucracy and slow procedures, notably in relation with the Board of Revenue, but also in this field progress has been made (e.g. refunds of duties on imports related to exports are now usually paid within a month).

1.29 Labour issues

Most of the business people met during the preparation of this guide book have mentioned the good relationship maintained with the workforce, its dedication, hard working behaviour, as well as the absence of conflict in general. It appears, however, from various studies that the Labour productivity in Pakistan is inferior to similar countries in the region. The main weakness seems to be a lack of efficient management and organisation skills.

Pakistan's labour force is estimated at 43 million persons as of June 2003 and unemployment was officially estimated at 7.8% during the fiscal year 2003. The real unemployment rate is commonly accepted as being much higher.

Labour is represented through a number of Unions, the most important being the Pakistan Workers Confederation (PWC) which regroups a nine-federation front of industrial workers.

1.29.1 Trade unions

Trade unions are generally organised on the basis of individual enterprises or at plant level. Firm level trade unions join hands to form a federation of trade unions and such federations are organised at various levels including the national level. Some of them also have an international affiliation. In Pakistan an individual enterprise or establishment (there is no limit on the employment level) may have more than one registered trade union, in which case only one trade union is determined as the "collective bargaining agent” (CBA) for two years in respect of that establishment. If there is only one trade union in an establishment it is necessary for such trade union to enjoy a membership of at least one third of the total number of workmen employed before such trade union can be certified as CBA for such establishment.

The Industrial Relation Law puts a limit on the number of office bearers up to 15, including persons who can form the Executive committee of a trade union, and further provides that they shall include not less than 75% from amongst the workers actually engaged or employed in the establishment. This particular provision has enabled trade unions which mostly comprise of a less educated work force to

Page 85 New Business Opportunities in Pakistan seek the assistance of professional labour leaders in organising the trade union activities on professional and progressive lines in some organisations.

1.29.2 Hiring and firing of labour

According to the labour laws of Pakistan, workers subject to a contract termination or dismissal can seek redress from labour courts. The employer who has the option to terminate the services of a worker, shall indicate reasons for such termination; his action is open to judicial adjudication by the labour court. The issue may entail long drawn litigation, which is definitely a check on the employer’s prerogative.

Usually, a compromise is reached through the payment of compensation equal to several months’ wages when the service of a workman who does not suit the need of an employer is terminated.

1.29.3 Minimum conditions of employment

Table 24 presents a summary of minimum employment conditions in Pakistan.

Annual leave for workers is clearly defined and codified in the Labour Code. However, its implementation is not extremely strict. Usually, the leaves of a worker other than those covered by the Labour Code such as the Factory’s Act, are decided at the time when the contract is signed between the employers and employee. Usually, a worker is given 22 days holidays and about 15 sick leaves a year. However, there are few standardised practices that are applicable in all the sectors of the economy.

Table 24: Overview of minimum employment conditions Paid maternity leave (max.) 90 days Normal work hours 7 – 8 hours daily Paid holidays (Gazetted) 11 days /Annum Paid Annual Leave for Employees 33 days /Annum Paid Sick Leave for Employees 15 days/Annum Minimum wage for unskilled worker (48h.p.w.) Euro 40.00 equivalent per month

1.29.4 Wages rates

Average wage rates for different categories of employees are presented in Table 25.

Table 25: Salaries & Benefits Rupees per month from to Executives Managing Director 250,000 500,000 General Manager 125,000 275,000 Senior Manager 75,000 150,000 Manager 50,000 90,000 Deputy Manager 30,000 70,000 System Analyst 30,000 70,000 Programmer 20,000 50,000 Employees Foreman 10,000 Supervisor 6000 8000 EDP Supervisor 8000 10,000 Boilerman 6000 8000 Electrician 6000 7500 Clerk/Typist 5000 6000 Data Entry Operator 5000 6000 Source: BOI

Page 86 New Business Opportunities in Pakistan 1.29.5 Statutory contributions

1.29.5.1 Employees Provident Fund Employers 8.3% Min. Employees 8.3% Min. Workers Welfare Fund (WWF) 2% on pre tax profit Workers Profit Participation Fund (WPPF) 5% on pre tax profit

1.29.5.2 Employees old-age benefits The old age benefits Act-1976 covers industrial, commercial & other establishments where employees are ten or more in number.

Contribution: 5% of wages of insured workers getting up to Rs.3000/- p.m. payable by Employers.

1.29.5.3 Provincial employees social security scheme The Provincial Employees Security Ordinance 1965 covers industrial, commercial & other establishments where employees are ten or more in number.

Contribution: 7% of wages of secured workers getting up to Rs.3000/- p.m. payable by Employers.

1.29.6 Labour Productivity

A 2003 study on the investment climate in Pakistan undertaken by the World Bank in co-operation with SMEDA summarises labour productivity as follows: “The proximate source of Pakistan’s competitiveness problem is that its wages are broadly similar to wages in China or India, but it has much lower factor productivity; it has about the same factor productivity as Bangladesh, but its wages are nearly 50% higher. As a result, it has trouble competing with any of these neighbours”.3

This assessment is confirmed by the Chief of the National Productivity Organisation, who has stated that "the domestic productivity growth is slower in Pakistan than that recorded for Malaysia, Philippines and India [...]. Similarly, Dr. Memoona Rauf Khan, an Associate professor at the National University for Sciences and Technology (NUST), Institute of Management Sciences laments that the country ranks sixteenth in productivity among the members of the Asian Productivity Organisation (APO), lower than Bangladesh, Nepal, and only higher than Mongolia.”4

However, it must be stated that in recent years the labour force has not entered into any severe conflict with employers. The Ministry of Labour reports 2 work stoppages involving 59 workers during 2002. During 2001, there were 4 work stoppages involving 711 workers, resulting in the loss of 7,078 man-days (as per the Ministry of Labour). These rates are low by international comparison.

1.30 Costs and prices http://www.pakboi.gov.pk/html/cost_of_doing_business_.html

1.30.1 Efficiency costs

A significant cost of doing business in Pakistan is the result of unreliable infrastructure or inefficient public suppliers.

The transport system has obvious weaknesses. Examples include the highway infrastructure linking the industrial zones of Punjab to the ports, the roads linking Karachi to the nearby Industrial Economic Zones or even the KEPZ, the roads linking the main industrial areas of Sialkot to the Dry port, or the road from Lahore to Sialkot. Similarly, the Overseas Investors Chamber of Commerce and Industry (OICCI), which represents overseas investors, reports that Karachi port is significantly more expensive than Bombay, and Dubai.

3 Improving the Investment Climate in Pakistan, An investment climate assessment prepared by The World Bank Group in collaboration with The Small and Medium Enterprise Development Authority of the Government of Pakistan, 30 May 2003 (to be published). 4 Dawn Economic and Business review, 13 October 2003. Page 87 New Business Opportunities in Pakistan

On the positive side, one must note the exceptional motorway linking Islamabad to Lahore and Faisalabad, with very limited traffic, or the airport in Sialkot developed by the Sialkot Chamber of Commerce and Industry.

The OICCI also mentions other inefficiencies in the Public sector, such as the expensive price of the steel supply by the public owned steel industry, or the unreliability of electricity supply which requires companies to invest in private generators.

Another extra cost of doing business in Pakistan originates from the security issue, whereby special security guards have to be employed to patrol the premises.

Finally, it was pointed out that smuggling is a penalising issue in certain sectors. The smuggling of goods originates mostly through the long and porous border with Afghanistan, as well as Iran. The Customs Authority of Pakistan estimates that out of the Rs 10 billion of transit trade bound for Afghanistan, about 25% is smuggled back to Pakistan, causing a significant prejudice to the local industries. Products mentioned as subject to such smuggling are the betel nuts, electronics, cosmetics, tyres and industrial raw material. From Iran, smuggling mostly concerns fuel oil.

However, it is worth noting that significant progress has been made in the regulatory environment in recent years, and that the cost of finance has reached an all time low. Also, the performance of the financial sector has improved with the privatisation of banks, while the telecom industry offers a rather satisfactory service (period to obtain fixed telephone lines is usually less than one month, depending on the area).

1.30.2 Energy costs

1.30.2.1 Gas and fuel costs

Table 26: Energy costs (gas & fuel costs, as of July 2003) Fuel Rupees / Litre Gas Rupees / kg.

Petrol (87 RON) 32.19 LPG 29

Hi-Octane (97 RON) 36.59 CNG 25 (Approx.)

Diesel 15.63

Medium Quality Fuel Oil 135 – 140

Kerosene 14.97 Source: BOI

1.30.2.2 Electricity prices http://www.pakwapda.com/htmls/customer-index.html Table 27: Water and Power Development Authority (Wapda) tariff schedule SURCHARGE FIXED ENERGY ADDITIONAL TARIFF FAS @10.4% of CHARGE CHARGE SURCHARGE CATEGORY (Rs/KW) Supply (Rs/KW) (Rs/KW) (Rs/KW) charges** A. General Supply Tariff A-1 (including FATA) i) Upto 50 Units 0 0.61 0 0 0.73 For First 100 units 0 0.41 0.49 0 1.31 (1-100) For Next 200 0 0.58 0.49 0 2.02 units (101 - 300) For Next 700 0 1.51 0.49 0 3.28 units (301 - 1000)

Page 88 New Business Opportunities in Pakistan Above 1000 units. 0 1.88 0.44 0 4.15 MINIMUM| Rs.45/- For Single Phase Connection

CHARGE | Rs.100/- For Three Phase Connection B. General Supply Tariff A-2 ( including FATA ) MINIMUM| Rs.150/- For Single Phase Connection

CHARGE | Rs.300/- For Three Phase Connection C. Industrial Supply Tariffs MINIMUM| Rs.70/- For first 20 Kilowatts of Load

CHARGE | Rs.90/- For load between 20-40 KW Source: Wapda

Electricity prices in Pakistan are considered on the expensive side in the region (see Figure 24) and Wapda is not always regarded as most efficient. In December 2003, the authority was criticised by the the ruling parties' senators "for its poor performance, high power tariffs and overcharging through defective electricity meters” (The Nation, 09 December 2003)

Figure 24: Electricity prices, a comparison in Asia, 1999. Industrial Electricity Prices

0.12

0.1

0.08

0.06 US$/KWH

0.04

0.02

0 ia a a ia a n s nd in k d re la an In esia sta i Ch L n Ko i alay ha i ak S.Arabia M T r P S Indo Industrial Electricity Prices US$/KWH S. Arabia Malaysia Thailand China Sri Lanka India Indonesia Korea Pak 0.03 0.056 0.058 0.07 0.075 0.0825 0.09 0.1 0.11

Source: Planning Commission, 1999 Annual report on the working of State Electricity Boards and Electricity Departments, New Delhi, Power and Energy Division, Government of India

1.30.3 Price level

Prices in Pakistan are not regulated except for the pharmaceutical industry, the as well as some agricultural goods such as the sugar cane, while the principle of independent agencies to monitor public service prices has been established (see Box 18).

The independence of these specialised authorities is sometimes questioned, and the Government tends to influence the prices of some items, such as fertilisers or basic food items.

Page 89 New Business Opportunities in Pakistan Box 18: Price control of public utilities The Pakistan Telecommunications Authority (PTA) has rejected Pakistan Telecommunication Company Limited (PTCL) an astounding 3,000% tariff surge on co-location services and has forthwith stopped implementing its order. The PTA reached the decision on Saturday in Islamabad after hearing complaints from numerous PTCL customers, mostly the Internet service providers, sources close to the authority said. An official in the PTA while confirming the decision said that the PTCL could not take any unilateral decision without duly informing the regulator. "The PTCL about three months back increased co-location tariff by almost 3,000%. The ISPs and other PTCL customers approached the authority against such decision and today (Saturday) the PTA rejected the PTCL decision and asked the company to charge according to the old rate," said a source who attended the hearing. He said the PTA called the PTCL high ups, ISPs representatives and other stakeholders to deliberate on the issue. Conclusively, it was decided that the 3000% increase in tariff is totally unjustified and must be stopped, he added. "According to the Pakistan Telecommunications Act 1996 the telecom company could not pass any order even for cut in charges of any service without informing us (PTA)," said the official and added: "It is an abject violation of rules by the PTCL." This was the second rejection by the PTA on the PTCL decision since November 2002, when the telecom regulator termed the ban over Internet telephony illegal and asked the company to remove it. However, instead of heeding to the PTA decision the PTCL moved the court and took a stay on the authority’s decision. PTCL officials argue that under the Pakistan Telecommunication (Re-organisation) Act 1996, basic telephone services are the prerogative of the phone utility. According to the increased tariff, the ISPs and other PTCL customers would have to pay Rs198 per square feet as co-location charges, against the previous rate of Rs2 per square feet. Source: The News, 28 September 2003

1.31 Insurance

Almost all Insurance Companies operating in Pakistan provide insurance cover to all types of businesses owned by Pakistani nationals or foreign nationals provided the operations fulfil all the legal and moral requirements. There is no limit on the value, assets, turnover, or size of the Company to be insured.

The procedure to get the business insured is normal and simple. Once the Insurance Company is selected, the company personnel will inspect the site of the business and the equipment installed in the company. The next step is to verify and validate the value of the business. The premium is negotiated and the insurance policy is prepared.

There are a number of risks that can be covered through an insurance policy. Generally the following types of risks are covered: - Fire in the factory caused by natural calamity or short circuit; - Theft or robbery of equipment in the factory; - Malicious damage; - Atmospheric damage (e.g. floods, earth quakes etc.); - Accidental damage; - Damage done during riots or strikes.

In addition to these the company could have its employees insured (e.g. health, life, children education, wedding etc.). http://www.pakboi.gov.pk/html/insurance_companies.html

1.32 Financing and bank accounts

For Pakistani registered companies, whether locally or foreign controlled, opening a bank account (current or check in accounts) requires a board resolution, a reference, and the legal documentation of the company such as its charter etc. However, for foreign company branch offices and liaison offices, the requirement of having a BOI registration is a prerequisite for opening the bank account.

Contracting foreign private loans (which does not involve any Guarantee by the Government of Pakistan) is available to all foreign investors who make investment in sectors open to foreign investment, to finance the cost of imported plant and machinery required for setting up the project. However, loan agreements should be registered / cleared by the State Bank of Pakistan.

Foreign controlled manufacturing concerns are allowed unlimited domestic borrowing according to their requirements for working capital. For foreign controlled semi-manufacturing concerns, the borrowing entitlement is 75% of paid-up capital including reserves, and for foreign controlled non- manufacturing concerns (trade/services) it is 50%.

Page 90 New Business Opportunities in Pakistan There exist also a number of administered loans to support specific ventures or exports. Such a scheme for example could be a Rupee loan at 4% per annum under the concessional loan for locally made machines (LMM).

Lending by banks in Pakistan has traditionally been short term, with little medium term finance. Recently, the depth of the market has improved due to the liquidity situation of the banking sector. The Government, which used to issue bonds with a maximum tenor of five years, has decided in October 2003 to issue bonds with a tenor of fifteen and twenty years duration.

In line with the improvement of the macro economic figures, interest rates have decreased substantially throughout 2003. First class borrowers can draw short term funds at around 5%, while borrowings up to 3 to 5 years, when available, reach 8 to 12%.

Transfers of funds with the rest of the world have become more expeditious since the abolition of a requirement for banks to pre-notify the SBP before issuing foreign exchange prior to transfer of funds. Delays for such transfers have therefore been reduced from four weeks to less than a week. http://www.sbp.org.pk/ http://www.pakboi.gov.pk/html/financial_institutions.html

1.33 Import and export procedures, tariffs

Export is freely allowed except for certain items such as intoxicant and intoxicating liquors, certain wildlife species, wood and timber, antiques, certain chemicals etc. Certain petroleum products are only exportable through the public sector while wheat, cotton, rice, metals, small arms, certain defence projects, nuclear energy equipment, precious stone and gold jewellery, poppy seeds, urea, pet dogs and cats and wild boar meat and skin are only exportable after complying with special conditions attached to these commodities.

The Government continues to provide a 25% freight subsidy on certain products to support their export growth.

1.33.1 Tariff rates

Import tariffs have been reduced significantly in recent years (see Table 28), while the rate structure has been streamlined considerably. Rates are now 5%, 10%, 15% 20% or 25% maximum, with the exception of the car industry, protected by rates ranging from 75% up to 125%, depending on the car size. The weighted average rate is 16.5%, while the average rate is 12.5%.

Table 28: Import tariffs and their dispersion Description 1997 1998 1999 2000 2003 Number of rates 13 5 5 5 4 Maximum rate (%) 65 45 35 35 25 Average rate a (%) 23 21 18 18 16.5 Average rate b (%) 17 16 14 12 12 a Duty collected divided by value of dutiable imports. b Duty collected divided by value of total imports. Source: The Government of Pakistan http://www.cbr.gov.pk/default.htm

1.33.2 Procedures http://www.epb.gov.pk/epb/jsp/ebook/epb.html

1.33.2.1 Export clearing procedure Once the consignment to be exported arrives at the port or dry port, usually a clearing agent’s services are sought so as to facilitate the procedure of clearing the consignments. The documents to be provided by an exporter to the clearing agent are as follows: a) Packing list b) Invoice

Page 91 New Business Opportunities in Pakistan c) Form ‘E’ 1(State Bank form) d) Letter of Credit or Contract e) Certificate of Origin

However if the exporter is exporting for the first time, then the following documents have to be provided in addition to those mentioned above: a) Sales Tax Registration Certificate (copy) b) National Tax Number (NTN) Number (certificate).

Provided the above mentioned documents are complete, the clearing agent prepares the shipping bill and files the documents with the Customs department. A “machine number” is allotted to the Shipping Bill, and the case is forwarded to the Port Gate. The consignment is allowed to enter the port vicinity, and is registered at the gate according to the allotted number. The Deputy Superintendent (D.S.) marks the consignment for examination to the inspector of the examination hall. Once the inspector has examined the consignment, the case is marked to the D.S. for approval.

2% Export Development Surcharge (EDS) of the invoice value shall be deducted through the receiving banks upon remittance of the export proceeds against the Export Development Fund (EDF). However, EDS has been waived for small exporters and those who exceed their exports by more than 10% compared to the previous year.

Provided the D.S. approves the case, it is forwarded to the Superintendent with the examination report for final approval. The case if approved by the Superintendent is marked to the D.S. for “Out of Charge”. The container is given a final physical check and is sealed by the bonded carriers or the port customs authority.

The loading programme is obtained from the shipping firm/cargo carrier for the country to which the consignment is being exported. Loading programme lists the schedule of various ships leaving port for the export destination along with the availability and 4 copies of Form E are issued by the intermediary, one copy is handed to the exporter and one copy is retained by the bank. The remaining two copies are required to be sent to the State Bank of Pakistan and the Customs department respectively.

1.33.2.2 Duty and Tax Remission for Exporters (DTRE) In order to make Pakistan’s exports more competitive in the international markets, the Government of Pakistan brought in a new set of rules in 2001 called the DTRE Rules. The basic objective of these rules are to over come the delays in sales tax and custom duty refunds that has become a big issue in the recent years with exporters.

Under the DTRE rules, an exporter does not have to pay up front any duty or sales tax on imported raw material that he uses in export production. Instead the Revenue Division of the Government of Pakistan, with the help of industry specialists, work out the raw material requirements of the exporter against the export order and then the exporter is allowed to import the raw material without paying any duty or sales tax. The Customs department later on carries out a post shipment audit to verify that the amount of imported raw material was actually used in the export production. In this manner, the funds of the exporters avoid being blocked with the Government in the form of duties and sales tax.

1.33.2.3 Import procedures There is no restriction on imports of any goods except for those prohibited due to security, religious, health and other reasons. The list of items under these categories is available on the website of the CBR. Anything else can be imported after paying the duties and sales tax, the rates of which at the 8- digit HS Code level are published and also available on the CBR website (http://www.cbr.gov.pk/default.htm).

In practice, import procedures can cause substantial delays. Although efforts are being made by the authorities to reduce import clearance times, by international comparison import procedures are still slow (see Figure 25).

Page 92 New Business Opportunities in Pakistan Figure 25: Customs delays on imports

Longest Time (Days) to Clear Imports in Last Year 25 20 15 10

Median Value 5 0

n ta na India hi C kis Poland gladesh Pa n a Cambodia B

Source: World Bank; Investment Climate Surveys

1.34 Foreign exchange control http://www.sbp.org.pk/fe_manual/index.htm

Full repatriation of capital, capital gains, dividends and profits, is allowed, except in the service sector where a 60% limit on repatriation of profit is in place (see 1.26.2 above).

1.34.1 Local currency

The local currency is the Pakistan Rupee (PKR). The exchange rate at the end of 2003 was approximately 67 PKR / 1 EUR.

The Pakistan Rupee is issued in the following denominations: Notes: 1000, 500, 100, 50, 10, 5; Coins: 2, 1.

1.34.2 Repatriation of capital and foreign currency accounts

Pakistan has a liberal foreign exchange regime with few restrictions on holding foreign exchange and bringing it in or out of the country. There are no limits on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property or payments for imported inputs.

However, investor remittances shall only be made against a valid contract or agreement which has to be registered with the State Bank of Pakistan within 30 days.

Corporate and individual foreign currency accounts can be opened in commercial banks.

1.34.3 Technical assistance (Fee remittance)

There is no restriction on payment of royalties / technical fees etc., in the manufacturing sector. For the non-manufacturing sector, the initial lump sum fee should not exceed USD 100,000. The maximum rate will be 5% of net sales. The initial period for which such fees may be allowed should not exceed 5 years.

1.35 Accounting and auditing

Pakistan has adopted international accounting standards, with comprehensive disclosure requirements for companies and financial entities. The professional bodies involved in the accounting and auditing

Page 93 New Business Opportunities in Pakistan are the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan.

While Pakistan adheres to 38 of 41 international accounting standards it does not yet apply IAS 15 (information reflecting the effect of changing prices), IAS 29 (financial reporting in hyperinflation) and IAS 41 (accounting treatment of agricultural activities).

Cross shareholding and stable shareholding agreements (to control management) are restricted to 30% of equity, excluding subsidiaries, but it does not apply to foreign investors.

1.36 Taxation

Pakistan's tax system distinguishes between two categories of taxes: - Direct taxes: Income tax - Indirect taxes: Customs Duty, Central Excise Duty, Sales Tax, Stamp Duty and Property Tax etc. which relate to commercial transactions.

In Pakistan taxes are considered as Federal levies. The Federal Government regulates all direct taxes including income tax and indirect taxes such as Customs Duty, Central Excise Duty and Sales Tax. However, provincial Governments levy taxes which include land revenue, tax on agriculture income, property tax and other local taxes including local sales tax.

Box 19 presents an overview of taxes and tax rates. http://www.cbr.gov.pk/default.htm

Box 19: Taxes in Pakistan, an overview Direct taxes Banking Companies 44% Public Companies 35% Other Companies 41% Personal Income Tax Resident and Non-Resident Individuals 7.5% - 35% Indirect taxes Withholding Tax ¨ Interest on Securities 20% ¨ Profit on debit (on Bank Account / Fin.Inst.) 10% ¨ Fees for Technical Services 15% of Gross Fee ¨ Royalty 15% of gross royalty .. Services Rendered 5% Execution of contracts a) Value not exceeding 30 million rupees 5% b) Value exceeding 30 million rupees 6% c) Supply of Goods 3.5% ¨ Profit or Interest on Bonds, Certificates etc. 10% ¨ Commission or Brokerage 5% Sales Tax This tax is imposed at the import and manufacturing level 15 – 20% Supplies by registered person to registered persons 15% Supplies by registered person to un-registered persons 18% Specified items (Mentioned in SRO 389(I)2001 dt. 18-6-2001 20% Turnover Tax 2%

1.36.1 Direct taxation

Pakistan’s direct tax code is called the Income Tax Ordinance, 2001. Forms and Statements and certain procedures are contained in the Income Tax Rules, 2002. Taxes on income are usually charged with regard to 5 income classifications which include (i) Salary; (ii) Income from Property; (iii) Income from Business; (iv) Capital Gains; and (v) Income from Other Sources [residuary clause].

“Tax year” means a period of 12 months and generally ends on 30 June. However the Government willingly allows December 31 or any other date as the financial year end, provided justification is furnished for such change. A Tax Year is denoted by the calendar year in which such year-end falls, e.g. if the financial year ends on, say, June 30, 2004 or March 31, 2004, it will be termed as “Tax Year 2004”.

Page 94 New Business Opportunities in Pakistan For Pakistan tax purposes, a taxpayer can be either an Individual or an Association of Persons (AOP) or a Company. AOPs are usually formed when business entities collaborate to form a consortium or a joint venture between a local and a foreign contractor.

General and administrative provisions of law are applicable to both, the resident and non-resident persons. Provisions relating to basis of taxation, computation of income and calculation tax are separately provided for resident and non-resident persons In other words residency in Pakistan (i.e. resident or non-resident) largely effects computations. The residency requirements for each type of person are presented in Table 29.

Table 29: Residency status Tax Status Residency Requirements Individual a. is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-two days or more in the tax year; b. is present in Pakistan for a period of, or periods amounting in aggregate to, ninety days or more in the tax year and who, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty-five days or more; or c. is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year. Association of An association of persons shall be a resident association of persons for a tax persons (AOP) year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year. Company a. it is incorporated or formed by or under any law in force in Pakistan; b. the control and management of the affairs of the company is situated wholly or almost wholly in Pakistan at any time in the year; or c. it is a Provincial Government or local authority in Pakistan.

For tax years ending June 30, tax returns are to be furnished by following December 31 and require attachment of different information including Profit & Loss Account, Balance Sheet, etc. if the taxpayer has chosen net income basis as his basis of taxation (see 1.36.1.1). Taxpayers choosing the presumptive basis however are not required to furnish return, rather they shall file a simple Statement on the prescribed form containing brief detail (see 1.36.1.2).

1.36.1.1 Taxation of business income Taxable business income includes income from property, income from business, capital gains and income from other sources such as dividends, interests, deposits, etc. Usually taxable business income is computed after deduction of allowable expenditure against business income. The following expenditures are considered allowable: - Interest on borrowing; - Depreciation in respect of business assets other than land; - Cost of repair, maintenance and insurance; - Research and development cost (charged through amortisation); - Expenditure on technology, know-how, patents, copy rights etc. (charged through amortisation); - All other expenditures incurred wholly for business; - Donations to registered charities and welfare institutions.

However, there are special regulations relating to expense provisions with regard to insurance, petroleum exploration and production as well as the exploration and extraction of mineral deposits.

Corporate tax is applicable to all business enterprises including foreign companies operating in Pakistan as branch office or liaison office. The tax rates applicable vary with regard to the type of business entity between banking companies, public companies (quoted or majority held by Government) or private companies. The tax rates with regard to banking and private companies are to be reduced as described in Table 30.

Table 30: Corporate tax rates evolution Tax Year Banking Company Public Company Private Company 2003 47% 35% 43% 2004 44% 35% 41% 2005 41% 35% 39% 2006 38% 35% 37%

Page 95 New Business Opportunities in Pakistan 2007 35% 35% 35%

1.36.1.2 Presumptive basis of taxation There also exists a system of presumptive taxation applied on the principle of assumed profits, as a%age of gross receipts. This scheme concerns mostly the income of contractors, rentals, shipping, dividends, royalties and fees for technical services. Especially for non-residents, this scheme is available for taxation in the following areas: - Shipping; - Air transport; - Fees for technical services; - Royalties; - Dividends from a resident company; - Turnkey contracts; - Contracts (or sub-contracts) for the design, construction or supply of plant & equipment under a Power Project; - Contracts (or sub-contracts) under a construction, assembly or installation project in Pakistan, including contracts for the supply of supervisory activities in relation to such project; - Any other contract for construction or services rendered, other than a contract for royalty or fee for technical services.

The second Schedule to the Income Tax Ordinance (2001) contains provisions for opting for the presumptive tax regime in respect of certain incomes of non-residents without a permanent establishment in Pakistan. An option once exercised, is valid for at least three succeeding years.

The rates applicable for taxation on presumptive basis are presented in Table 31.

Table 31: Presumptive rates of income tax Source of Presumptive Income Tax Rate Turnkey contracts @ 8% Contracts or sub-contracts for design, supply of plant and equipment and @4% transmission line project, other than hydel power projects Contracts or sub-contracts for design, supply of plant and equipment, and @ 5% construction of hydel power project Execution of contracts other than above - where the value of contract is up to Rs. 30 million @ 5% - where the value of contract exceeds Rs. 30 million @ 6% Dividend received by a public company or an insurance company 5% of the gross amount Dividends received in any other case. 10% of the gross amount Fee for Technical Services and Royalty 15% Shipping income 8% of the gross amount Air transport income 3% of the gross amount

1.36.1.3 Taxation of non-resident entities Business income of non-residents is considered as Pakistan-source income to the extent it is directly or indirectly attributable to: - A permanent establishment of the non-resident person in Pakistan; - Sales in Pakistan of goods, merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan; - Other business activities carried on in Pakistan of the same of similar kind as those effected by the non-resident through a permanent establishment in Pakistan; or - Any business connection in Pakistan.

Under Pakistan tax law a Permanent Establishment (PE) is a place of business by a non-resident entity established in Pakistan including various office sites, building site, construction site as well as rendering of services through employees or having any asset in Pakistan yielding income. The

Page 96 New Business Opportunities in Pakistan existence of a PE is a main factor in determination of the taxability of a non-resident’s income in Pakistan.

1.36.1.4 Taxation of gains The difference between the consideration received on disposal of a Capital Asset and the cost of such asset is liable to Capital Gains tax in Pakistan; when the asset being disposed off has been held for more than one year, only ¾ of such gains are liable to tax.

Capital asset does not include any stock-in-trade, consumable stores or raw material for the purpose of business. Depreciable assets, amortisable intangibles, immovable property are also excluded from the definition of Capital Asset.

Loss on disposal of a Capital Asset cannot be set off against income under any other head, except capital gains. Capital gains arising in the following cases are exempted from tax: - Gains on disposal of shares companies listed in Pakistan are exempt from tax up to tax year 2005. - Capital gains arising from sale of shares of a public income derived by any foreign institutional investor approved by the Government of Pakistan. - Capital gains arising from an industrial undertaking set up in an area declared as Export Processing Zone.

1.36.1.5 Taxation of salaries Salary is taxable under Pakistan Tax Law: - to the extent received from any employment exercised in Pakistan, wherever paid; - when paid by, or on behalf of, the Federal Government, a Provincial Government, or a local authority in Pakistan, wherever the employment is exercised.

Remuneration for rendering of independent services is also taxable in Pakistan (including professional services and the services of entertainers and sports persons) when paid by a resident person or borne by a permanent establishment of a non-resident in Pakistan.

1.36.1.6 Individual taxes Tax on salaried individuals is computed on taxable income (Computed by allowing certain deductions or allowances from gross income) according to Table 32.

Table 32: Personal Income Tax Rates 1. UP to Rs. 80,000 No tax

2. Rs. 80,001 – Rs. 150,000 7.5% of the amount exceeding Rs. 80, 001

3. Rs. 150,001 – Rs. 300,000 Rs. 5,250 + 12.5% of amount exceeding Rs. 150,001

4. Rs. 300,001 – 400,000 Rs. 24,000 + 20% of amount exceeding Rs. 300,001

5. Rs. 400,001 – 700,000 Rs.44,000 + 25% of amount exceeding Rs.400,001

6. Over Rs. 700,000 Rs.119,000 + 35% of amount exceeding Rs. 700,001

1.36.1.7 Relief from double taxation Pakistan has signed avoidance of double taxation treaties with 51 countries. Relief from double taxation is available by way of credit in respect of foreign tax paid in any other country. This credit is allowed at the average rate of tax of Pakistan or the average rate of tax of the other country, whichever is lower.

Box 20: List of countries with double taxation agreements Austria Greece * Korea Republic Poland Tunisia Azerbaijan Hungary Kuwait Oman Turkey Bangladesh India * Lebanon * Qatar Turkmenistan Belgium Indonesia Libyan Arab Jamahuria Romania United Arab Emirates Canada Iran * Malaysia Saudi Arabia * United Kingdom

Page 97 New Business Opportunities in Pakistan China Ireland Malta Singapore United States of America Denmark Italy Mauritius Sri Lanka Uzbekistan Egypt Japan Netherlands Sweden Finland Jordan * Nigeria Switzerland France Kazakhstan Norway Syria Germany Kenya * Philippines Thailand * Limited Purpose Agreement (e.g. for income from Shipping or Airlines etc.) Source: Central Board of Revenue

Concessional tax rates are specified in Tax Treaties with members including new members and applicant countries of European Union as at the end of 2003. Summary is as under:

Table 33: European Union rates under the tax treaties Rates as per DTT (%) S. No Country DTT Royalty Dividend FTS Interest Member states 1 Austria Yes 20 10 & 20 25 Taxable 2 Belgium Yes 20 & 15 10 & 15 15 3 Denmark Yes 15 15 12 15 4 France Yes 10 10 & 15 10 10 5 Germany Yes 10 10 & 15 10 10 & 15 6 Greece Air & Shipping Treaty 7 Ireland Yes Exempt 10 Exempt 8 Italy Yes 30 15 & 25 30 9 Luxembourg No 10 Portugal No 11 Spain No 12 Sweden Yes 10 15 10 15 13 Netherlands Yes 5 & 15 10 & 20 10 / 15 / 20 14 UK Yes 12.5 15 12.5 15 New Member states 1 Cyprus No 2 Czech Republic No 3 Estonia No 4 Hungary Yes 15 15 / 20 15 15 5 Latvia No 6 Lithuania No 7 Malta Yes 10 15 10 8 Poland Yes 15 / 20 15 Exempt 9 Slovakia No 10 Slovenia No Applicant countries 1 Bulgaria No 2 Romania Yes 12.5 5 & 10 10 10 3 Turkey Yes 10 10 & 15 10 Source: Central Board of Revenue

Cases of Companies originating from Countries without Non Double Taxation treaties: As a consequence of a recent tax reform, tax credit is also available in situations of double taxation where the foreign company is from a non-treaty country. The principle of such relief is that for all foreign entities which are tax resident in Pakistan, credit for tax paid outside is available at the lower of tax chargeable in Pakistan or tax paid outside subject to certain considerations. For non-resident foreign entities, the regulation on taxation is principally the same as those governing entities of treaty countries in which a tax rate has been specified for fee for technical services at 15%. http://www.pakboi.gov.pk/html/avoidance_of_double_taxation_.html

1.36.2 Indirect taxes

The most important types of indirect taxation are sales tax, central excise duty and customs duty (see 1.33.1). http://www.cbr.gov.pk/default.htm

Page 98 New Business Opportunities in Pakistan 1.36.2.1 Sales Tax Sales tax is an indirect tax on the supply and import of goods (except those which are exempt from levy of sales tax under section 13 of the Sales Tax Act, 1990) made by an importer, manufacturer, wholesaler, dealer, or retailer. The rate of sales tax is 15% on the value of supply for registered persons and 18% on the value of supply for unregistered person. Taxable entities are required to get registered under the Sales Tax regime including manufacturers, retailers, importers and wholesalers.

Supply of agricultural products, live animals, unprocessed food stuff for human consumption, eggs, drugs, Holy Koran, newspaper, books, journals, currency notes, coins, defence store items, computer software, import of artificial kidney, eye corneas etc., and most services are exempt from sales tax.

1.36.2.2 Excise Duty Excise duty is levied and collected on excisable goods produced, manufactured or imported into Pakistan and excisable services being rendered. The excisable services are basically those that are rendered by food caterers, hotels advertising agencies and telecommunication companies. The excise duty is levied also on the telecommunication sector at a rate of 15%. Rates of excise duty range predominantly from 5% to 15% of the value applicable for the duty. However, in certain cases it can be higher up to 90% ad-valorem for certain products. In respect of certain goods, the value of duty is based on the quantity of such goods; e.g. certain petroleum products, cement, cigarettes etc.

1.36.3 Investment protection treaties http://www.pakboi.gov.pk/html/bilateral_investment_treaties.html

Pakistan has signed Bilateral Agreements on Promotion and Protection of Investment with 40 countries (see Box 21). The general features of these agreements are as follows: - The term investment includes all assets of the individual investors and companies for the purpose of business investment. This includes: shares, moveable and immovable assets, intellectual property rights, licensing and know-how agreements, goodwill, and concessions to cultivate, extract, or exploit natural resources. - The Contracting Parties shall encourage investments in their respective territories by investors of the other Contracting Parties. - Non-discrimination vis-à-vis local investors and foreign investors of third countries. - Nationalisation shall be applied exclusively for the reasons of public interest, pursuant to the law, and shall in no case be discriminatory. Countries adopting such measures shall pay to investors an adequate indemnity without undue delay according to the market value of the investment nationalised. - Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts, a state of national emergency, requisitioning measures, etc. - The free transfer of investments, and income deriving there from, including, particularly but not exclusively, profits, dividends, interest income, proceeds of sales or liquidation, repayments of loans, salaries, wages and other compensation received by foreigners employed on the investment. - Subrogation. - A dispute settlement mechanism to settle any dispute between the countries with respect to the interpretation of the respective agreement. - A dispute settlement procedure to settle any dispute between a host country and an investor of the other country. If the dispute is not settled through mutual consultation, the investor concerned can take his case to the competent court of the respective country or ad hoc court of arbitration established under the rules of the UN Commission on International Trade Law or the International Centre for Settlement of Investment Disputes (ICSID) or the Court of Arbitration of the International Chamber of Commerce (see 1.38).

Page 99 New Business Opportunities in Pakistan Box 21: List of Countries / Organisations with which Pakistan has Bilateral Investment Treaties S.No. Name of Country S.No. Name of Country S.No. Name of Country 1. Australia 15. Kyrgyz Republic 29. Spain 2. Azerbaijan 16. Lebanon 30. Switzerland 3. Bangladesh 17. Malaysia 31. Syria 4. Belarus 18. Mauritius 32. Sri Lanka 5. Belgium 19. Netherlands 33. Tajikistan 6. China 20. Oman 34. Turkmenistan 7. Egypt 21. OPEC FUND 35. Turkey 8. France 22. Portugal 36. Tunisia 9. Germany 23. Philippines 37. Uzbekistan 10. Iran 24. Qatar 38. United Kingdom 11. Indonesia 25. Romania 39. U.A.E. 12. Italy 26. Sweden 40. Yemen Arab Republic 13. Japan 27. 14. Kuwait 28. Singapore

1.37 Government procurement

1.37.1 Pakistan regulatory authority

The Public Procurement Regulatory Authority (PPRA), created in 2002, is an autonomous body endowed with the responsibility of prescribing regulations and procedures for public procurements by the Federal Government owned public sector organisations, with a view to improve governance, management, transparency, accountability and quality of public procurement of goods, works and services.

It is also endowed with the responsibility of monitoring procurement by public sector agencies / organisations and has been delegated necessary powers under the Public Procurement Regulatory Authority Ordinance 2002

The PPRA website http://www.ppra.org.pk/ (under construction) lists the different procurement bodies within the public sector and should make available, in due course, each entities rules and requirements. At present each entities follows its own regulations with little coordination.

The main purchasing entities of the Government are in the oil and gas sector, the telecommunication sector as well as the Public Works department.

Although international competitive bidding is the norm, some people complain that the process is not always transparent. There have been allegations that recent telecommunication have not been decided on technical factors and price only.

1.37.2 Government purchasing and tenders

The central purchasing, storage and supplies organisation for the Pakistan Government is the Government Supplies Department (GSD), which is responsible for more than 80 departments, agencies and non-governmental bodies, including the Hospital Authority.

Tenders are advertised in the Pakistan Government Gazette and other leading Pakistan newspapers. Some tender information is also relayed through TradeUK.

The GSD keeps a list of suppliers who are occasionally contacted with information about future tenders. Companies are also free to register their interest with the GSD. For further information contact:

Department of Supplies, Government of Pakistan (GSD) 12 Oil Street North Point Tel: + 92 2802 6290 Fax: + 92 2807 2764

Late bids are not considered. Cheques are the most common form of payment, usually within 30 days of receiving the goods, although terms are negotiable.

Page 100 New Business Opportunities in Pakistan So far, Pakistan has not signed the WTO Government Procurement Agreement.

1.38 Litigation and arbitration

Litigation and arbitration is probably the most contentious area for any prospective foreign investor in Pakistan. Resolution of litigations and arbitrations is not satisfactory at present, as exemplified by very visible recent cases, despite the existence of a domestic law, and Pakistan's signing of the New York convention (not yet ratified).

1.38.1 Domestic arbitration

The law of arbitration in Pakistan is contained in the Arbitration Act, 1940 (a pre-partition enactment, which is still in force). The Act provides for three classes of arbitration: – arbitration without court intervention (Chapter II, sections 3-19); – arbitration where no suit is pending, (but through court) (Chapter III, section 20) and – arbitration in suits (through court) (Chapter IV, sections 21-25).

The Act also contains further provisions, common to all the three types of arbitration (Chapter V, sections 26-38): – Arbitration agreement: Whatever the class of arbitrations, there must be an arbitration agreement. As defined in the Arbitration Act, 1940, it means a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not [section 2 (2)]. – Arbitrators: The number of arbitrators can be one, two, three or even more. In the case of an even number of arbitrators, an umpire is to be appointed according to the procedure given in the Act [First Schedule. Where the arbitration agreement does not specify the number, the arbitration shall be by a sole arbitrator (First Schedule). An arbitrator may be named in the arbitration agreement or may be left to be appointed by a designated authority (First Schedule). Where the arbitration agreement is silent about the mode of appointment of arbitrators and the parties cannot agree about the choice of the arbitrator, the Act gives power to the court to make the appointment, after following the prescribed procedure (sections 8-10). An arbitrator who does not diligently conduct the proceedings, or who is guilty of misconduct, can be removed by the court after due inquiry (section 11). The arbitrator has got certain statutory powers, including the power to administer oaths to witnesses, power to “state a case” for the opinion of the court etc.

1.38.2 International arbitration (private/private)

The New York Convention (about arbitration in international disputes) was prepared by the United Nations and adopted in 1958. The Convention achieves its aim by requiring courts in contracting states: – to refer to arbitration any disputes brought before them that are covered by an arbitration agreement; – to recognise and enforce foreign arbitral awards provided that certain conditions relating to proof and validity are met.

A country's accession to the New York Convention has to be accompanied by the amendment of the existing arbitration statute. However, legal reform is only truly effective if the courts put the reforms into practice. Pakistan is a signatory to the New York Convention; however this agreement has not been ratified and is not implemented easily through the courts (see the example described in Box 22).

Page 101 New Business Opportunities in Pakistan Box 22: Arbitration and legal dispute in Pakistan, the Siemens-Westinghouse case In March of 1996, WAK entered into an Engineering Procurement Construction Contract ("EPC Contract") with a Consortium of Raytheon-Ebasco Overseas Limited ("REOL"), and Westinghouse International Service Company, Limited, a predecessor in interest to Siemens Westinghouse Service Company Limited ("SWSC"). (Partial Award, §2.5). The contract set forth terms for design and construction work by the consortium. (Id.). The EPC Contract also required that any dispute arising from the contract be resolved through binding arbitration. Specifically, it stated: "Any dispute, controversy or claim of any nature whatsoever arising out of or relating to or in connection with this Contract (the "Dispute"), or the breach, termination or invalidity thereof, shall be referred to arbitration and finally settled in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce ("ICC"). The parties hereby consent to arbitration there under." On August 19, 1998, Plaintiffs SWSC and REOL, pursuant to the arbitration provision of the EPC contract, filed a request for Arbitration in London with the International Chamber of Commerce's Court of Arbitration, claiming that WAK had defaulted on payments that were owed to SWSC and REOL. (Partial Award, §2.21). On September 7, 1998, aware of its agreement to arbitrate all claims related to the EPC contract, WAK filed a civil suit in Lahore, Pakistan against SWSC, REOL, and CBS. There, it claimed, among other things, that the EPC Letter of Credit constituted a pledge by SWSC, REOL, and CBS to provide the eleven million dollar KESC letter of credit for the benefit of WAK. On October 12, 2000, the Lahore High Court vacated the Lahore trial court's judgment, including the $1.4 billion dollar award in favour of WAK. The Lahore High Court determined that the lower court erred when it struck SWSC, REOL, and CBS's defences. That court also determined that those parties had not been given the opportunity to file a written statement. (Lahore High Court Judgment Sheet, p. 8). Further, statements by the civil trial judge regarding SWSC, REOL, and CBS's delinquency in filing written statements seemed to the High Court to be erroneous. The High Court noted: "After hearing the learned counsel for the parties and perusing the available record it has become clear to us that the impugned judgment and [illegible] is not sustainable. In the impugned order it was observed by the Civil Judge that 8/9 opportunities had been given to the appellants [SWSC, REOL, and CBS] to file the written statement but they have failed to do so. These observations are contrary to record which shows that only at one occasion i.e. 23.12.1998 the suit was adjourned at the request of appellants to file the written statement. On all other dates of hearing there were miscellaneous applications pending before the court which were to be disposed of (Id. at p.3)." Accordingly, the Lahore High Court remanded the case to the trial court "for decision afresh after giving sufficient opportunity to the appellant to file the written statement." (Id.) On December 18, 2000, the International Court of Arbitration issued its Final Award. It found in favour of SWSC, REOL, and CBS on all claims. The Award 1) ordered WAK to pay SWSC and REOL two million dollars, plus specified interest, 2) dismissed WAK's counterclaims on the merits in their entirety, 3) declared that SWSC, REOL, and CBS have no liability concerning construction financing or obtaining the KESC letter of credit, and 4) ordered that WAK pay SWSC, REOL, and CBS $762,000 in arbitration costs, plus specified interest. (Final Award, §§16-16.5). On January 15, 2001, SWSC, REOL, and CBS filed the instant motion to confirm the Final Award pursuant to 9 U.S.C. § 207. WAK opposed the motion on February 9, 2001. Since that time, SWSC, REOL, and CBS have filed a reply and WAK has filed a sur-reply.

1.38.3 International arbitration (private/public)

Pakistan is a member of the International Centre for the Settlement of Investment Disputes (ICSID) which provides for conciliation and arbitration of investment disputes between contracting states and nationals of other states under the Convention for the settlements of Investment Disputes. However, here also implementation remains difficult (see Box 23).

Box 23: The Hub Power Company Ltd. case Another example with negative repercussions was the Hub Power Company Ltd Co's dispute with the Government. Following a 'regime' change, the Government reneged on a long-term contract to take up electricity from the power plant on the basis of US$ 0.06 per Kwh. The dispute lasted more than three years before it was finally resolved through a compromise, having caused substantial damage to Pakistan's image of reliability and legitimacy.

1.39 Environmental issues and quality controls http://www.pakboi.gov.pk/html/mstq_-_assurance_system_.html

Due to the importance of the export sector in relation with FDI, due consideration has been given by the Government to environmental and quality issues. Most of the exporting firms are ISO 9000 qualified. Still, improvements are to be made, especially in relation with the food and food processing industries where the phyto-sanitary conditions are particularly important to gain access to the EU and US markets.

The European Commission has designed a programme, scheduled to start in early 2004, to further strengthen the capacity of PSQCA and PNAC to function as internationally recognised quality control and accreditation organisations, notably in the fisheries and agro-food sector.

To provide one-stop shops for standardisation and quality control, the Government of Pakistan has established the Pakistan Standards and Quality Control Authority (PSQCA) by Act-VI of 1996, combining three previously existing institutions. PSQCA is a member of the International Organisation

Page 102 New Business Opportunities in Pakistan for Standardisation (ISO), the International Electrochemical Commission (TEC) and the International Organisation for Legal Metrology (IOML).

The Government of Pakistan is involved: - in the setting up of standards on quality and dimensions, preparation and promotion of general adoption of Pakistan Standard Specifications, operation of the Certificate Marks System and co- ordination of the efforts of producers and users for the improvement of standardisation and to provide assistance in the manufacture of quality products. - in testing and assessment of industrial raw materials and finished products to establish their quality, grade and composition with reference to national and international standard specifications of quality in various fields like chemical, chemical products and formulations, textile, food items etc. - in co-ordination and co-operation with other national, regional and international organisations, associations, societies, institutes or council and dissemination of technical information through seminars, workshops, symposia, press print and electronic media and to develop a quality conscious culture in Pakistan.

PSQCA works through three centres, the Standards Development Centre (SDC), the Quality Control Centre (QCC) and the Technical Services Centre (TSC). These are described in the following sections.

1.39.1 Standards Development Centre (SDC)

About 4700 standards have been developed by eight divisions (Agriculture & Food, Chemical, Civil Engineering, Electro-Technical, Electronics, Textile, and Weights & Measures) of SDC related to the many manufactured products and services.

The Government of Pakistan has issued a notification that all the ISO standards (about 13500) have been directly adopted as Pakistan Standard Specifications. All Pakistan Standards developed earlier are being reviewed to be re-designated as ISO standards and only those standards will be retained which are specific to Pakistani products and services. The adoption of ISO standards means that Pakistan Standards Specifications have increased (at least temporarily) to about 15000. Pakistan Standard Specifications are, thus, available now on a wide range of products and services.

The adoption of most of the Pakistan Standards by the local industry is voluntary, but it is mandatory to manufacture some items as announced by the Government of Pakistan from time to time. The present list contains 46 items, including edible oils / banaspati ghee, margarine, biscuits, cement, electric bulbs, tube-lights, safety razor blades, PVC pipes, natural mineral water bottled drinking water and two wheeler/ three wheeler auto vehicles.

Under the PSQCA Act. VI of 1996, the manufacturers of items under the Certification Marks Scheme need licenses to manufacture. These licenses are issued only after ascertaining that proper quality control facilities are available with the manufacturers. The primary responsibility for quality is of the manufacturers and PSQCA monitors the quality by periodical checks of quality control, collection of samples from manufacturers and random collection of samples of the products from the market.

1.39.2 Quality Control Centre (QCC)

The Quality Control Centre (formerly Central Testing Laboratories) undertakes testing and assessment of industrial raw materials and finished products to establish their quality, grade and dimensions with reference to national and international standard specifications of quality in the field of chemical, mechanical, engineering, electrical goods and appliances, building materials and textile materials. QCC also provides scientific advice to industrial units with regard to product quality.

1.39.3 Technical Services Centre (TSC)

The TSC provides additional technical services including failure analysis, metallurgical evaluation of metallic materials and chemical, as well as physical testing.

1.39.4 Pakistan National Accreditation Council (PNAC)

The Pakistan National Accreditation Council (PNAC) has been established as an autonomous body under the administrative control of the Ministry of Science & Technology to regulate the Accreditation

Page 103 New Business Opportunities in Pakistan and Registration System in the country. The PNAC is a national body assigned to assess, qualify and supervise certification agencies, laboratories, training course provider and personnel in the relevant fields.

The PNAC is seeking membership of the International Accreditation Forum (IAF) and International Laboratory Accreditation council (ILAC), the apex international agencies in relevant fields, and would also act as focal point for co-ordination with relevant international, regional and national organisations. This will ensure that all ISO certification in Pakistan will have international recognition and thus save cost and time spent by local companies on testing and inspection by the buyers.

PNAC has accredited various foreign certification bodies.

To create awareness among all the stakeholders about the standards and quality practices, the "Crash Awareness Raising & Training Programme in the field of Quality" has been launched. Under this programme, more than 500 seminars and courses are being held in Pakistan on different quality and certification topics, e.g. ISO 9000, ISO 14000, HACCP, SA 8000, ISO17025, etc.

1.40 Regulation and bureaucratic control

The impression collected by the authors of this Guide based on their visits to a number of operations in Pakistan contradicts the result of the World Bank study quoted hereafter. The impression of the authors is that the burden from the administration regarding enforcement of various rules, including the tax authority is much lighter than ever. It was never mentioned as a significant problem. The authors still wanted to quote the World Bank study given that it draws on a much larger sample than the authors of this Guidebook had time to consult.

The main entities involved with commercial and financial regulations are the Securities and Exchange Commission of Pakistan (SECP), the Board of Investment (BOI), the Central Board of Revenue (CBR) and the State Bank of Pakistan (SBP). While Pakistani law provides for recourse against adverse administrative decisions, the legal system remains backlogged and long court delays are common.

The SECP under the 1984 Companies Ordinance regulates the securities market, supervises the insurance sector and administers the companies’ incorporation rules and regulation.

The SBP supervises and regulates the banking sector, as well as takes care of the money supply policy of the country.

The CBR regulates through Special Regulatory Orders (SROs) the taxes and duties to be levied per sector, so as to give special relief in exceptional circumstances.

A 2003 World Bank report5 finds that management time and, hence, the cost of Government inspections "seems to be particularly heavy in Pakistan. Firms report spending 10% of management time dealing with Government officials, much more than in China (7%) or Bangladesh (4%). China and Pakistan both average 36 inspection visits per year, well above the levels in Bangladesh or India.”

It is the performance of the CBR which appears the most controversial, as reported by The Nation on 10 December 2003: “In a tone of admission on behalf of the Government, the Minister for Privatisation and Investment, Dr Abdul Hafeez Shaik said that the Central Board of Revenue’s (CBR) working was cumbersome and a big hurdle in attracting investment. However, he rushed to add that the difficulties and the bottlenecks were being removed not only to attract investors but also to facilitate them […]. Earlier, the participants of the conference had raised the points that the tax officials were to discharge the investors instead of attracting them. For instance, one participant cited a case where CBR had caused delay of over one and a half years in release of machinery.”

1.41 Social accountability of Investments (child labour, bonded labour)

The child labour issue could have been very damaging for Pakistan exports, especially in the carpet and sports good exports. Dedicated action undertaken by the authorities, together with the Sialkot

5 Improving the Investment Climate in Pakistan. An investment climate assessment, prepared by The World Bank Group in collaboration with The Small and Medium Enterprise Development Authority of the Government of Pakistan, 30 May 2003, to be published. Page 104 New Business Opportunities in Pakistan Chamber of Commerce and backed up by NGOs and the International Labour Organisation has addressed the issue.

Pakistan has signed and ratified the Convention on the Rights of the Child in 1990 and the ILO Convention 182 in 2001. At the national level, Pakistan passed the Employment of Children Act in 1991, although this has been criticised for not covering all sectors (such as agriculture) and for weak enforcement.

In the mid-1990s, the Government and the private sector have had to respond to international pressure exerted on Pakistan for its child labour practices by international human rights groups and trade unions. The threat of an export boycott on goods that involve children in the manufacture or production processes has existed for some time. The soccer ball industry's response led to the signing of an agreement, in Atlanta, Georgia, USA, in February 1997, between ILO, UNICEF and the Sialkot Chamber of Commerce and Industry (SCCI). In view of the seriousness of the problem of child labour, the Government has taken several steps. Among these is the establishment of rehabilitation centres for working children by the Pakistan Bait-ul-Mal, a Government welfare agency established in 1992.

Following the constitution of the National Steering Committee on Child Labour to guide the International Programme on the Elimination of Child Labour (IPEC Programme), several committees and bodies have been constituted by the Government and the private sector to deal specifically with the child labour issue from different perspectives. Among these are: the National Committee on Protection of Rights of Children, established in the context of the Convention on the Rights of the Child by the National Commission for Child Welfare and Development (NCCWD) of the Ministry of Women's Development, Social Welfare and Special Education; and the Advisory Committee on Child Labour, established by the Ministry of Commerce and Industries. An NGO, the Child Care Foundation of Pakistan (CCF) has been established with support from the private sector and the Government to address child labour in the export sector. ILO-IPEC's technical assistance is being provided for research and development of the monitoring system under the CCF.

For the first time in Pakistan, an NGO Coalition against Child Labour was formed, comprising more than 45 NGOs, at national and provincial level, in September 1997.

Any potential investor should by no means try to circumvent the existing legislation on child labour.

Box 24: Child labour and education in 2003 Some 13 million children are currently being left out, perhaps never to see the inside of a classroom, a UNICEF report said. This month millions of families will not share in the pride of sending their children off to school, said Carol Bellamy, Executive Director of UNICEF. This is a disheartening reality in a world where education is the right of every child. And it is a major impediment to any effort to reduce poverty. The more children we leave out of school today, the more adults we leave behind a few years down the road. We need some new math. Pakistan has approximately 27 million children in the primary school age bracket (5-10 years) but as many as 13 million are not enrolled in primary school; seven million of these children are girls. Fifty% of those children who do enrol drop out before they complete a full primary education, the majority is girls. For those who complete primary school, learning achievements are low: just seven% achieve expected competency levels in literacy and 18% in numeracy. Public expenditure on primary education has not increased significantly for a decade. At present the country spends less than three% of its Gross Domestic Product (GDP) on the education sector as a whole. In Pakistan, where girls’ education is a particular problem, UNICEF has spearheaded a strategic effort to get girls into school by focusing on the specific barriers that prevent girls from accessing and completing an education. Ignoring the children who are not in school translates into huge losses in this generation and the next, Bellamy said." Source: The News, 21st September 2003

The bonded labour issue seems to afflict part of the workforce mostly in the countryside, as frequently reported by newspapers. Heavy indebtedness is usually the reason for the bond. The International Labour Organisation together with the Government is in the process of tackling the issue. http://www.ilo.org/public/english/region/asro/bangkok/arm/pak.htm

LIVING IN PAKISTAN

Expatriates have to adjust to the social environment, and take into consideration values based on the Koran, gender issues and restrictions on entertainment. However, the daily family life of expatriates benefits from substantial domestic help, while the education system provides quality international schools (including a French school in Islamabad, and a British school in Karachi).

Page 105 New Business Opportunities in Pakistan The security issue has recently attracted considerable attention from the international media. Although some degree of caution is advisable in the present circumstances it should be noted that a number of expatriates have continuously been living in Pakistan with their families, and a substantial number of expatriates who had left the country in the aftermath of 9/11 have been returning to Pakistan since the beginning of 2003.

1.42 Visa and residence requirements

To facilitate travel to and staying in Pakistan for foreign businesspersons and investors, business visa policies have been considerably relaxed. The bona fide businesspersons and investors from the countries listed in Table 34, which include all EU Member States, can be issued business visa of up to 3 years with multiple entries by Pakistan Missions abroad. Table 34: List of 45 countries with substantial investment in Pakistan 1. Australia 16. Indonesia 31. Qatar 2. Austria 17. Iceland 32. Russian Federation 3. Bahrain 18. Iran 33. Saudi Arabia 4. Belgium 19. Ireland 34. Singapore 5. Brunei 20. Italy 35. Slovakia 6. Canada 21. Japan 36. South Africa 7. China 22. Kuwait 37. South Korea 8. Czech Republic 23. Luxembourg 38. Spain 9. Denmark 24. Malaysia 39. Sweden 10. Finland 25. Netherlands 40. Switzerland 11. France 26. New Zealand 41. Thailand 12. Germany 27. Norway 42. Turkey 13. Greece 28. Oman 42. U.A.E. 14. Hong Kong 29. Poland 44. United Kingdom 15. Hungary 30. Portugal 45. USA Note: The facility of landing permits has been suspended temporarily and all foreigners are required to obtain prior proper visa from Pakistan Missions abroad.

Pakistani industrialists and businesspersons interested to invite foreign entrepreneurs from countries other than those listed, for promotion of trade and industrial co-operation, are allowed to sponsor, on their own guarantee, the granting of a business visa for one month through the Chambers of Commerce and Industry at Lahore, Karachi, Peshawar, Quetta, Islamabad, and the Federation of Pakistan Chambers of Commerce and Industry. They may apply to the Ministry of Interior for business visa. http://www.pakboi.gov.pk/html/immigration_procedures.html

1.42.1 Business visa

Pakistani Missions abroad can issue multiple entry visas for up to 3 years to businesspersons and investors from the 45 listed countries with substantial investment in Pakistan.

Multiple entry resident visas for up to 3 years will be issued to businesspersons of all countries, except those not recognised by Pakistan, who bring in an amount of USD 200,000.

1.42.2 Work visa procedures

A uniform facility has been extended to exempt technical and managerial personnel from work permits for the newly opened sectors of the economy, including the agriculture, service and social sectors, in addition to exemption already enjoyed by such personnel for working in the manufacturing/industrial and infrastructure sectors. Staffs are now only required to obtain work visas.

Work visas will be granted to foreign technical and managerial personnel for the purpose of transferring skills and know-how. These visas will be granted subject to a constructive plan to train Pakistani personnel to take over the technical and managerial responsibilities over a reasonable period of time.

A Committee under the Chairmanship of the Secretary of BOI periodically considers and decides the cases of granting or extending work visas to foreign personnel. Companies requiring employment of Page 106 New Business Opportunities in Pakistan foreign nationals or extension in their visa should submit the request on the prescribed application form to the Board of Investment (FTP Wing) Islamabad. The prescribed form can be obtained from the offices of the Board of Investment Islamabad, Karachi and also from the website of BOI (www.pakboi.gov.pk).

Work visas will be authorised and issued by the Ministry of Interior on the basis of the decision of the Committee.

The work visa may be issued for a period up to 5 years or for the life of the applicant's passport. The concerned Pakistani Mission abroad will grant work visas to the applicant whereas extension in work visa will be endorsed by the Regional Passport Office of the city where the expatriate is working upon authorisation by the Ministry of Interior.

In case of multiple entry visas, the number of entries will not be restricted.

For the purpose of changing the category of visa of foreign national employees and investors from business visa to work visa, the condition to go out of Pakistan to any third country and get it converted from the Pakistani Mission in that country has been withdrawn. The Ministry of Interior will process such requests simply upon receiving verification from the BOI.

1.42.3 Registration of foreigners with the police

The Government has decided to exempt all foreigners who have been issued work visas from registration with the police, except for nationals of countries on the negative list.

Even in the case of countries on the negative list (except for Indians and foreigners of Indian origin), foreign nationals in the managerial category who are issued work permits/visas will also be exempted from police registration.

1.43 Housing

Rental rates for houses or apartments in Pakistan are lower than in EU countries. Indicative rental rates for different types of accommodation in major cities, e.g. Karachi, Lahore, Islamabad, Peshawar and Quetta, are presented in Table 35.

Table 35: Rental for private accommodation Rupees per month EUR per month* from to from to Bungalow (2, 3 bed rooms) 30,000 40,000 452.30 603.07 Semi-detached 10,000 15,000 150.77 226.15 Apartments (Unfurnished) One bedrooms 3000 5000 45.23 75.38 Two bedrooms 5000 7000 75.38 105.54 Three bedrooms 8000 10,000 120.61 150.77 Four bedrooms 12,000 18,000 180.92 271.38 * Exchange rate of December 2003: 66.327

1.44 Living costs

Compared to prices in most of the EU Member States, living in Pakistan is inexpensive, with the exception of imported goods. Table 36 presents typical prices of consumer goods in Rupees, as well as their equivalent in Euro at the end of 2003.

Page 107 New Business Opportunities in Pakistan Table 36: Prices of consumer goods Rupees EUR* Item from to from to A Tin of Coke 25 0.38 A bottle of Coke (disposable) 12 0.18 A bottle of Mineral Water (1.5 litre) 25 28 0.38 0.42 A pack of 20 cigarettes (Premier) 30 45 0.45 0.68 A box of Corn Flakes 75 80 1.13 1.21 A loaf of wholemeal Bread (800 gms) 20 25 0.30 0.38 Tetra Pack of Milk 32 0.48 A bottle / tin of local Beer 60 0.90 A bottle of local Whisky / Vodka / Gin / Rum etc. 400 6.03 Durable goods Shirt 400 800 6.03 12.06 Trousers 600 1,000 9.05 15.08 Coat + Pant (Suit) 5,000 8,000 75.38 120.61 Track Suit 500 2,000 7.54 30.15 Dress Shoes 800 1,500 12.06 22.62 Jogger Shoes 1,000 2,500 15.08 37.69 Tennis Shoes 300 600 4.52 9.05 Hand Bag 500 1,500 7.54 22.62 Brief Case 1,000 5,000 15.08 75.38 Suit Case 1,500 5,000 22.62 75.38 Calculator 700 1,500 10.55 22.62 Computer P-III 40,000 45,000 603.07 678.46 Tape Recorder 2,500 6,000 37.69 90.46 CD Player 8,000 15,000 120.61 226.15 T.V. Set 20" 20,000 25,000 301.54 376.92 Bed Sheet 500 1,000 7.54 15.08 * Exchange rate of December 2003: 66.327

1.45 Personal security

Personal security in Pakistan has been an issue especially since 9/11. In October 2003, the Foreign and Commonwealth Office country advice was as follows: “There is a serious threat from terrorism throughout Pakistan. While British nationals of Western origin are particularly likely to be targeted by terrorists, anyone is at risk from indiscriminate attacks. There is also a serious threat from criminal violence. We advise against holiday travel unless you have family contacts there. If you are travelling to Pakistan for professional or holiday reasons, you should be very careful about, and confident of, your personal security arrangements throughout your visit”.

Nevertheless it should be noted that a number of expatriates, with their families, are living in Pakistan. It appears that Punjab is the safest province of Pakistan for foreigners.

Since early 2003, an increasing number of expatriate families have returned to Pakistan. Also, the French school has recently reopened in Islamabad and counts about 30 children.

1.45.1 Terrorism

In October 2003, the British High Commission advised that there "is reliable evidence that terrorists are targeting western interests throughout Pakistan. Although the major cities are particularly vulnerable to indiscriminate bombing and other attacks, no part of Pakistan is immune. Types of attack have included suicide bombings, kidnap and execution, hand grenade attacks, vehicle bombs and shootings. Many attacks have injured or killed innocent bystanders, including foreign nationals and Pakistani citizens. Targets in 2002/3 included the US consulate, a Christian hospital in Taxila, a Christian school near Islamabad, a bus in Karachi carrying French nationals, a church in the diplomatic enclave in Islamabad, Daniel Pearl, the American journalist who was kidnapped and subsequently murdered, assassination of a Sunni extremist parliamentary and Sunnite extremist leader, further to killings of Shiite by Sunnites, and finally, two failed attempts on the life of President Musharraf in

Page 108 New Business Opportunities in Pakistan December 2003. There is also a risk posed by militant and military activity along the border with Afghanistan and near to the line of control in Kashmir, especially the Neelum Valley.

We therefore advise against holiday travel to Pakistan unless you have family contacts there. If you are travelling to Pakistan for professional or holiday reasons you should be very careful about and confident of your personal security arrangements throughout your visit. Visitors of visibly western origin should not linger in public places, especially those frequented by foreigners, and avoid public transport and cheap hotels”.

1.45.2 Crime

On criminal risks and violence, the British High Commission advised in October 2003 that there is “a risk of sectarian attacks, tribal killings and other criminal violence e.g. armed carjacking, robbery, kidnapping and murder as well as bombings in public areas such as markets, offices and public transport e.g. buses. Although sectarian, tribal and criminal violence is not usually aimed at foreigners, there is always a risk of being caught up in such attacks.

There has been recent sectarian violence between Shia and Sunni communities, including attacks in Quetta in July 2003 (which killed more than 50 people), in Karachi in August and September, and in Islamabad in early October. Each attack has been followed by street disturbances, in some cases involving further deaths”.

1.45.3 Political situation

Large-scale demonstrations, which can become violent, occur throughout Pakistan at short notice. You should monitor the local media for information about any demonstrations or gatherings and avoid them.

1.45.4 Local travel

To travel to certain areas, such as the Federally Administered Tribal Areas and parts of Kashmir, you will need a No Objection Certificate issued by the Pakistani Ministry of Foreign Affairs. The provision of consular assistance is limited in remote areas.

1.45.5 Health

You should get medical insurance (including against medical repatriation costs) and seek medical advice before travelling. Outside the major cities, few hospitals are of western standards. Malaria exists in parts of Pakistan.

1.46 Holidays, time difference etc.

1.46.1 Time difference

The local time is GMT + 5.

1.46.2 Office hours and days worked

Office hours are usually 9 am to 3 pm with public offices. Private companies usually operate from 9 am to 5 pm daily.

Days off are usually Friday afternoons and Sundays.

1.46.3 Holidays

The following public and official holidays will be observed during the year 2004.

Page 109 New Business Opportunities in Pakistan Box 25: Holidays in 2004 Feb 2 Eid ul-Azha (Feast of the Sacrifice). Mar 2 Ashoura. Mar 23 Pakistan Day. May 2 Eid-e-Milad-un-Nabi (Birth of the Prophet). Aug 14 Independence Day. Nov 9 Allama Muhammad Iqbal Day. Nov 14-16 Eid al-Fitr (End of Ramandan). Dec 25 Quaid-e-Azam’s Birthday.

Note: Muslim festivals are timed according to local sightings of various phases of the moon and the dates given above are approximations. During the lunar month of Ramadan that precedes Eid al-Fitr, Muslims fast during the day and feast at night and normal business patterns may be interrupted. Most restaurants are closed during the day and there is a restriction on smoking and drinking in public places. Eid al-Fitr and Eid ul-Azha may last from two to four days, depending on the region.

Bank holidays in 2004 are presented in Box 26. On these days, the banks are closed to public but not for their employees.

Box 26: Bank holidays 1st January 2004 1st July 2004 3 October 2004, 1st day of Ramzan 1425 (subject to appearance of moon)

A number of optional holidays can be granted on a discretionary basis by management, mostly based on the Hindu or Christian faith.

1.47 Adjusting to the cultural environment

Being a former colony of the UK, most people involved in business do speak English. It may happen in some remote part of the country, or in the bazaars, that English will not be understood, but to conduct business, the language barrier should not present a problem.

Pakistan is a conservative, traditional society strongly influenced by Islam, which pervades every aspect of life.

You should consult a reputable travel guide before travelling. Pakistan is a Muslim state and local customs, such as dress and behaviour, should be respected. Importation of alcohol and pork products is forbidden by law. Homosexuality is illegal, as is co-habitation of unmarried couple. Possession of even small quantities of illegal drugs can lead to imprisonment. Drug smuggling can attract the death penalty.

1.47.1 Introductions

Men commonly greet with a handshake; women greet each other with a handshake or hug. Foreign men should not shake hands with a Pakistani woman unless she offers her hand first. It is appropriate for Western women to initiate handshakes with Pakistani men.

Pakistani names have up to four basic parts - a first name, a patronymic, a caste name and an honorific. Pakistanis introduce themselves using all their names. Mr. or Mrs. are both expressed with Sahib.

In trying to locate someone under a local directory, be sure to try all their names. For example, for Mian Abdul Latif, search under M, A and L.

When greeting someone, it is always best to ask someone what they would like to be called. For Western business people, it is appropriate to use Mr., Mrs. or Ms. and a last name. Physicians should be referred to as Doctor.

As much as possible, when you are introduced to somebody, present your business card with your right (clean) hand only. Receive your counterpart's card in the same way.

Page 110 New Business Opportunities in Pakistan 1.47.2 Build a solid relationship before talking business

Developing a strong personal relationship is the real key to doing business with Pakistanis. Personal contacts make things happen. It is very important to get to know your counterpart before starting to discuss business. Socialising is a good way to build and maintain good rapport.

The exchange of mutual favours and gifts is the cornerstone of any relationship as in most parts of the world. If you are asked for a favour, agree to do it even if you think you may not be able or willing to do it. Your Pakistani friend will understand that circumstances later make it impossible to fulfil his request and will appreciate the fact that you agreed to try to help.

Entertaining and being entertained is an essential part of building a close relationship with your counterpart. If invited to dinner at a Pakistani businessman's home expect to eat a great deal as a way of showing your appreciation. Your host will press you to eat more than you really want to. Eat as much as you can. When you have reached your limit, you may have to decline further helpings three times, emphatically, in order to make the point.

Similarly, when hosting Pakistanis you must keep pushing them to eat and drink. But remember that alcoholic beverages and pork products are forbidden to Muslims.

1.47.3 Orientation to time

Many Pakistanis look at time differently than people from the west. People and relationships are more important than the clock. So your counterpart may keep you waiting while he deals with unscheduled visitors and family emergencies. He may be late for any number of pressing reasons.

1.47.4 Business customs & etiquette

The atmosphere in the Pakistani work place is for the most part casual. The foreign national working in Pakistan, however, may be expected to be prompt when going to an appointment with a Pakistani businessman. One precept of the Pakistani business area which may prove beneficial to Westernised businesspersons is the concept that fellow workers are viewed as friends. The Pakistani businessman may not do business with someone he does not consider a friend. It is very important to be patient, and above all, very friendly when doing business in Pakistan.

The boss in Pakistan plays a very important role. They hardly ever command, instead, they suggest. High-ranking individuals tend to arrive at work and leave work when they desire. It is customary for all employees to stay at work as long as the boss does.

When being introduced to a business colleague, or when being introduced to anyone in Pakistan, take careful note of the name used. It may be considered disrespectful to call someone in Pakistan by their first name. When being introduced to a co-worker, try to have a business card with you. Your business card should clearly state your position in the company.

1.47.5 Meetings

When conducting either a small or large meeting, make sure to have tea available. It is considered much more enjoyable to do business over a cup of tea. This is true even if the meeting consists of the person in the next cubicle stopping by to say hello. This is an important feature of Pakistani hospitality; it is impolite not to accept.

Remember also that Pakistan is officially an Islamic country and alcohol is forbidden. At no time would it be appropriate to serve alcohol at meetings. When scheduling meetings, be sure to do so months in advance, and do not be upset if people are late. Avoid scheduling appointments during Ramadan or the tropical storm season.

1.47.6 Business dress

Appearance is very important to the Pakistani businesspersons. Business attire is substantially influenced by western dress code especially in the service sector. Also, it is important to appear calm

Page 111 New Business Opportunities in Pakistan at all times. Losing one’s temper is seen as a lack of intelligence and is viewed as a negative characteristic.

1.47.7 Negotiating style

Because Pakistani negotiators try to avoid confrontation, they usually avoid saying no to you in your face. Avoid blunt language.

Pakistani negotiators tend to expect their counterparts to grant major concessions on price and terms during the course of the negotiation. For this reason it is wise to build plenty of margin into an initial offer, leaving room for manoeuvre during the lengthy negotiating process.

Be prepared for bazaar haggling - hard bargaining. Take care to make each concession with great reluctance and only on a strict "if...then," conditional basis. Always demand something equivalent in return for each concession in price, terms or other issues.

Negotiating in Pakistan tends to proceed at a leisurely pace. It would be a tactical error to press hard for a quick decision. Go with the flow. Decisions take time, so adjust your expectations accordingly.

1.47.8 Further hints

A Pakistani's honour, dignity and reputation are precious to him and must be protected at all cost. Loyalty to the family is a paramount value. Family needs often come before individual needs.

Page 112 New Business Opportunities in Pakistan

PART III: SECTOR ANALYSES, INVESTMENT AND MARKET OPPORTUNITIES

INTRODUCTION AND SECTOR OVERVIEW

The sectors presented in the following sections have been identified as being particularly interesting for potential European investors:

– Textile and garment manufacturing with the sub-sectors Spinning, knitting and weaving; Dying and printing; Ready made garments (including made ups such as towels and bed-linen: This is the traditional sector of the Pakistan industry, representing 70% of the country exports. The planned suppression of the Multi Fibres Agreement on the 1st January 2005 will likely translate into a number of opportunities and challenges for the sector, in view of its world competitiveness. The main opportunities should be in the processing and designing where Pakistan’s expertise can be improved.

– Food processing and packaging, specifically the sub-sectors Milk and dairy products; Fruit and vegetable processing (Conservation, Phyto-sanitary concerns - Wiper heat treatment technology to access the US market); Fish and sea food processing. The main argument in favour of this industry is the general expertise of EU companies in this sector, especially made up of SMEs. Also, Pakistan is a large food producing country with a significant export potential and a local market still very primitive in its approach, while the middle class is growing with expectations closer to the western habits. It is reported that significant portion of the harvest is lost every year due to poor processing facilities. The importance of the Phyto-sanitary regulations in the export markets makes it a precondition to improve the processing expertise and capacity of the industry to tap these markets. The packaging industry forms an integral part of the food processing process, and is therefore considered as an integral part of this sector development.

– Light engineering, including the sub-sectors Auto-parts; Power related components and parts (for power transport, power metering and controls, etc.); and Textile related machinery and parts. The automobile sector is growing fast, further to the explosive growth in consumption, fuelled by excellent macro economic figures, which translate into very low interest rate, large surplus funds in the banking system channelled towards consumer lending. The main auto assemblers are Japanese which have not been accompanied by there usual subcontractors. Improvement of the quality and technology of existing auto part manufacturers for the local market as well as for exports seems to have a future. Similarly, the privatisation of the telecommunication sector, as well as the power sector (electricity, oil & gas, water, etc.) is creating a very dynamic environment for growth with the resulting needs in better performing services, and industry parts. The local market and exports shall provide a very supportive environment. Comparative export growth statistics over the last year show that this sector is the best performing among South Asian countries6. Finally, there is hardly any need to justify the choice of the textile related equipment sector in view of the textile industry dominance in the country.

A number of niche sectors are also briefly presented: – Information Technologies; – Surgical and dental equipment; – Gems and jewellery; and – Marble production.

Naturally, investment opportunities exist in other sectors as well. The selection of sectors presented below is not to be understood as exclusive. The purpose of the sector presentation below mainly is to provide some first sector-specific insights to a large number of potential investors. Enterprises considering investments in other sectors should by no means discouraged from studying the potential project in detail.

6 COMTRADE database export statistics re the General Industrial Machinery sector (74), the Road Vehicles sector (78) and the Electrical Machinery and Parts sector (77). Page 113 New Business Opportunities in Pakistan As an indication for the success of projects in diverse sectors, Table 37 presents examples of the cost structure and profitability of selected investment projects in Pakistan, including some in sectors which are not presented in the following sections. Likewise, Box 27 presents reasons for investing in Pakistan which are valid for any sector.

Box 27: Six Reasons to Invest in Pakistan as presented by the BOI 1. Abundant Land and Natural Resources - Extensive agricultural land - Crop production (wheat, cotton, rice, fruit and vegetables) - Mineral reserves (coal, crude oil, natural gas, copper, iron ore, gypsum, etc.) - Fisheries and livestock production 2. Strong Human Resources - English speaking work force - Cost-effective managers and technical workers 3. Large and Growing Domestic Market - 140 million consumers with growing incomes - A growing middle-class moving to sophisticated consumption habits 4. Well-Established Infrastructure and Legal Systems - Comprehensive road, rail and sea links - Good quality telecommunications and IT services - Modern company law - Long-standing corporate culture 5. Strategic Location as a Regional Hub - Principal gateway to the Central Asian Republics - Strong and long-standing links with the Middle East and South Asia - Comprehensive duty-free facilities for investors 6. Incentives and Liberalisation Measures - Reducing minimum foreign equity from USD 0.5 million to USD 0.3 million, - Remittance of royalty, technology and franchise fee allowed to projects in social, service, infrastructure, agriculture and international chains food franchise; - Zero import duties on capital goods, plant and machinery and equipment not manufactured locally. CBR can supply a list of locally manufactured good. In case of doubt the investor is invited to consult the BOI. - Enhanced FYA from 50% to 75% of PME for infrastructure and agriculture projects - The import tariff on agriculture machinery (not manufactured locally) for registered corporate agricultural projects will be zero-rated - The investors who invest in the newly opened sectors can import plant, machinery & equipment (not manufactured locally) at concessional rate of customs duty which is 10% and also avail first year allowance @ of 50% of the cost of plant, machinery & equipment. - Zero import duties on raw materials used in the production of exports.

Page 114 New Business Opportunities in Pakistan Table 37: Selected SME Projects in Pakistan - Cost Analysis No. Sector / Projects Project Capital Working Land Work Capacity IRR % Payback Cost Cost Capital (Sq. ft) Force (Years) (mill. Rs) (mill Rs.) (mill. Rs) Agriculture Livestock & Fisheries 1 Abattoir (Slaughterhouse) 20.23 18.17 1.14 66000 2750 animals/day 52.79% 3.13 2 25-Animal Dairy Farm 1.5 0.1 0.18 370,262 5 250 litres/day 22.00% 3 50-Animal Dairy Farm 2.94 0.19 0.28 32 acres 7 552 litres/day 30.00% 5.5 4 Broiler Farm (7500- Birds) 0.41 0.06 0.34 7830 2 7500 birds / clock 43.03% 3.94 5 Layer Farm (5000-Birds) 0.35 0.06 0.29 10718 2 8463 eggs 34.69% 6.84 6 Calve Fattening Farm 0.89 0.63 0.26 6510 5 390 calves p.a 35.66% 4.26 7 Farming 21.35 4.55 13.24 871200 19 251.06 kg 8 Cut Flower Farm (Rose) 1.27 0.09 0.5 217801 7 4538 flowers 27.00% 3.59 9 Flower Shop 2.01 0.1 0.59 217801 11 3028 flowers 68.00% 2.15 10 Seed Processing (Wheat & Rice) 17.69 8.79 8.9 8 Kanals* 17 2000 tons/ season 24.89% 4.5 11 (Fresh Cut Roses) 9.76 9.16 0.6 10 Kanals 13 25000 Plants 190% Textiles 12 Circular Knitting - Commercial 12.05 10.5 0.72 1750 15 1550 kgs/day 13 Collar Knitting - Commercial 4 3.62 0.28 1150 9 3900 collars/day 14 Label Manufacturing Unit 15.1 12.25 2.59 2250 10 67500 Labels/day 17.00% 2.97 15 Denim Jeans - Stitching 5.38 4.3 0.39 3800 47 500 gmts/day 40.06% 5.18 16 Fabric Dying (Knitted) 50 31.79 5.44 8 Kanals 60 3200 Kg/day 19.90% 5 17 Fabric Weaving (Auto Looms) 10.38 9 1.38 9200 34 693000 mtrs pa 23.00% 4.2 18 Work Wear - Stitching 6.3 4.37 1.4 3300 55 400 gmts/day 91.22% 2.01 19 Polo / T-Shirts - Stitching 7.5 5.38 0.69 13640 96 2,000 gmts/day 20 Embroidery Unit - Commercial 7.75 6.75 0.74 1950 14 26.4 mill. Stitch 21 Lingerie - Stitching 2.21 0.78 1.34 1221 15 25 dozens/day 29.00% 3.84 22 Yarn Dying & Finishing 66 46.54 6.65 8Kanals 62 2960 Kg/day 19.80% 5 23 Men's Undergarments -Stitching 2.06 1.41 0.66 1440 8 100 dozens/shift 61.20% 3.32 24 Tents & Canvas 4.2 1.41 2.81 10050 39 16000 tents/year 39.30% 4.62 25 Boutique (Women Designer Wear) 1.45 0.88 0.57 3050 12 500 dresses 40.20% 3.87 26 Bed Linen Stitching Unite 3.6 1.22 2.38 4500 20 1000 per day 14.00% 5.33 27 Cotton Bags Manufacturing Unit 2.78 2.06 0.73 4500 54 4280 per day 53.00% 3 Light Engineering 34 Bicycle Parts (Handles) 2.4 0.36 0.57 2250 16 230 handles/day 33.00% 4.6 35 Bicycle Parts (Stand) 1.5 0.13 0.14 1125 7 115 units/day 29.00% 6.41 36 Bicycle Parts (Carrier) 1.5 0.16 0.17 1125 7 230 units/day 31.00% 5.43 37 Bicycle Parts (Crank & Sprocket) 2.13 1.77 0.36 4500 16 6000 per month 29.85% 6.74 38 Motorcycle Gearshift Lever 1.53 0.26 0.03 1125 4 92 units/day 39 Fan Guards Mnfg. Unit 8.29 4.09 1.47 7000 39 380 units/day 33.00% 3.09 40 Electrical Goods (Bakelite Products) 1.3 0.78 0.52 816 13-16 10200 Gurs pu**

Food 41 Kinnow Processing 18.87 3.8 11.27 6575 34 80 tons 50.06% 2.04 42 Milk Pasteurisation 13 10.29 2 9000 5 72000 Litres/day 43 Animal Casing Processing 3.34 2.29 1.05 1500 19 500 hanks/shift 31.17% 6.69 44 Mango Processing 21.4 16.12 4.12 44000 44 3 Tons / day 18.00% 2.55 Service Industry 45 CNG Filling Station 27 24.39 0.38 9000 14 170 cars/day 18.90% 5 46 Internet Café 1.3 1.12 0.16 880 2 144 hours/day 29.91% 2.48 47 IT College 2.1 1.1 0.57 1346 18 54.00% 3.47 48 Medical Transcription 3.88 2.84 1.04 18750 66 110.00% 1.67 49 Subcontract Workshop 0.89 0.87 0.03 1.15 13 12 hours/day 49.00% 2.87 50 Beauty Clinic 2.51 0.86 0.49 5400 14 28 customers/day 24.59% 7.79 51 High School 9.84 9.48 0.36 13500 19 750 Students 24.94% 6.3 Chemicals 52 Essential Oils Disti. Unit 3.8 1.48 0.12 1089004 11 4.583 litres 34.00% 4.01 Gems & jewellery 53 Gemstone Lapidary 1.67 1.37 0.28 1000 15 3300 units p a 44.75% Source: BOI Pakistan * 1 kanal = 500 sq meter approximately ** 1 Gur = 144 pieces

THE TEXTILE SECTOR

The textile sector is the back bone of the Pakistan’s Economy. Over the years it has grown to cover the full range of the production process for cotton products, from the farming and growing stage up to the garment industry as well as retailing of the finished products.

Page 115 New Business Opportunities in Pakistan Non cotton textile such as synthetic fibre remains small compared to the cotton industry (about 20% in terms of volume), while the growth of the polyester fabric is significant.

It is the largest industry in the country, while Pakistan is ranked first in the world, as per the World Bank Balassa index, in terms of competitive advantage.

1.48 Sector overview

Pakistan is blessed with various advantages which have placed it amongst the world leaders in the textile industry, including availability of cotton, skilled labour and consistent development. The textile industry’s significance in Pakistan is highlighted in Box 28. The All Pakistan Textile Mills Association (APTMA) is the largest textile business association, and it plays an important role in the sector.

Box 28: Textile sector overview Total turnover : Rs. 315bn / USD 5.44 billion % in GDP : 8.5% % of total exports : 61% Sector employment : 15 million with 70% considered as skilled Total sector investment : Rs. 146 billion No. of Units and their capacity Ginning : 1221 units servicing 20 million bales Spinning : 452 units with capacity of 1818 million Kgs of yarn Weaving : 565 units of which 190 are large units + 2600 power looms with capacity of 4897 million sq meters of fabric Finishing : 731 units of which 106 are large units with capacity of 4600 sq meters Garments : 5100 units of which 600 are large units with capacity of 685 million pieces Knitwear : 700 units with capacity of 550 million pieces Towels : 400 units with capacity of 55 million KGs Source: Board of Investment

1.49 Main sub-sectors within the textile industry value chain

1.49.1 Cotton ginning and fibre production

Fibre production is the initial stage in the textile value chain. There are 3 types of fibres, cotton, man- made and wool. Given Pakistan’s leading position as a cotton producer, cotton plays a key role in the textile sector, contributing 39% of total fibre consumption. Wool accounts for some 3% while man- made fibres which include polyester, acrylic, nylon, and rayon, account for some 58% and in this 80% is polyester.

The process of ginning involves processing of cotton through separating lint from seed to facilitate the availability of cotton fibre through a mechanical process. The machinery used by and large is local, old and inefficient leading to low productivity. Therefore, at present the very start up process requires upgrading to ensure better quality output.

1.49.2 Yarn spinning

This is the process of converting fibre into yarn. It is the first process in the value chain. The various processes involved in spinning include blowing (main process), carding, drawing, combing, simplex (Roving), spinning, winding and doubling/reeling. Spindles as well as rotors are the main production facilities.

In the worldwide market estimated at around 163 million spindles Pakistan has more than 8 million accounting for more than 5% of the total market and classified as the 3rd largest player. This market is growing at 5% per annum.

The world market of yarn is estimated at around USD 30 billion out of which Asia provides more than 40%. Cotton yarn accounts for 25% of the global market. Pakistan’s share in the global yarn market is around 4% to 5%, estimated at more than 1550 million tones. It consists mainly of course and medium cotton count leaving considerable opportunity in the higher value added final count substantially unexploited. Only 18% of the spindle utilisation is on man-made fibres as against the desired 40% to be in line with global trade patterns.

Page 116 New Business Opportunities in Pakistan 1.49.3 Fabric weaving & knitting

These processes relate to the creation of fabric from yarn through either the process of weaving or knitting. Of the total global market of around USD 18 billion, Pakistan has a market share in fabrics of 7%. More than 25% of the textile and clothing exported from Pakistan comprise of woven fabric including both pure cotton and blended fabrics. Pakistan is the 4th largest producer of cotton fabrics in the world with approximately 4 billion sq meters of fabric being produced. The overall fabric production has registered a growth of approximately 6% per annum over the past decade.

The weaving industry is broadly categorised into 3 sectors, composite weaving units, independent shuttleless weaving units and power looms. While the composite weaving units comprise of integrated textile mills having their own spinning and dying facilities, the shuttleless weaving units are those comprising of shuttleless looms. With more than 300 units and a production capacity of around 1.2 billion sq meters, they account for 40% of total exports. The power looms sector is the one which dominates the fabric production accounting for 63% of total fabric production estimated at 2.8 billion sq meters through some 215,000 power looms.

Within the weaving process the various activities include warping, sizing, weaving and finishing. The weaving process has witnessed various options including shuttleless looms, projectile, rapier, air jet, water jet, terry towel looms etc.

1.49.4 Finishing sector including fabric processing, dying, printing & finishing

This sector relates to the activity through which grey cloth is processed into finished fabric. It depends on the requirement for utilisation in production of the final outputs, including garments, hosiery, made ups etc. The capacity of this sector is around 4.6 million sq meters. The various processes involved include bleaching, dyeing, printing and finishing with each process having different variations to suit different requirements. The total production of finished cloth during 2002-03 was approximately 200 million sq meters.

1.49.5 Garments, hosiery, knitwear and made ups including bed-linen, towels etc.

This sector is the pinnacle in the textile production chain. It represents the fastest growing sector in textile globally with Asian countries as the leading players and China having 40% of the total share. Pakistan’s production in this sector through more than 4500 units of which 80% are cottage based small units, is approximately 700 million pieces providing employment to more than 700,000 individuals. Exports in this sector are around USD 1.8 billion, representing approximately 1% of the overall global market. The main markets are the USA and the EU accounting for 92% of Pakistan’s exports in this sector. The main processes are the cutting, stitching and finishing processes.

1.50 Type of businesses by size and category

1.50.1 Large companies (More than € 1 million turnover)

The textile sector in Pakistan is rather concentrated, with the larger companies representing a significant part of the industry mostly in the first stages of the production process such as spinning and weaving.

Table 38: Pakistan large textile companies Sub-sector No. of units Capacity Production 9.06 Mn.Spindles 1. Spinning Units 452 1,818 million kgs 15,016 Rotors 2. Composite Units 50 9,898 Looms 577 million sqm 3. Independent Weaving Units 140 23,652 Shuttleless Looms “ 4. Finishing Units 106 - “ 5. Garment Units 600 - - Source: Textile Commissioner’s Organisation

Page 117 New Business Opportunities in Pakistan 1.50.2 Small & Medium sized companies (Less than € 1 million turnover)

Table 39: Pakistan small and medium size companies Sub-sector No. of units Capacity Production 1. Independent Weaving 425 50,000 Looms - Units 2. Power Looms Sector 20,600 175,253(Conventional 4,897 (577+4,320) Looms) million sqm* 3. Finishing 625 4,600 million sqm** 4. Terry Towels 400 7,602 (Looms) 55.00 million kg 5. Canvas 2,000 (Looms) 35.00 million kg 6. Garment Manufacturing 4,500 Sewing Machines 200,000 (Industrial) 685.0 million Pcs. 450,000 (Domestic) 7. Knitwear 700 Knitting Machines 15,000 5.50 million Pcs. *Include large/small scale independent weaving units & Power Looms Sector **Include large/small scale Sector Source: Textile commissioner’s organisation

1.51 Break-up of Investment in Textile Sector

As can be seen from Table 40, the sector is still concentrated in the primary stages of the industry, providing fewer added values, while the present trends privilege the last stages of the process with more added values such as Garments, Hosiery or Knitwear.

It is worth noting the importance of the investment in the sector which makes it one of the most modern one in the world with state of the art machinery.

Table 40: Breakdown of investment in the textile sector by sub-sector (total investment = USD 1.4 billion over the last 3 years) Spinning 54.0% Weaving 14.1% Textile Processing 9.8% Knitwear 5.4% Garments 4.4% Synthetic Textiles 14.0% Source: Textile Commissioner’s Organisation

1.52 Value addition

The value chain in the textile sector can be gauged from the value addition from fibre to the end product in terms of garments. Starting with one bale of cotton, the final output creates the following value addition:

Table 41: Pakistan value addition in textile One Bale of 170 Kgs of Cotton is worth* …… Products USD Raw Cotton 119 Cotton Yarn 253 Towels 434 Cotton Fabric (Grey) 579 Finished Fabric 603 Bed Wear 618 Knit Wear 1,401 Woven Garments 1,561 * Based on Actual Unit values of 2001-2002 Source: Experts Advisory Cell, Ministry of Industries

Page 118 New Business Opportunities in Pakistan 1.53 Growth of the textile industry in Pakistan

The growth of the textile industry in Pakistan has followed the macro economic situation of the country over the years. The recent improvements in the fundamental macro economic situation of the country in the last three to four years have been accompanied by increased investment in the industry.

Table 42: Pakistan growth of cotton textile industry INSTALLED CAPACITY (in 000) WORKING CAPACITY (in 000) Period Units Spindles Growth% Looms Growth% Spindles Growth% Looms Growth% 1997-98 442 8,368 1.68 10 0 6,631 1.42 4 -20 1998-99 442 8,392 0.48 10 0 6,671 0.57 5 25 1999-00 443 8,477 1.01 10 0 6,825 2.31 4 -20 2000-01 444 8601 1.46 10 0 6913 1.29 4 0 2001-02 450 9060 6.88 10 0 7440 9.01 5 25 2002-03 453 9233 7.35 10 0 7624 10.28 5 0 Source: All Pakistan Textile Mill Association (APTMA)

1.54 Main raw material and components

The total requirement of cotton is mostly sourced locally, but for the production of some counts of cotton and blended yarn, cotton is sometimes imported from Central Asian Republics, Egypt or even the USA. The other significant raw material is the polyester staple fibre which is fast replacing the acrylic staple. The total installed capacity of Polyester Staple Fibre is more than its local consumption but it is occasionally imported from Far-Eastern countries due to price differentials.

Table 43: Pakistan consumption of raw material ('000 kg) RAW MATERIAL GROWTH% % OF TOTAL Period Cotton Fibre Total Cotton Fibre Cotton Fibre 1998-99 1,441,923 407,686 1,849,609 -2 28 78 22 1999-00 1,566,348 404,008 1,970,356 9 -1 79 21 2000-01 1,673,280 405,038 2,078,318 7 0 81 19 2001-02 1,755,669 409,557 2,165,226 5 1 81 19 2002-03 1,858,727 412,342 2,271,069 6 1 82 18 Source: APTMA

Table 44: Pakistan consumption of man made fibre ('000 kg; '000 Rs) Polyester Staple Viscose Staple Acrylic Staple Synthetic Staple Years Quantity Value Quantity Value Quantity Value Quantity Value 1998-99 8,793 446,783 28,657 1,816,061 16,996 956,984 69 4,427 1999-00 10,372 510,805 24,000 1,539,576 10,299 555,461 45 3,043 2000-01 17,616 918,691 25,626 2,074,139 6,234 478,102 48 3,037 2001-02 19,938 1,044,827 26,741 2,372,193 4,935 374,210 51 3,031 2002-03 22,566 1,188,177 27,904 2,713,077 3,907 292,894 54 3,025 Annualised Growth% 1118516811-20-17 Source: APTMA

1.54.1 Main machinery and equipment

The recent evolution of the interest rates, down from high and discouraging levels to very low rates, below 5%, is encouraging the industry to further increase its investments. Even more, it induces the industry to target more efficient machinery, mostly from Europe, even if the equipment is more expensive, since the higher cost at such interest rate is more than compensated by the higher efficiency and quality of the machines.

The majority of the equipment is imported, the details of which are presented in Table 45.

Page 119 New Business Opportunities in Pakistan Table 45: Pakistan import of textile machinery (in Rs million) 2001-02 2002-03 % CHANGE I T E M Value Value .P.Y Ginning Machinery, Cotton 14 - - Carding Machinery, Cotton 152 783 414 Combing Machinery 35 164 371 Drawing or Rowing Machinery 145 1,087 651 Machinery for preparing Textile Fibres 2,605 2,345 -10 Textile Spinning Machines 837 2,849 240 Textile Doubling or Twisting Machines 78 257 230 Cone Winding Machine 863 - - Weft Winding Machine 31 394 1159 Textile Winding Throwing & Reeling Machine 2,319 1,785 -23 Spindles __ _ (Qty. in Kg) 210 330 58 Spinning Ring (Qty. in Kg) 15 513 3350 Card Clothing (Qty. in Kg) 121 225 86 Looms 3,875 52 -99 Circular Knitting Machine 401 430 7 Flat Knitting Machine 217 128 -41 Hand Knitting Machine 27 - - Machine for Making Gimped Yarn 1,107 2,751 149 Machines for Preparing Textile Yarn 1,563 1,971 26 Shuttles 4 5 24 Part & Accessories of Weaving Machine (Qty. in Kg) 477 513 8 Needles Hosiery (Qty. in Kg) 89 161 80 Part & Accessories of Knitting Machine (Qty. in Kg) 103 126 23 Drawing Machine 100 112 12 Bleaching Machine 8 134 1626 Dyeing Machine 1,320 872 -34 Dressing & Finishing Machine 11 97 758 Coating or Impregnating Machinery for Yarn 0 89 20448 Textile Printing Machines 73 542 641 Machinery for Pressing Bleaching Ns 2,061 2,992 45 Ironing & Textile Pressing Machinery 6 33 424 Weaving Machine 3,877 6,590 70 Other Machines (not Specified) 2,340 2,336 0 TOTAL 25,084 30,668 22 Source: APTMA

The above stated machinery is being imported mainly from Japan, Germany, Switzerland, Belgium and China.

1.54.2 Main products manufactured

The different types of textile products exported do reflect closely the manufacturing production of the country, most products being exported. The table below gives a clear idea of the relative importance of each category of products manufactured and exported.

Page 120 New Business Opportunities in Pakistan Table 46: Textile exports – core categories (values in USD million) COMMODITIES 1999-00 2000-01 2001-02 Raw cotton 72.55 139.28 24.73 Yarn 1,162.04 1,145 980.5 Cotton fabrics 1,096.23 1,032.53 1,130.82 Knitted Fabrics 67.39 71.41 72.42 Apparels 771.72 826.77 874.95 Hosiery 886.82 911.40 845.94 Bed wear 709.92 744.88 918.55 Towels 195.62 241.688 267.71 Tents & Canvas 52.92 49.23 49.67 Textile Synthetic 457.64 544.60 410.02 Other Textile & Made-ups 386.10 407.46 421.55 Total 5,858.86 6,115.07 5,996.91 Source: Export Promotion Bureau

1.55 Cost factor analysis

The main constraints on productivity have been significantly alleviated over the recent past. The production of reasonable quality cotton (being steadily improved) is an advantage to the industry, while import of other types of cotton from the rest of the world is easy.

Labour is hard working, co-operative and productive.

The cost of finance which was a drag on the industry has been reduced to very low levels for the last year, allowing the purchase and refinance of higher priced equipment from Europe, the better productivity of which largely compensate for the higher price, the more so that the cost of money is low.

Logistic is not an issue despite a large part of the industry in Punjab is far from a sea port, and the road network could be improved.

The main draw back would stem from the electricity cost and reliability (see section 1.30.2.2).

The cost structure of different textile products with details of each component is not available. It is therefore difficult to conduct a meaningful cost factor analysis.

1.55.1 Labour

- Cost-effective technical and managerial workforce available. - The level of skill required is medium to high. - Pakistan does enjoy an advantage as far as textile related labour is concerned but due to the inclination of the Pakistani textile industry towards value addition as well as increased quality requirements from buyers, the quality of the workforce needs further improvement. - Pakistan lacks expertise in textile designing, branding issues and formulation of modern marketing strategies. - The Government, with the involvement of the private sector, is establishing modern Textile Engineering and Fashion Designing Institutes to counter the challenge imposed by other regional textile exporting countries.

1.55.2 Raw-Material

- Cotton and Man-Made fibre (see Table 43 and Table 44) - Area wise sourcing of raw materials is available on www.aptma.org.pk. The main growing are in Southern Punjab and Sindh. - Local and international prices of cotton and polyester staple fibre are pegged to the New York Cotton future Market. For PSF, international prices are dictated by the major parties to the industry world wide.

- The figures for import of machinery are presented in Table 45.

- Imports of polyester staple fibre are as follows:

Page 121 New Business Opportunities in Pakistan Table 47: Import of polyester staple fibre (values in USD million) Item 2001-02 2002-03 Polyester Staple Fibre 63.10 97.40 Source: State Bank of Pakistan Annual Report 2002-03

1.55.3 Energy Cost

Energy costs in Pakistan are deemed on the high side as discussed in § 1.30.2.2 of the report.

1.55.4 Financing

- Debt/equity ratio: 70:30 required to obtain favourable bank financing. - Export Re-Finance available at concessionary rates of approximately 3.5% p.a. at pre and post shipment stages. This incentive is available to exporters only in order to meet their working capital requirements. The financing limits are based on export sales and performance. - Project financing available at around 8-9% p.a., while short term bank facility is below 5% p.a. for prime borrowers.

1.55.5 Logistics

- Machinery installed in the sector is at par, if not better than the technological standards of other competing textile exporter countries; - Comprehensive road, rail and sea links is available;

- Good quality telecommunications and IT services.

1.55.6 Research and development

The large Industrial concerns have realised the need for research and development to handle quality and price competitiveness issues, especially in the wake of post WTO regime. A number of the companies visited have developed such departments. R & D expenses for the industry are unfortunately not available.

1.55.7 Government policies and incentives

The following incentives are available to the textile industry: – No restriction on import and export of cotton. – Duty drawback allowed. – Duty concessions on import of Plant, Machinery and Equipment. – Tariffs have been reduced on import of raw materials to 5% and 10%. – Zero% import duty on raw materials used in production of exports. – Bank financing for textile sectors available. – Enhanced Market access in Europe and the USA through improved preferential agreement negotiated notably with the EU by the end of 2001. – Access to concessional Rupee loan at 4% for buyers of textile machinery manufactured locally, provided they have a minimum local content of 20%.

1.56 Analysis of export flows

The major characteristic of the textile sector exports is its reliance on the western world, whereby Europe represents about 60% of the total, and the USA 30%.

Items produced and exported cover mainly the basic material such as yarn and cloth, however on a declining trend, while the more Value Added items grow moderately over the years. Main successes in this matter concern the bed linen and the towels.

Page 122 New Business Opportunities in Pakistan Table 48: Breakdown of Pakistani textile exports by destination country 2001-02 2002-03 Change COUNTRIES TEXTILE EXPORTS TEXTILE EXPORTS 2003/2002 value % of Total Value % of Total (%) USA 1,855,816 31 2,187,454 29 18 DUBAI 325,211 5 536,492 7 65 U.K 458,129 8 574,535 8 25 GERMANY 265,453 4 378,330 5 43 HONG KONG 375,315 6 430,509 6 15 SAUDI ARABIA 230,909 4 354,300 5 53 ITALY 147,498 2 199,484 3 35 AFGHANISTAN 2,147 0 12,796 0 496 FRANCE 147,044 2 190,474 3 30 NETHERLANDS 142,729 2 189,152 3 33 CHINA 168,565 3 161,702 2 -4 BELGIUM 133,521 2 165,537 2 24 SPAIN 105,643 2 150,400 2 42 SOUTH KOREA 185,571 3 158,505 2 -15 CANADA 139,277 2 161,398 2 16 TURKEY 62,316 1 107,742 1 73 JAPAN 89,021 1 71,872 1 -19 AUSTRALIA 80,226 1 91,349 1 14 BANGLADESH 71,778 1 83,574 1 16 KENYA 12,253 0 36,145 0 195 SUB-TOTAL 4,998,422 83 6,241,750 84 25 OTHER COUNTRIES 998,488 17 1,215,998 16 22 TOTAL 5,996,910 100 7,457,748 100 24 Source: Board of Investment

1.57 Analysis of the main trends

The impression from the authors of this guidebook is that the Punjab area seems the best location to envisage an investment, despite its distance from the Karachi ports, due to a better general environment in this region.

The pressure brought over the manufacturing sector by international buyers as well as the WTO rules will favour the large and efficiently managed groups, more able to invest and adapt to the evolving environment.

Agreements with international textile groups are sought after by the local industry to gain improved manufacturing process, design, brand (toll producing) and marketing.

It does not appear that financial involvement of foreign investors is eagerly sought by the local firms in view of their present liquid situation as well as the low cost of borrowings.

1.57.1 Location

The production facilities of all the segments of the textile sector are concentrated around Karachi (about 45%), Lahore, and Faisalabad.

1.57.2 Trends, possible evolution

The main evolutions noted through the visits made by the mission to various textile companies, concern the following points: - Improvement of the technology, with increased reliance on IT integrated manufacturing and management processes, including for the most advanced companies, direct tele-video access by clients to follow the manufacturing process of their commands, access to the shipping documents on line, etc. - Improved quality and environmental concerns, backed up by certification processes, certified in house laboratories;

Page 123 New Business Opportunities in Pakistan - Improved social concerns with regards to fair working conditions for the staff; - Improved designs, manufacturing processes, brands and toll manufacturing; - Development in the Garment and Hosiery markets, as representing more value added products.

1.57.3 Role of local exporters, foreign agents

Large numbers of reputable and well organised buying houses and principal agent offices like Home Textile of the IKEA group are operating in Pakistan, which provides the local exporters access to international market. The small and medium sized exporters do need the services of these houses and agents to fetch good prices and get introduced to prestigious foreign companies.

Also, a number of private quantity & quality surveyors provide services to the foreign buyers, the main ones being SGS or Bureau Veritas.

Many popular international brands are produced under license in Pakistan such as Levis, Pierre Cardin etc.

1.58 EU GSP, WTO rules and regulations

Changes implied by the WTO on going negotiations are only a part of the necessary adjustments to be faced by the industry. A number of important evolutions are in fact demanded by the large international clients for these industries. The changes are not that different from the usual evolution faced by industries in general, and they represent as much an opportunity as a threat to operating businesses. The main evolutions which will affect more and more textile companies in Pakistan are the following: - Disappearance of the MFA and related quotas from the end of 2004; - Social compliance regarding child labour, gender issues and workers piece meal employment contracts; - Environmental compliance as far as gas emission, water pollution, noise levels…

Proper auditing of these new rules will have to be organised, which has already started as far as the best enterprises are concerned (ISO 9001, ISO 14000 EMS, SA 8000).

It is obvious that the large and efficiently managed groups within the industry, well aware of the WTO implications are the ones which stand to benefit more from these increased regulations, having the means to invest and adapt to the norms.

Specific concession obtained from the EU in 2001 is being contested by India through the WTO as discussed in the following press article which might jeopardise the successes achieved recently by Pakistan in its export drive to Europe. Another point being discussed at the moment concerns dumping charges pressed against Pakistan export of bed linen. These issues are presently reviewed by the EU.

Page 124 New Business Opportunities in Pakistan Box 29: GSP negociations with the EU KARACHI: Pakistan may lose additional tariff concession under the Generalised System of Preference (GSP) given by the European Union (EU) two years ago owing to a case filed by India before the WTO’s appellate body, industry sources said here on Thursday. "Despite the fact that under these arrangements the EU had been allowing such tariff concessions to many countries for the last many years, but India filed its complaint immediately after the EU decided to add Pakistan to its list", chairman of a textile association commented. According to sources, a World Trade Organisation panel issued a preliminary ruling on September 5, upholding a complaint by India against a provision under the EU’s GSP system. Pakistan was given this special status under GSP in recognition of its efforts for plugging drug trafficking and its implementations of labour laws in various industries. "If the tariff concession under GSP is revoked or India is given the same concession, Pakistan would definitely lose its edge of 10% duty reduction and consequently the Pakistani exporters’ would become in-competitive in the EU markets" sources said. Trade circles familiar with the ruling said; that the panel backed India’s claim that the special tariff preferences are inconsistent with article 1.1 of the WTO’s General Agreement on Tariff and Trade (GATT), which ensures that any advantage or privilege granted to the imports of one WTO member to be automatically extended to all members. The panel also backed New Delhi’s argument that the special treatment to Islamabad and other developing countries violated provisions under the GATT’s so-called "enabling clause", which calls on WTO members to provide "nonreciprocal and non- discriminatory preferences" to the developing countries under their GSP schemes. In addition, the panel rejected the EU’s claim that the special tariff preferences qualified as an exemption from WTO rules under article XX (B) of the GATT, which allows members to implement trade-restrictive measures under their GSP schemes. Trade sources, however, said that there was an unusual dissenting opinion by one of the three panel members who sided with the EU by arguing that the other panellists want beyond the GATT agreement in their interpretation of enabling clause. It is more likely that the EU would appeal once the ruling is finalised and made public. Although the panel’s decision is only preliminary, no WTO panel to date has subsequently altered its interim conclusions in a final ruling. The panel is expected to circulate its final ruling to the two parties later this year. If maintained, the ruling would have important implications not only for the EU but also for the Unites States, which submitted third party arguments in favour of Brussels. The US offered preferential tariff treatment for drugs eradication programme under the Andean Trade Preference Act. Approximately $1.7 billion in imports from Bolivia, Columbia, Ecuador and Peru received preferential US tariff treatment under this GSP programme in 2001. The EU’s current GSP rules are set out under Council Regulation by European Commission, which entered into force from January 2002. The current beneficiaries include Bolivia, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru, and Venezuela. India filed its complaint after the EU decided to add Pakistan to its list, the sources added. Source: The News, Friday September 19, 2003-- Rajab 21, 1424 A.H.

1.59 Exports and quotas

As can be seen from Table 49 and Table 50, the exports subject to quota grew more slowly than the non quota exports, except for the EU where special increases in the quota references were granted from early 2002, as well as zero duty on clothing exports under a special GSP drug regime (see paragraph 1.11.4.2).

Table 49: Pakistan Textile export (USD million) 2002 2003 Growth% Non-quota exports 3,613.5 4,541.4 25.7 Quota exports 2,197.2 2,722.2 23.9 US 1,047.8 1,227.4 17.1 EU 1,053.1 1,352.6 28.4 Turkey 49.8 86.5 73.8 Canada 46.5 55.7 19.7 Source: State Bank of Pakistan Annual Report 2002-03

Table 50: Textile export market analysis Growth % 2003/2002 Contribution in Growth% to overall textile exports Growth pattern of Major quota Exports US 17.1 3.1 EU 28.4 5.2 Growth pattern of major non-quota exports US 18.9 2.6 EU 18.1 1.5 Asia 27.4 7.7 Others 26.5 13.2 Total 25.0 25.0 Source: State Bank of Pakistan Annual Report 2002-03

Page 125 New Business Opportunities in Pakistan 1.60 Local and regional competition

1.60.1 Competition from imports

Competition from imports is mostly restricted to polyester-cotton and blended fabrics and yarns. Textile products made only out of cotton are not imported.

1.60.2 Competition in the export markets

Further to the mission visits to a number of companies in the sector, impression is that major players shall be in a position to benefit from the larger “playing field”, probably at the expense of the smaller firms and less advanced countries. Also, the advantage for Pakistan shall be in the more industrialised first stages of production (spinning and weaving) where it has a definite comparative advantage, rather than the more value added stages of garments manufacturing.

Agreements with European companies helping Pakistan firms to achieve the required standards are therefore eagerly looked after by the major groups.

Pakistan faces fierce competition from neighbouring and regional countries such as China, India, Bangladesh, Thailand and Korea etc. This competition is on the rise and will create tough challenges for Pakistani exporters in post WTO regime.

The main competitors of Pakistan in the spinning industry worldwide are the following (2001):

Table 51: Pakistan Competitor countries in the textile industry Countries Spindles ‘000’ Share in world Share in Asia China 41,710 25.5% 38.6% India 31,835 19.5% 29.5% Pakistan 8,159 5.0% 7.6% Indonesia 7,050 4.3% 6.5% Source: APTMA

The Yarn main world markets (€ 27 billion) are in Hong Kong, China, Japan, Italy, Germany, Korea, UK and the USA. The Yarn exported by Pakistan is mostly cotton (about 80% of total) against a world share of 40% in man made fibre.

In the Fabrics sub sector, Pakistan ranks fourth as far as production is concerned, with the highest growth in the blended and man made fabrics.

1.60.3 Domestic competition

The textile sector offers huge export potential for international investors; however, the local market is not attractive for such investor because of low per capita incomes and very large number of small local players.

1.61 Identification and assessment of major business co-operation, project and investment opportunities

A major Pakistani quoted company recently signed a co-operation agreement with a French powerful textile group which exemplifies where the future lies as far as joint business opportunities are concerned. This agreement did not imply any joint venture process or joint investment, but a straightforward co-operation agreement covering the following points: - Assistance in the manufacturing process, the design and the quality improvement of the products; - Marketing of the Pakistan Company’s products to the French company non-clients worldwide, with a non competition clause from the Pakistani firm; - A “toll manufacturing” agreement, whereby the Pakistani firm can manufacture products under certain brand name of the French group, for certain markets/clients.

Page 126 New Business Opportunities in Pakistan As discussed in a number of the paragraphs above, the areas of development for the local textile manufacturers concern the following: - Development and improvement of the manufacturing process through technical agreements, especially related to the quality of the products, the IT systems as well as the certification processes; - Development of new product lines especially in added value productions such as the Garment and Hosiery sectors; - Development of the design of the products; - Co-operation for the marketing of the products through the major developed markets, while the less developed markets such as Central Asia, the Middle East or Africa is left under the responsibility of the local company; - Co-operation for Toll manufacturing under specific guidelines.

1.62 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint ventures, transfer of know-how, subcontracting etc.

The mission feels that the most promising area for co-operation should be with large and modern Pakistani textile firms re technical assistance (manufacturing process, quality and environment norms as well as IT), coupled with design development and toll manufacturing especially in the finished product markets.

Advantages for the European partner would be to secure low cost products under its brand name and design, as per its quality standards while receiving over the long term royalties over its contribution to the local operation.

Advantages to the Pakistan firm would be in the improvement of all aspects concerned by the agreement.

1.62.1 Subcontracting

Simple contracting of orders by international firms, satisfied with the quality and ability to produce of the local manufacturer, along certain specifications, is of course the simplest arrangement for business. Providing more detailed specifications such as the design, the raw material to be used, or even the process to be utilised are just more sophisticated kind of trading contract, common in Pakistan.

Risks, as usual, concern the property rights to the design, or the processing know how which can be easily copied and duplicated, unless contract is done with a reliable and long term minded supplier.

1.62.2 Technical agreements

Based on certain available expertise in Europe, technical co-operation agreements could be implemented without the need for investment by the international partner. These technical co-operation agreements would normally be of a limited time frame, based on a specific technical development. Due to the limited protection granted to property rights in Pakistan, long term royalties on technical co- operation is not an avenue to be considered, unless there is a long term interest for both parties to work together on a permanent basis through larger general agreements.

Such technical agreements should concern all size of operations in Pakistan.

1.62.3 Co-operation agreements

This appears to be the most promising area of co-operation, whereby the local firm requires support to gain access to the developed markets, through a general and permanent improvement of its manufacturing and marketing capacities, on a long term basis. Advantages to the European partner should arise from royalties, access to goods manufactured under its trade mark as per its specifications, at a competitive price.

These co-operation agreements should concern mostly large textile companies, already active in the finished products or eager to enter such added value markets.

Page 127 New Business Opportunities in Pakistan 1.62.4 Joint Venture agreements

As already mentioned in this report, investment finance is not an issue in Pakistan at the moment for most companies. Therefore, demand for such form of agreement would normally come only from middle sized companies which would want to go through an aggressive expansion policy, whereby they would need not only the technical and marketing support of the international partner, but its financial support as well.

Definitely, such type of investment would be the most risky for the foreign partner, and should only be envisaged after both parties fully understand each other, and are sure that their strategy offers common goals over the long term.

1.63 List of major local companies

Gadoon Textile Mills Ltd. Product Line: GREY CLOTH CEO: Mr. A Razzak A Aziz Tabba APTMA House, Tehkal Payan, Jamrud Road, Crescent Textile Mills Ltd. Peshawar CEO: Mr. Mian Muhammad Anwar Phone: +92-111-786-555 Fax: +92-021-4382436 Sardhoda Road Faisalabad E.mail: [email protected] Phone: +92-041-111-105-105 Fax: +92-041-111-103-104 City: Peshawar. State: N.W.F.P E.mail: [email protected] Country: Pakistan URL: nil City: FAISALABAD State: Punjab Brands: Peach, Koel Country: Pakistan URL: www.ctm.com.pk Production Capacity: 128,160 Spindles Turnover: Rs. 4 billion Product Line: Spinning Yarn Turnover: Rs. 6 billion Mahmood Textile Mills Ltd. CEO: Mr. Khawaja Muhammad Iqbal Nishat Chunian Ltd Mehr Manzil, Lahori Gate, PO Box 28, Multan, Pakistan CEO: Mr. Shahzad Saleem Phone: 92-061-511158-59-511260, 0303-631200 31-Q Gulberg,II Fax: 92-061-511262, 549711, 061-511262-570400 Lahore. Cable: Qadri Multan E.mail: [email protected] Phone: +92-042-5761730-9 Fax: +92-042-5878696-7 Brands: Engine, Zaitoon, Palm, Cotton King City: Lahore State: Punjab Production Capacity: Spinning: 65,280 Spindles Country: Pakistan URL: www.nctex.com Weaving: 103 Shuttleless Loom Production Capacity: 450 Airjet Looms Product Line: Cotton Yarn & Fabric Product Line: cotton yarn Textile Mills Ltd. Nishat Mills Ltd CEO: Mr. Bashir Alimohomed CEO: Mrs Naz Mansha Plot No. 82 Main National Highway, Landhi Karachi. 7, Main Gulberg Lahore Phone: +92-021-5015702- 5018095 Fax: +92-021- Phone: +92-042-5716351-59-111-332-200 Fax: +92-042- 5082625-5080071 5716350 E.mail: [email protected] E.mail: [email protected] City: Karachi State: Sindh City: LAHORE State: Punjab Zip code: 74000 Country: Pakistan Country: Pakistan URL: www.gulahmed.com Turnover: Rs 12 billion Brands: Gul-Light, Princess, Gul Ahmed, Chairman, Production Capacity: 140,000 Spindles, 550 Airjet Cotton Club Looms, 140 Shuttlless looms Production Capacity: Product Line: Made-ups (Home Textiles, Apparels) Spinning: 81,024 Spindles Weaving: 297 Shuttle Loom, 108 Shuttleless Loom Kohinoor Weaving Mills Ltd. Processing: Dyeing, Printing CEO: Mr. Aamir Fayyaz Sheikh Stitching: Yes 42-Lawrence Road, Lahore. Product Line: Bed lines, Curtains & Accessories Phone: +92-042-6304181-82 Fax: +92-042-6367671 Turnover: Rs.5 billion City: Lahore URL: www.kmlg.com Al-Karam Textile Mills (Pvt) Ltd. Production Capacity: 228 Shuttleless Looms CEO: Mr. Anwar Haji Karim Product Line: Cotton Fabric 3rd Floor, K.D.L.B Building, 58-West Wharf Road, Karachi. Phone: +92-021-2313031-35, 2313036, 0300-225550 Kohinoor Textile Mills Ltd. Fax: +92-021-2310625 CEO: Mr. Taufique Sayeed Saigol E.mail: [email protected] 42 Lawrence Road, Lahore. URL: www.alkaram.com Phone: +92-042-6302261, 6302262,-0300-8551934 Fax: Brands: AK, Supernit, lgloo, Superman +92-042-6368721 Production Capacity: Weaving: 308 Shuttle Looms 324 City: Lahore State: Punjab Shuttleless Looms Country: Pakistan URL: www.kmlg.com Spinning: 66568 spindles Brands: Super Taj Mahal, Taj Mahal, King Product Line: Yarn Counts: 21/s, 22/s, 30/s, 36/s, 60/s, Production Capacity: 65,984 Spindles 80/s & 100/s, Fashion Garments,Textile Madeups, Product Line: Cotton and Blended Yarn Bedlinen

Chenab Limited Fazal Textile Mills Limited CEO: Mr. Mian Muhammad Latif CEO: Mr. Sohail Tabba Nishatabad Faisalabad L-A-2/B, Block 21, Fedral B Area, Karachi Phone: +92-041-75447-76 Fax: +92-041-752400-752700 Phone: +92-021-6321311, 6322048, 0320-220984 City: FAISALABAD State: Punjab Fax: +92-21-6313372 Country: Pakistan URL: www.chenabgroup.com Cable: Page 128 New Business Opportunities in Pakistan E.mail: [email protected] Brands: Twin Star Cuckoo, Jugnoo City: Karachi State: sindh Production Capacity: 55,320 Spindles Zip code: 74000 Country: Pakistan Product Line: Cotton Yarn / Blended Yarn Knitted Fabric. URL: www.fazaltextile.com I.S.O 9909720 Tunover: Rs. 1 billion

1.64 Listing of European and other foreign companies present in the sector

ICI Pakistan Limited Polyster Fibres Business ICI House, 63 Mozang Road PO Box 6368805 Tel: 6311272 Fax: 6368805 UAN: 111-100-200

1.65 Main sources of information

All Pakistan Bedsheets & Upholstery Manufacturers Fax: 021-2851429 Association 20, block t, Masoom Shah road Pakistan Chemicals & Dyes Merchants' Association P.o.box no. 268 Chemical dye house Multan Tel: 061-552909/564811 Rambharti street, jodia bazar Fax : 061-552981 Karachi TEL: 021-2432752/2439124/2430170 E.mail: [email protected] FAX: 021-2430117

Pakistan Canvas and Tents Manufacturers and All Pkistan Coth Eporters Asociation Exporters Association (regd.) 30/7, civil lines, near Sate Bnk 15/63, Shadman commercial market Faisalabad Tel: 041-644750-51/644754/615563 Afridi mansion Fax: 041-617985/644773 Lahore Tel: 042-7577572 E.mail: [email protected] Fax: 042-7577572 E.mail: [email protected] Pakistan Commercial Exporters of Towels Association Pakistan Cloth Merchants' Association Pceta house, 7-h, block 6, pechs 4th floor, Hasan Ali centre Karachi Tel: 021-4535757/4535759/4222507/4522636 Hussaini market, new m. W. Tower Fax: 021-4522372 M. A. Jinnah road E.mail: [email protected] Karachi Tel: 021-2444274/2444053/2444393 Url: www.towelword.com Fax: 021-2401423 E.mail : [email protected] Karachi Cotton Association The cotton exchange Pakistan Knitwear & Sweaters Exporters Association I. I. Chundrigar road 1014, 1015 & 1016, 10th floor Karachi TEL: 021-2425007/2412570/2416497/2410336 Dirpark avenue, block 6, p.e.c.h.s. Fax: 021-2413035/2412580 Karachi Tel: 021-4544035-38 E.mail: [email protected] Fax: 021-4544039 Url: www.kcapak.org E.mail : [email protected] Url: www.paksa.com.pk Pakistan Cotton Fashion Apparel Manufacturers & Exporters Assn. Pakistan Second Hand Clothing Merchants 2nd floor, Amber court Association Shaheed-e-millat road Jehangirpura bazar Karachi Tel: 021-4522936/4533936/4521614 Peshawar Tel: 091-211565 Fax: 021-4546711 Fax: 091-272788 E.mail: [email protected]

Pakistan Leather Garments Manufacturers & Exporters Pakistan Cotton Fashion Apparel Manufacturers & Association Exporters Assn. Plot no. 92 c, 1st floor 2nd floor, Amber court Khayaban-e-Ittehad, dha phase ii Shaheed-e-millat road Karachi Tel: 021-5388799/5387365/5387366 Karachi Tel: 021-4522936/4533936/4521614 Fax: 021-5388799 Fax: 021-4546711 E.mail: [email protected] E.mail: [email protected]

Pakistan Hosiery Manufacturers Assn. All Pakistan Textile Mills Association P. H. M. A. House Aptma house, 44-a, lalazar 37-h, block 6, p.e.c.h.s. Moulvi Tamizuddin Khan road Karachi Tel: 021-4522769/4522685/4544765 Karachi Tel: 021-5611961/5610547/111-700-000 Fax: 021-4543774 Fax: 021-5611305 E.mail: [email protected] E.mail: [email protected] Url: www.phmaonline.com Url: www.aptma.org.pk

Pakistan Bedwear Eexporters Asociation Towel Manufacturers' Association of Pakistan 245-1-v, block 6 Tma house, 77-a, s.m.c.h.s. P.e.c.h.s. #1206, 1212, 1218, Kashif Center, 12h Floor, Karachi Tel: 021-4541149/4541192/2851311-13 Shahra-e-Faisal, Karachi-75530, Pakistan

Page 129 New Business Opportunities in Pakistan Tel: (92-21) 566-1953, 567-7278 Fax: (92-21) 567-7132 Karachi Tel: 021-111-360360/4382801-6 Fax: 021-4551628 E.mail: [email protected] URL: www.towelassociation.com

Pakistan Vanaspati Manufacturer's Assn. House no. 5-b, sector f-7/3 College road Islamabad Tel: 051-274358 Fax: 051-272529

Pakistan Woollen Mills Association 2nd floor, Republic Motors building 87, shahrah-e-quaid-e-azam Lahore Tel: 042-6308398 Fax: 042-6306879 E.mail: [email protected] www: www.lcci.org.pk/pwma

PakistanYarn Merchants Association 802-3, 8th floor Business centre, Dunolly road Karachi Tel: 021-2410320/2424896 Fax: 021-2424896/4547843 E.mail: [email protected]

Pak Readymade Garments Manufacturers & Exporters Association Shaheen view building, 18-a Block vi, p.e.c.h.s, Sharea Faisal Karachi Tel: 021-4533327/4535394 Fax: 021-4536686/4539669 E.mail: [email protected]

Page 130 New Business Opportunities in Pakistan

1.66 Textile export statistics for Pakistan

Table 52: Yarn trade statistics (SITC 651), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 1,457,785 1,118,660 1,097,814 1,188,501 1,097,407 5,960,167 Total import value 45,937 43,737 55,245 53,390 78,084 276,393

2001 1997-2001 Exports by country Value % Value % China, Hong Kong 297,532 27.10% 1,587,570 26.60% Japan 82,753 7.50% 834,996 14.00% Rep. of Korea 183,668 16.70% 706,135 11.80% China 134,532 12.30% 454,328 7.60% USA 73,991 6.70% 346,862 5.80% Portugal 46,575 4.20% .. .. Italy 11,322 1.00% .. .. others .. .. 2,030,276 34.10% Source: PC&A Calculations Source: Based on COMTRADE database

Table 53: Cloths trade statistics (SITC 652, 653, 654, 655, 656, 657), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 1,994,044 1,885,996 1,711,328 1,707,372 1,665,127 8,963,867 Total import value 35,088 39,405 51,183 67,786 69,007 262,469

1997-2001 SITC 652-657 Exports by country Value % USA 1,345,589 15.00% China, Hong Kong 874,373 9.80% United Arab Emirates 689,080 7.70% United Kingdom 669,305 7.50% Italy 321,566 3.60% others 5,063,954 56.50%

2001 SITC 652-657 SITC 652 SITC 653 SITC 654 SITC 655 SITC 656 SITC 657 Exports by country Value % Value Value Value Value Value Value USA 275,586 16.60% 190,338 58,346 57 6,962 2,257 17,626 United Arab Emirates 153,409 9.20% 46,863 86,181 1,258 16,258 933 1,916 United Kingdom 110,684 6.60% 58,193 44,062 164 2,199 1,123 4,943 China, Hong Kong 101,997 6.10% 97,122 4,186 11 178 464 36 Italy 66,330 4.00% 42,912 19,449 524 334 3,111 China 58,040 3.50% 55,244 2,654 101 28 13 Spain 55,925 3.40% 18,430 36,335 32 742 103 283 Belgium 51,451 3.10% 28,998 20,642 91 27 1,693 Bangladesh 44,496 2.70% 35,350 8,004 5 1,043 28 66 Germany 36,006 2.20% 23,413 8,564 10 316 589 3,114 Source: PC&A Calculations based on COMTRADE database

Page 131 New Business Opportunities in Pakistan

Table 54: Garments trade statistics (SITC 841, 842, 843, 844, 845), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 1,306,584 1,366,341 1,407,157 1,601,173 1,555,487 7,236,742 Total import value 1,180 2,779 2,587 3,175 3,615 13,336

1997-2001 SITC 841-845 Exports by country Value % USA 4,034,902 55.80% Germany 721,700 10.00% United Kingdom 558,621 7.70% France 309,961 4.30% Netherlands 303,017 4.20% others 1,308,541 18.10%

2001 SITC 841-845 SITC 841 SITC 842 SITC 843 SITC 844 SITC 845 Exports by country Value % Value Value Value Value Value USA 881,105 56.60% 234,762 60,387 416,135 57,163 112,658 Germany 133,904 8.60% 66,480 14,911 19,460 4,993 28,060 United Kingdom 130,945 8.40% 55,523 9,696 26,481 7,475 31,770 Canada 59,108 3.80% 19,783 6,798 18,254 4,484 9,789 Netherlands 58,759 3.80% 21,994 11,949 8,991 5,414 10,411 France 52,938 3.40% 25,869 6,882 6,227 1,633 12,327 Belgium 43,391 2.80% 15,997 3,341 12,860 1,331 9,862 United Arab Emirates 29,660 1.90% 4,507 10,974 4,699 849 8,631 Italy 29,120 1.90% 18,346 761 3,816 1,005 5,192 Spain 23,694 1.50% 11,092 2,252 3,134 1594 5,622 Saudi Arabia 19,032 1.20% 3,160 3,911 1,446 726 9,789 Sweden 9,308 0.60% 4,295 1,866 1,089 486 1,572 Australia 8,077 0.50% 3,508 201 2,289 12 2,067 Ireland 6,331 0.40% 3,658 1,780 284 81 528 Source: PC&A Calculations based on COMTRADE database

Table 55: Towels trade statistics, values in USD '000 2001-2002 % SHARE 2000-2001 % SHARE 1999-2000 % SHARE Top 10 Buyer Countries 1 U.S.A. 126,151 47.1 120,079 49.7 94,675 48.4 2 DUBAI 19,155 7.2 12,161 5.0 8,057 4.1 3 U.K. 14,703 5.5 10,388 4.3 10,947 5.6 4 GERMANY 11,549 4.3 12,815 5.3 10,936 5.6 5 NETHERLANDS 10,204 3.8 9,193 3.8 7,347 3.8 6 SAUDI ARABIA 9,128 3.4 7,509 3.1 3,892 2.0 7 CANADA 7,710 2.9 7,147 3.0 7,219 3.7 8 BELGIUM 7,390 2.8 4,826 2.0 4,095 2.1 9 ITALY 6,906 2.6 7,754 3.2 6,669 3.4 10 FRANCE 6,840 2.6 6,070 2.5 5,789 3.0 SUB TOTAL 219,736 82.1 197,942 81.9 159,626 81.6 Next Top 10 Buyer Countries 11 AUSTRALIA 5,695 2.1 5,521 2.3 4,577 2.3 12 SPAIN 4,598 1.7 4,033 1.7 4,108 2.1 13 GREECE 4,237 1.6 3,064 1.3 2,373 1.2 14 SWEDEN 4,026 1.5 5,448 2.3 3,673 1.9 15 NEW ZEALAND 3,958 1.5 3,702 1.5 2,704 1.4 16 NORWAY 3,498 1.3 4,177 1.7 3,680 1.9 17 S.AFRICA 2,349 0.9 888 0.4 1,076 0.6 18 CHILE 1,958 0.7 1,616 0.7 1,113 0.6 19 DENMARK 1,876 0.7 2,026 0.8 1,887 1.0 20 HUNGERY 961 0.4 787 0.3 598 0.3 SUB TOTAL 33,156 12.4 31,262 12.9 25,789 13.2 SUB TOTAL OF TOP 20 252,892 94.5 229,204 94.8 185,415 94.8 OTHERS 14,823 5.5 12,484 5.2 10,212 5.2 TOTAL 267,715 100.0 241,688 100.0 195,627 100.0 Source: Export Promotion Bureau

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Table 56: Bedwear and linen trade statistics (SITC 65841, 65842, 65843), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 486,781 567,460 681,008 744,859 831,467 3,311,575 Total import value 4 30 0 54 34 122

1997-2001 SITC 65841-65843 Exports by country Value % USA 837,373 25.30% United Kingdom 416,747 12.60% Germany 348,489 10.50% France 272,617 8.20% Netherlands 260,801 7.90% others 1,175,548 35.50%

2001 SITC 65841-65843 SITC 65841 SITC 65842 SITC 65843 Exports by country Value % Value Value Value USA 241,397 29.00% 2,235 187,504 51,658 United Kingdom 116,195 14.00% 431 71,334 44,430 Saudi Arabia 74,030 8.90% 116 48,124 25,790 Germany 61,747 7.40% 718 49,726 11,303 France 55,794 6.70% 52 46,144 9,598 United Arab Emirates 42,628 5.10% 1,495 25,765 15,368 Netherlands 40,832 4.90% 130 30,457 10,245 Australia 32,504 3.90% 85 16,708 15,711 Canada 24,415 2.90% 394 14,374 9,647 Belgium 16,489 2.00% 63 11,176 5,250 Sweden 14,736 1.80% 79 11,650 3,007 Italy 13,103 1.60% 83 8,341 4,679 New Zealand 8,222 1.00% 209 3,914 4,099 Tanzania 6,237 0.80% 136 4,563 1,538 Source: PC&A Calculations based on COMTRADE database

Table 57: Made-up textile articles trade statistics (SITC 658), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 957,241 1,088,304 1,204,799 1,354,150 1,497,526 6,102,020 Total import value 1,768 3,988 3,291 4,002 3,613 16,662

2001 1997-2001 Exports by country Value % Value % USA 2,216,631 36.30% 597,706 39.90% United Kingdom 664,528 10.90% 174,559 11.70% Saudi Arabia 351,214 5.80% 103,688 6.90% Germany 507,152 8.30% 90,738 6.10% France 341,710 5.60% 69,194 4.60% United Arab Emirates .. .. 66,011 4.40% Netherlands .. .. 55,289 3.70% Australia .. .. 41,891 2.80% Canada .. .. 40,678 2.70% others 2020785 0.331 .. .. Source: PC&A Calculations based on COMTRADE database

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Table 58: Bedwear trade statistics, values in USD '000 2001-2002 % SHARE 2000-2001 % SHARE 1999-2000 % SHARE Top 10 Buyer Countries 1 U.S.A. 290,237 31.6 203,829 27.4 184,561 26.0 2 U.K. 134,209 14.6 93,500 12.6 89,233 12.6 3 SAUDI ARABIA 79,535 8.7 65,627 8.8 44,213 6.2 4 GERMANY 62,520 6.8 59,860 8.0 69,912 9.8 5 FRANCE 55,815 6.1 55,904 7.5 63,410 8.9 6 DUBAI 50,338 5.5 37,080 5.0 24,415 3.4 7 NETHERLANDS 40,247 4.4 42,230 5.7 53,604 7.6 8 AUSTRALIA 31,658 3.4 38,818 5.2 28,214 4.0 9 CANADA 25,493 2.8 21,782 2.9 19,548 2.8 10 BELGIUM 19,066 2.1 13,729 1.8 18,781 2.6 SUB TOTAL 789,118 85.9 632,359 84.9 595,891 83.9 Next Top 10 Buyer Countries 11 SWEDEN 15,327 1.7 12,202 1.6 13,204 1.9 12 ITALY 12,733 1.4 12,869 1.7 13,014 1.8 13 SPAIN 7,816 0.9 4,944 0.7 4,725 0.7 14 NEW ZEALAND 6,880 0.7 9,407 1.3 8,164 1.1 15 DENMARK 6,376 0.7 4,182 0.6 5,600 0.8 16 AUSTRIA 4,908 0.5 2,265 0.3 1,768 0.2 17 SINGAPORE 4,754 0.5 3,877 0.5 3,581 0.5 18 TANZANIA 4,676 0.5 4,457 0.6 775 0.1 19 IRISH REPUBLICS 4,354 0.5 2,011 0.3 1,999 0.3 20 NORWAY 4,313 0.5 4,581 0.6 3,839 0.5 SUB TOTAL 72,137 7.9 60,795 8.2 56,669 8.0 SUB TOTAL OF TOP 20 861,255 93.8 693,154 93.1 652,560 91.9 OTHERS 57,303 6.2 51,729 6.9 57,364 8.1 TOTAL 918,558 100.0 744,883 100.0 709,924 100.0 Source: Export Promotion Bureau

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THE FOOD PROCESSING AND PACKAGING SECTOR

The head of the Pepsi Cola Company described Pakistan as “the best kept secret”, with reference to the business environment for the food and beverage industry. Pepsi Cola, with a 70% market share achieved a seven month pay back on its concentrate production plant.7

Agriculture is the key sector of Pakistan’s economy, contributing around 25% to the GDP. The agriculture sector is dominated by the Crops sub-sector with a share of 60% (major crops 41% and minor crops 19%), followed by the Livestock sub-sector with a share of 36%, with a share of 3.5% and Forestry with a share of 0.5%

1.67 The dairy sector of Pakistan

Despite having a sizable herd of around 45 million dairy animals and ranked fifth largest milk producing nation in the world, only 3% of over 27 million tons of the milk produced in the country is industrially processed.

The opportunities for foreign involvement in this sector are mostly directed at the local market and the nearest export markets, contrary to the textile sector. The development of a middle class, as well as growing awareness of the phytosanitary constraints creates favourable opportunities for development in the country as exemplified by the successes of the major companies in the sector.

1.67.1 General description of the sector

Total Turnover: Rs. 289.12 Billion % in the GIP 8.3% Cattle population Cows: 22.86 million; Buffalos: 24.03 million; Dairy Plants: 38; Operational: 13; Daily rated capacity: 2.18 million litres No of employees Accurate no of employees not available but an estimated 5.5 million households are engaged in the dairy sector. Total Turnover/volume 95 million litres of milk per day 55% consumed at source; 45% traded in urban centres. Total Investment N/A

1.67.2 Main industrial processes

Apart from the processing of the products themselves, two of the main points in the development of this industry concern the collection of the products in a quality/phytosanitary acceptable way, as well as the distribution of the finished products for the local market through a retail network which is still primitive.

The production of raw milk in Pakistan is mostly achieved through family farms with no more than five animals, either cows or buffaloes. The milk from buffaloes usually warrants a better price, up to 20% over cow’s milk, because of its higher tenor in fat, its higher density and its stronger taste. Commercial farms exist with the aim of supplying the milk processing industry or directly the markets, but they still represent only a tiny minority.

7 According to the Pepsi Cola Company in Pakistan

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Figure 26: Milk processing chart

1.67.2.1 Pasteurisation It is achieved through the heating of the milk up to a specific temperature for a specific time, without recontamination of the milk during the process. There are two basic methods for pasteurisation, either through Batch pasteurisation (within a container), or through the Continuous method (through flowing milk). The pasteurisation process allows a shelf life for the milk of a few days at chilled temperature.

1.67.2.2 Ultra High Temperature (UHT) This method is a quasi sterilisation of the milk through heating and packaging in air tight containers. The method used is usually through flowing milk with either direct or indirect heating. This method allows a long shelf life to the product of several months. Obviously this method is more complex due to the sterilisation environment which must be maintained. Clarification is also used to separate the fat/cream from the milk, or even to eliminate impurities. It helps to standardise the milk and to clarify it.

1.67.2.3 Milk Powder Plant The final moisture targeted in the powder ranges between 2.5% and 4%. Drying is an energy intensive process usually carried on in three stages. Following operational plants are used to make it energy efficient: - Multistage Evaporator - Spray Dryer - Vibro Fluid Bed Dryer as second stage dryer

1.67.3 the dairy processing industry

Table 59: Annual production of milk and milk products (2001-02) Item Unit Annual Production Milk (Fresh and Boiled) (Ltr.) 10.08 billion Milk (packed) (Ltr.) 50.04 million Butter (Kgs.) 110 million Ghee (Kgs.) 67.20 million Yogurt (Kgs.) 806.40 million Source: Agricultural Statistics of Pakistan 2001-02

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Table 60: Per capita consumption (kgs.) of milk and milk products (2000) Country Fluid milk Cheese Butter France 68 23.2 8.8 Germany 63 12.8 6.7 India 33 N/A 1.9 Pakistan 72 N/A 1.11 Japan 39 1.8 0.6 China 2 N/A - Source: Agricultural Statistics of Pakistan 2001-02

1.67.3.1 Cold storage chain in the collection process Fresh milk has a shelf life of four hours. To preserve the collected fresh milk, it has to be chilled to 4°C within this time. The collection and delivery process is therefore very important. The situation in Pakistan is not efficient in this regard, conducting to almost 30% of the milk produced being wasted.

The development and streamlining of the collection process as done by Nestle Pakistan is one of the main areas where development is required. Milk producing regions need to be connected through a speedy transportation network and chilling stations should be established along the routes where milk from the farms can be chilled on its way to the milk plants or markets.

1.67.3.2 Dried milk, pasteurised milk, UHT, packing The “first generation” milk plants established in the 70s focused on pasteurised milk production. They were not successful at the time due to poor acceptance of the recombined milk and the short term shelf life of pasteurised milk.

The “second generation” plants concentrated on ultra high temperature treated milk (UHT) with a long shelf life. These units have been successful, and the number of such processing plants has increased over the years, surpassing demand.8 Distribution of these products implies relying on specific packaging which is mostly supplied by Tetra Pack in Pakistan. The packaged milk market is estimated at 200 million litres per annum, valued at about 6 billion Rs, with a yearly growth rate close to 20% over the last few years.9

Of the ten milk powder plants established in the country, two have been closed, six operates below 50% and two have delayed production due to the lack of supply, especially in the low summer season as well as to the competition from subsidised low price imports in the past. Imports have reduced from about 12,000 tons in 97-98 to about 5,000 tons in 2001-02, confirming the import substitution of the local industry.

1.67.3.3 Yogurts, cheese, butter, other milk based products, packing Butter and yogurt manufacturing in an industrial way has been developed and promoted by few modern plant in the last ten to fifteen years. The production is starting to achieve some diversity alongside the traditional “dahi” (yogurt) made at the cottage level. Imports of butter and butter oil have been reducing regularly in the last 4 years.

Khoa is an important specific ingredient in the manufacturing of milk based sweets. Three types of Khoa are available in the market: - Danedar (granular texture, 20 - 25% fat and 35-40% moisture) used for the preparation of kalakand and granular burfi. - Dhap (20-23% fat and 37-44% moisture). - Pindi (moisture content about 19%, fat 37% , protein 18%, lactose 22% and ash 3.6%).

The packing industry, important as far as consumer products are concerned will have to be developed to accommodate the anticipated growth of these sectors. No specific statistics are available on the packaging facilities in the country.

8 As per Report: Modern Dairy Technology and Prospects for Growth. 9 As per the Experts Advisory Cell of the Ministry of Industries and Production, Islamabad: Dairy Sector Profile, August 2003.

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Cheddar and mozzarella cheese is being processed in Pakistan along side imports of cheese which has tended to increase regularly over the last few years, growing from 244 tons p.a. in 1997-98 to 515 tons in 2001-02.

1.67.3.4 Cold storage distribution In Pakistan to day, the milk reaches the city markets after a long chain of middlemen from the point of production to the point of sale. During this long chain of trade, many operations are done like addition of water or ice, skimming, churning, etc. which implies a low price paid to the producer, and deficiencies in the quality of the milk provided to the end consumer.

The commercial farms (less than 10% of total milk production) have a more direct access to markets, meaning better quality products and better profit for the producers, while the processed milk (about 3% of total production) is sold through the usual retail network thanks to its long shelf life.

1.67.4 Main raw material and components

Productivity of cows and buffalos is still limited at about 3 to 8 litres per day. Efforts are made to improve productivity which is a long term issue.

Table 61: Pakistan number of cattle per type Figures in ‘000 97-98 98-99 99-00 00-01 01-02 A. Cattle Female Cattle 3yrs and above 10398 10648 10796 11002 11216 i. In Milk 6564 6688 6815 6945 7080 ii. Dry 2471 2517 2565 2614 2665 iii. Not yet Calved 1363 1389 1416 1443 1471 B. Buffalo 3 years and above 12904 13271 13656 14056 19375 i. In Milk 8253 8488 8734 8990 9258 ii. Dry 2571 2644 2721 2801 9884 iii. Not yet calved 2080 2139 2201 2265 233 C Sheep Female One year & above 13435 13512 13595 13681 13775 D Goats Female one year & above 23994 24858 25755 26686 27651 Source: Ministry of Agriculture, Forest and Livestock, Agricultural Statistics of Pakistan (ASP), 2001/2002

Table 62: Pakistan – number of cattle per region type (in millions) Cattle Buffalo Sheep Goat N.W.F.P. 4.94 1.50 3.30 9.00 Punjab 9.74 14.40 5.84 18.90 Sindh 6.72 7.80 4.60 12.12 Balochistan 1.46 0.30 10.68 10.88 Pakistan 22.86 24.00 24.42 50.90 Source: Ministry of Agriculture, Forest and Livestock, Agricultural Statistics of Pakistan (ASP), 2001/2002

1.67.4.1 Main machinery and equipment Milk pasteurisers, Chillers, Refrigerating equipment, storage tanks, transportation system, tetra packaging machinery, sterilisers.

Majority of the equipment used is sourced locally but machines used for packaging and pasteurising are imported mostly from Germany and Korea.

1.67.5 Main cost factors

The main issue facing the industry at the moment is the availability of the raw milk to be collected from farmers in satisfactory conditions. This appears contradictory in view of the very low amount of milk

Page 138 New Business Opportunities in Pakistan formally processed, but is explained by the poor infrastructure in the country (lack of adequate refrigerated transport and electricity in small villages) as well as the very low productivity of the cattle at about 3 to 8 liters of milk per animal.

1.67.5.1 Labour - Self employed work force - High level of skill not required - Easily and cheaply available specially in Punjab - Uneducated work force resulting in low productivity and hygiene issues

1.67.5.2 Raw Material - Abundant/low cost Dairy Animals - Packaging material used is local as well as imported from USA, Germany etc. - Milk in powder form is imported from EU Countries and Australia. Milk powder is mostly consumed by infants and confectioners

1.67.5.3 Energy - Energy cost is not significant in this sector due to low usage, except that the supply unreliability presents a cost burden when back up generators have to be provided.

1.67.5.4 Finance - Financing is available at very low cost but only to the organised sector. As the dairy sector mainly consists of the unorganised sector, the Government of Pakistan through SMEDA and micro finance banks is providing working capital to the small players.

1.67.5.5 Logistics - A large number of villages and rural areas have to be connected through unsatisfactory road networks; - More villages will have to be electrified, which is of concern as far as the possibility of chilled storage of milk is concerned.

1.67.5.6 Productivity - 30% of 95 million litres of daily milk production is wasted; only 2.7% of total production is processed.

1.67.5.7 R&D, quality controls and certification - R & D is mostly carried out by the Packaged Milk Industry in the organised sector. - The Government is sponsoring a campaign for promoting packaged milk, and awareness is being created for maintaining clean and hygienic conditions. - The major players in the industry are involved in the upgrading of the cattle performance. - The missing link in the country comes from duly accredited laboratories, qualified to conduct satisfactory testing of the products, as will be more and more required for export, as well as locally.

1.67.5.8 Government incentives - In order to bring about greater mechanisation in the livestock and agricultural sector for the production of higher quality value added exportable goods, Machinery import in this sector is exempt from General Sales Tax (GST). - The dairy and dairy products are subject to 25% custom duty, while the raw-material used in this industry attracts an import duty of 10%.

1.67.6 Analysis of import & export flows

For detailed statistics see section 1.67.14.

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1.67.6.1 Analysis of the main imports, per type of imports, per country of origin The import statistics do confirm our analysis whereby Pakistan is self supporting as far as milk and dairy products are concerned. Imports represent a small amount and are sourced from a number of countries in Europe including Poland and Russia.

1.67.6.2 Analysis of main exports, per type of exports, per country of origin Similarly, the export figures are small which confirms that this industry is essentially a domestic market related activity, as far as production and marketing are concerned. The only significant exports concern Afghanistan, which is easily understandable.

The Government has identified this industry as a promising sector with a view to develop export towards the Middle East, Central Asia and other South Asian countries.

1.67.7 Analysis of the main trends

There is no doubt that the area most suited for the dairy industry is Punjab, in view of the concentration of the dairy cattle.

1.67.7.1 Location 70% of the total milk production is obtained from Punjab mostly from Sahiwal, Lahore, Gujeranwala, Faisalabad etc

1.67.7.2 Trend, possible evolution Some ideas which were floated around during the numerous meetings with various parties in the industry mentioned the importance of producing / supplying pasteurised milk as opposed to the existing UHT facilities.

Other investments mentioned concerned the setting up of flavour manufacturing plant as well as colouring for the food industry in general.

Finally, packaging facilities were often mentioned as a sector where improved capacities and quality is required, not only for the liquid sector but also for the rest of the sector. Such developments would facilitate the development of “toll manufacturing” for the foreign markets.

1.67.7.3 Role of local importers, foreign agents Only milk powder is imported in this sector, it is sourced from Australia and Europe.

1.67.8 WTO rules and regulations

Major market for dairy products is heavily subsidised in countries like the EU and the USA. In the long term, and depending on the developed countries attitude towards subsidies, export opportunities might increase, however, subject to stringent quality concerns.

1.67.9 Local and regional competition

1.67.9.1 Competition from imports The seasonal nature of demand for milk powder from bakeries, confectionaries and the dairy plants have necessitated the import of powder milk to fill the gap between the requirement of urban consumers and the available supply. Milk is imported as skimmed milk powder and vegetable fats- filled milk powder. In addition, other milk products including butter, cream, yogurt, etc. are also imported in limited quantities. Heavily subsidised imported milk from the USA and the EU is the key reason for closure of local units and reduction in capacity utilisation of the powder milk units in operation.

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1.67.9.2 Competition in the export markets The dairy sector offers some potential for exports from Pakistan. However, it has not been successful so far. The main reasons being the lack of quality controls and quality certification capacities coupled with the large subsidies to the milk producers in the developed world.

1.67.9.3 Domestic competition The packaged milk industry is highly competitive mainly dominated by CDL and Nestle with market share of 39% and 44% respectively. Other brands include Halla by Idara-e-Kissan with market share of 5%, Candia 4% and Dairy Queen 4%.

Competition extends not only in the retail market but also in the supply of the raw milk from farmers.

1.67.10 Success stories

Two of the main success stories in the industry have gone through different routes.

Box 30: NESTLE MILKPAK Summary of Operations Production: The joint venture between Milkpak Ltd. And Nestle S.A. came about in 1988 and the company was renamed as Nestle Milkpak Ltd. Prior to that, Milkpak Ltd., produced UHT milk, butter, cream, desi ghee and fruit drinks at Sheikhupura factory. 21 branded product lines were added during 1990 to 1998. Milk Collection: Nestle Milkpak operates the largest and an extremely efficient milk collection system in the country, which enables it to collect the highest quality milk for production of UHT and powder milks as well as other milk based products. The company voluntarily provides extension services of farmers in the area of animal husbandry and livestock breed improvement. Exports: Nestle Milkpak entered the export market in 1993 with exports of Rs.3.2 million to Afghanistan. Growing steadily over the years, its exports stood at Rs.321 million by June, 1998. Currently, its overseas markets include the UAE, UK, USA, Sri Lanka, Malaysia, Bangladesh, Afghanistan and Central Asian States.

Contribution to other Sectors: In the social sector, the company provides over 1,100 job opportunities for skilled, unskilled and professional manpower. It plays a remarkable role in vitalising the rural economy by disbursing over Rs.1.37 billion annually against milk purchases, benefiting over five million household members of the dairy farmers.

The Environment: In line with its universal commitment, Nestle Milkpak fully complies with its responsibilities forwards the protection of the environment. By making available the processed and packaged dairy products to urban consumers, it helps in arresting urban environmental degradation caused by the influx of cattle into towns. Within it's own production facilities, the company takes pains to operate an elaborate water treatment system to cleanse its industrial wastewater before releasing it for irrigation. Source: BOI

The Nestle Pakistan joint venture is a very prominent case of a foreign controlled company’s success in the country with an extremely profitable record and fast expansion. The JV format of the company tends to justify our reasoning that in the food sector, contrary to the textile sector, JV are justified by the lack of sufficiently matured enterprises with which to set up technical co-operation agreements.

CDL is the counter example, being a very successful local company with a technical agreement with a major French company. However, this type of co-operation reinforces the point: CDL being as large as the Nestlé operation, it could enter into such technical agreement with a foreign partner.

1.67.11 Listing of major local companies

CDL Foods Limited Producer of Pasteurised milk, yogurt 135 Ferozepur Road, Lahore 54600 Capacity: 80,000 litres / day Tel: +92 42 111 135 135, Fax +92 42 759 0376 Production: UHT milk, sterilised milk, milk powder, UHT Lahore Milk Plant cream Lahore Capacity: 230,000 litres / day Production: Pasteurised milk, UHT milk, yogurt, butter, desi ghee Idara-e-Kissam Capacity: 300,000 litres / day Pattoki

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Kabirwala Dairy Ltd. Kabirwala Dairy Food Industries (Pvt) Ltd. Production: UHT milk Plot-I-6/8,Sector-5, Capacity: 50,000 litres / day Korangi Industrial Area Karachi Tel: 92-021-5060386 Millac Food (Pvt.) Ltd. Fax: 7720637 Lahore Production: Dry milk powder Kissan Dairy Farm Shop No. Ratan Talaw Noon Pakistan Ltd. Gawali Lane No.3 Bhalwal Karachi Tel: 92-021-7765109 Production: Dry milk powder, butter, chees, pasteurised Mob: 0321-236502 milk, desi ghee Capacity: 80,000 litres / day New Lyallpur Kissan Dairy Farm #10, Frere Market Pakistan Milk Food Manufacturers Ltd. Shahrah-E-Liaquat Jhang Karachi 74200 Tel: 92-021-7724167 Production: Condensed milk, milk powder, desi ghee Fax: 7760487 Capacity: 30,000 Web: www.jamals.com/layapur

Prime Dairies Ltd. Pakistan Dairy Products (Pvt) Ltd. (igloo) Manga Plot No.1,Sector-24 Production: Yogurt Korangi Industrial Area Capacity: 8,000 Karachi Tel: 92-021-5062623 Fax: 5062624 Royal Dairy Products Ltd. E.mail: [email protected] Karachi Production: UHT milk Shahnawaz Dairy Farm Capacity: 100,000 B-219,Nazimabad No.4 Mujahid Colony Ravi Dairies Karachi Tel: 92-021-6341464 Jaranwala Production: UHT Halla Dairy Products Capacity: 80,000 40,Shahrah-e-Roomi,Walton Road Lahore Tel: 92-042-5824632, 5725772 Yummy Milk Products (Pvt) Ltd. 124/4, Industrial Area Pakistan Dairy & Livestock Complex Kot Lakhpat, Lahore. 5-A,Ferozepur Road Tel: 92-042-5112753 Lahore Tel: 92-042-7576849 Fax: 5113813

1.67.12 Listing of European and other foreign companies present in the sector

Nestle Pakistan 2nd Floor, Avari Plaza Falima Jinnah Road 308, Upper Mall Lahore. Karachi Tel: (042) 571 28 59 Tel: (021) 5660062-65. 5660067-69 Fax: (021) 5680918, 5681705, 56873 17 Cadbury Pakistan Limited 4th Floor, Tower- B World Trade Centre. Lever Brothers Pakistan Ltd. Block Clifton, Karachi - 75600 SNC Centre, 1st Floor, 12/4 East, Tel: (021) 5865281-3, 5865284 Islamabad Fax: (021) 5865285 Tel: 92-051-2826457-8 Fax: 2201162 Unilever Pakistan Limited

1.67.13 Main sources of information

Pakistan Dairy Association Live-stock Farmers Association of Pak 11/19-b, link Shami road Karachi house Lahore Tel: 042-6680041/6850653 i. I. Chundrigar road Fax: 042-6682042 Karachi Tel: 021-2417186-88 E.mail: [email protected] Fax: 021-2417184

Dairy Farmers Association Pakistan Agricultural Machinery and Implements Manf. Street No.4,Plot No.90,Malir Association Landhi Catlle Colony 6/21-26, Nazar bagh Karachi Tel: 92-021-5083108 G. T. Road Peshawar Tel: 091-211835 Fax: 091-216723

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1.67.14 Import and export statistics on the food and dairy sector

Table 63: Food processing and packaging trade data - SITC 0 (excl. 00 live animals except fish and 08 animal feed), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 857,453 1,121,818 1,071,386 942,680 964,671 4,958,008 Total import value 2,099,541 1,828,263 1,550,694 1,359,749 1,096,204 7,934,451

1997-2001 1997-2001 Exports by country Imports by country Value % Value % United Arab Emirates 697,066 14.10%Malaysia 2,325,560 29.30% India 358,682 7.20%Australia 946,198 11.90% United Kingdom 314,193 6.30%USA 917,890 11.60% other Africa 310,910 6.30%Kenya 669,497 8.40% Afghanistan 269,732 5.40%Indonesia 433,863 5.50% others 3,007,425 60.70%others 2,641,443 33.30% Source: PC&A Calculations based on COMTRADE database

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Table 64: Milk and dairy products (excl. eggs) - SITC 022, 023, 024, values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 455 1,104 625 1,113 1,429 4,726 Total import value 17,456 27,612 31,424 16,744 7,286 100,522

1997-2001 1997-2001 Exports by country Imports by country Value % Value % Afghanistan 3,782 80.00%Ireland 36,474 36.30% Iran 420 8.90%Poland 13,652 13.60% Uzbekistan 177 3.70%Netherlands 7,150 7.10% Kazakhstan 89 1.90%United Kingdom 5,528 5.50% Kenya 66 1.40%New Zealand 4,779 4.80% others 192 4.10%others 32,939 32.80%

2001 SITC 022-024 SITC 022 SITC 023 SITC 024 Exports by country Value % Value Value Value Afghanistan 1,295 90.60% 1,295 Kenya 66 4.60% 66 Rep. of Korea 52 3.60% 52 Turkmenistan 30 2.10% 30 Kyrgyzstan 29 2.00% 29 Germany 27 1.90% 27 USA 16 1.10% 8 8 Bangladesh 3 0.20% 3

2001 SITC 022-024 SITC 022 SITC 023 SITC 024 Imports by country Value % Value Value Value Ireland 910 12.50% 910 United Kingdom 858 11.80% 818 40 Poland 819 11.20% 819 Russia 602 8.30% 602 France 536 7.40% 408 66 62 Netherlands 505 6.90% 505 Singapore 485 6.70% 359 19 107 Germany 482 6.60% 419 63 Australia 422 5.80% 42 380 United Arab Emirates 391 5.40% 305 57 29 New Zealand 367 5.00% 203 48 116 Denmark 283 3.90% 38 122 123 Sweden 184 2.50% 184 Belgium 149 2.00% 149 Source: PC&A Calculations based on COMTRADE database

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1.68 Fruits and vegetables

The agriculture sector being the lynchpin of the country’s economy continues to be the single largest sector and dominant driving force for growth and development of the economy. It accounts for 25% of the GDP and employs 48% of the total workforce.

Pakistan is endowed with fertile land, good quality water, favourable weather and industrious labour which are capable of producing a variety of agriculture products in which fruits and vegetable constitute an important portion.

Due to a lack of processing facilities and limited cold storage capacity, a large part of the harvest is lost every year. Further more, in the absence of modern harvesting methods, inadequate phytosanitary concerns and inappropriate packing facilities, export to the European or North American markets is not yet possible.

However, given proper investment in the required equipment and process, significant successes could be ensured, as demonstrated by the Nestlé Joint Venture in the milk, water and fruit juice sector.

1.68.1 General description of the sector

Total Turnover: Fruits Rs.69,150 million and vegetables Rs.26,507 million Share of GDP 2.5% No of companies Fruit & vegetable cultivation is mostly done by small farmers. Approximately 25 firms are engaged in canning, preservation and bottling of fruit juices. There is no regular fruit and vegetable canning industry in Pakistan. Pakistan currently has 24 fruit juices and pulp processing plants in the organised sector and a number of small units in the un-organised sector, with an installed capacity of around 400,000 metric tons per annum.

Fruits and Vegetable Processing Capacity 25 units 30,000 m tons Confectionery Capacity 23 units 30,300 tons Cereals Capacity 1 unit 350 M. tons Corn Flakes 325 M. tons Rice Cereals 100% Production Capacity Beverages Capacity 100 units 600 million liters Utilisation 90% Fruit Juice/ Pulp Capacity 25 units 400,000 M. tons Biscuit and BreadCapacity 42 units 46,830 M. tons Utilisation 80% Source: Experts Advisory Cell, Ministry of Industries & Production

No of employees Almost 67.5% of the country’s population is directly or indirectly linked with the agriculture production system. The same labour force on part time or full time takes care of vegetable or fruit fields. Total Turnover/volume Fruits : 5.9 million tonnes, vegetables : 28.73 million tonnes Total Investment N/A

1.68.2 Main industrial process

Apart from the processing of the products themselves, two main issues in the development of the industry are improvements in quality and phytosanitary standards as well as upgrades of the distribution system of finished products through development of an organised retail network.

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No statistics are available to determine the size of the fruit and vegetable processing industry. It has only been possible, through various contacts, to ascertain that there is a very big potential to improve the fruit and vegetable conservation after harvest, as well as processing, based on the production statistics, the wastage due to poor handling, the low figures of exports compared to the production as well as the limited number of processing plants in the growing areas.

Year Fruits % of total cultivated area Vegetables % of total cultivated area 1998-99 646 3 334 1 1999-00 658 3 331 1 2000-01 672 3 323 1 2001-02 664 3 329 1

1.68.3 Growth of the fruit and vegetable processing industry

1.68.3.1 Cold storage collection process This is an area where the situation has to be improved. The cold storage chain is totally insufficient, as far as the country is concerned, relying mostly on freezing containers when transport of perishable goods is concerned. However, freezing facilities do not exist as far as fruit or vegetables are concerned except for a handful of units such as the Venus Distributors group which operates a freezing unit for salads, exported to the Middle East.

For example, there are no cold storage facilities at any of the airports in the country, including Karachi airport, and such an investment, including refrigerated air containers, should prove a worthwhile investment. Such project was mentioned as a possible avenue for a Joint Venture project in view of the necessary capital and technical outlay.

1.68.3.2 Fruits and vegetables washing, waxing, grading, canning, freezing, packing Upon reception of the products, washing has to be undertaken after reception control as quickly as possible to avoid unnecessary delays, damaging the products freshness. Sorting, trimming and eventually peeling and cutting the products are the next steps in the process. Certain fruits like peaches or citrus fruits have to go through a “waxing” process and grading.

No statistics are available on the extent of such processes in the industry.

1.68.3.3 Fruit juices canning, concentrate, packing According to a study conducted by Mitchells Pakistan Ltd., 4 - 5% of the vegetable production is preserved and canned or processed. These vegetables include tomatoes, peas, potatoes, mushrooms etc.

Around 10% of the total fruit production is processed into juice or other food items such as squashes, jams, marmalade etc.

1.68.4 Main raw material and components

Pakistan has no shortage of supplies in the agro business sector. However, the main challenge arises from the organisation of the collection system which is not rationally organised. This shall prove one of the main drawbacks of any food processing plant.

Table 65: Pakistan surface under cultivation, ‘000 hectares Source: Agricultural Statistics of Pakistan

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Table 66: Production of major fruits and vegetables in Pakistan, 2001-02, in tonnes Fruits Vegetables Citrus 1,830,276 Potato 1,721,645 Mango 1,037,145 Tomato 294,112 Dates 630,281 Turnip 267,440 Guava 5,838,459 Cauliflower 200,792 Apple 367,125 Carrot 195,034 Apricot 124,695 Reddish 155,935 Source: Agriculture Statistics of Pakistan (ASP)

1.68.4.1 Fertiliser The Government ensures the availability of fertilisers throughout the country. Fertilisers are being produced locally, some types are imported but in very small quantities. Major fertiliser producers are Fauji fertilisers and Engro Chemicals.

1.68.4.2 Seeds The Federal Seed Certification & Registration Department regulates the quality during flow of the seeds from breeder to grower. To provide certified crop seeds to the grower, the Public sector Seed Corporation in Punjab and Sindh, the Department of Agriculture in Balochistan and NWFP and 394 seed companies in the private sector, including 5 multinationals, have been entrusted with the task of seed production, processing and marketing.

1.68.4.3 Irrigation The mode of irrigation is flood irrigation which is inefficient as it results in huge loss of water. Modern irrigation systems, like drip irrigation, should ensure uninterrupted supply of water round the year. Water shortages throughout the country, dependant on the weather, are an area of concern to the Government, which is developing the construction of dams for irrigation.

1.68.4.4 Pesticides Government ensures availability of pesticides throughout the country. Mostly imported pesticides are used.

1.68.4.5 Equipment and machineries It has not been able to evaluate the quantities of equipment used in this industry in Pakistan. The main equipments used in the fruit and vegetable conservation processes are the following: – Extractors-Fruits & Vegetable juice Depositors- Food processing – Filters- Fruit Juices Slicers – Waxers Blenders – Grating Machines Food Coating Machines – Fruit Washing Machines Blanchers – Beverage Mixers Canning Machines/Sealers/ Labelling Machines – Bottling machines Lab equipment/ Quality Control – Liquid Solid Separators Peelers/ Presses – Sorters/ Graders Filling machines – Chilling Plants Freezing tunnels

The majority of equipment is imported from the USA, China, Germany and other EU countries by the companies in the organised sector. Some medium and small units in the unorganised sector are using local equipment as well.

1.68.5 Cost factor analysis

1.68.5.1 Labour - Self employed work force - Low paid educated/ uneducated industrious labour is available in rural areas of Sindh & Punjab - mostly unfamiliar with productivity/ quality issues

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1.68.5.2 Raw Material - Certified seeds are available throughout the country; - Packing material for export is also available locally, however in limited supply compared to the potential needs of the industry; quality and design is often not up to western standards. - Fertilisers are being produced locally, some types are imported but in small quantities.

1.68.5.3 Energy - Energy cost is not significant in this sector due to low usage. However its unreliability might prove a burden in view of the necessity of back up generating power for the processing as well as the storage facilities.

1.68.5.4 Finance - Financing available at very low cost but only to the organised sector. As the fruits and vegetable sector mainly comprises of the unorganised sector, the Government of Pakistan through SMEDA and micro finance banks is providing working capital to the small players. - It should be considered however that collection of the basic products from the farmers shall be organised on a cash or quasi cash basis.

1.68.5.5 Logistics - Satisfactory rail, road and sea links. However, a large number of villages and rural areas are not well connected through road networks - More villages will have to be electrified.

1.68.5.6 Productivity/ price evolution - Due to the perishable nature of the crops and the lack of proper facilities, nearly 50% of the fruit and vegetable production is lost during harvesting, transportation preservation and storage. Lack of proper conservation facilities explains the present high ratio of wastage, with farms distant from the consumption centres. - Exports of fruits stand at 4 to 5% of total production. - Only 3% of the total fruits and vegetables pass through the processing channel.

1.68.5.7 R&D - The Pakistan Agriculture Research Council and provincial agricultural departments are in charge. Also, it is worth mentioning that the agricultural sector does not appear very well organised, lacking efficient Associations to represent the interest of its members.

1.68.5.8 Quality and certification - The promotion of Organic Farming, to minimise the usage of pesticides and fertilisers, is being developed, together with the promotion of EM (effective micro organism), which enhances the crop yields, without the use of pesticides and fertilisers. - The development of the Quality and Certification requirements when exporting to the western markets, especially the Hazard Analysis and Critical Control Points (HAACP) will have to be developed for the food processing industry. At present, analysis is often done through foreign laboratories when specific requirement are involved.

1.68.5.9 Government Incentives and policy towards the sector - Foreign Equity 100% for first 5 years, 60% afterwards - Investment No minimum / maximum limit - Gains Repatriation Remittances of capital, profit and dividends are allowed - Credit Facilities Credit available for Corporate Agricultural Farming (CAF). - Land Holdings

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No Maximum Limit, - State Land leaseable for 50 years and extendable for further 49 years - Custom Duty Zero - Tax Relief 50% depreciation of Plant Machinery and Equipment (PME) in the first year - Dividends CAF Dividends not subject to tax - The Ministry of Science and Technology plans to launch a project for production of dried fruits at a total cost of Rs. 38million in collaboration with the private sector. The project aims to add value to the fruits by processing and preserving for longer shelf life. The project is expected to generate USD 600,000 in foreign exchange earnings in the first year of its operation. - The institution engaged in dehydrating vegetable is the Pakistan Council for Scientific and Industrial Research (PCSIR), having a capacity to dehydrate 1.5 M tons per day. National Food and Icepak Limited, Lahore are other significant processors of vegetables. The units claim to export 40% of their total production.

1.68.6 Analysis of Import & Export Flows

1.68.6.1 Analysis of the main imports Imports of vegetables originate mostly from Australia, Canada and China on a more or less equal footing.

Imports of Fruits originate mostly from Indonesia (52%) and Afghanistan (14%). For more details, see import and export statistics in 1.68.13.

1.68.6.2 Analysis of main exports per type of exports, per country of origin The main buyer of Pakistan vegetable exports is Sri Lanka (40%), followed by Saudi Arabia, while Europe comes only afterwards for a smaller amount.

Exports were heavily directed to India in the past, representing up to 30% of the total exports. However, due to the recent problems between the country, exports have been redirected with India share being much reduced10. The Middle East countries represent now the largest importers with more than 30% of the total while Europe exceeds 10% and the USA around 5%. For more details, see import and export statistics in 1.68.13.

1.68.7 Regional production structure

Table 67 presents a regional breakdown of fruit and vegetable production. The NWFP is suitable for the production of deciduous fruits, southern Punjab, i.e., Multan and for mango, Sargodha and Bhalwal for citrus fruits, while Okara and Sailkot for potato production.

Table 67: Pakistan, regional production of fruits and vegetables, in tonnes Fruits Vegetables Region Production % Share Production % Share Punjab 3,580,196 60.67% 2,082,008 72.45% Sindh 917,013 15.54% 202,603 7.05% NWFP 461,932 7.83% 358,741 12.48% Balochistan 941,740 15.96% 230,389 8.02% Total 5,900,881 100.00% 2,873,741 100.00% Source: ASP

10 Such trend may change depending on the improvement of the relationship between Pakistan-India and the progress of the newly agreed SAFTA under SAARC.

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1.68.8 WTO rules and regulations

Elimination of subsidies in the western countries should open up new markets with great export potential.

Consumer choice and preferences will be dictating the trends in the domestic and international market. It is understood that hygiene market oriented processing activities will be the trend in the future, not only for exports to the developed markets, but also in the local market.

Availability of testing laboratories, quality surveyors in the agro business shall be an area for development along side the growth of the industry.

Quality agricultural products, with diminishing use of fertilisers and pesticides, will be the hallmark of post WTO scenario.

1.68.9 Local and regional competition

1.68.9.1 Competition in the export markets

Table 68: Pakistan, export of major fruits and vegetables in Pakistan in 2001-02 Fruits Vegetables Item Quantity Value Item Quantity Value (tons) (Rs '000) (tons) (Rs '000) Kinnow 121,692 1,278,673 Potato fresh 56,987 373,575 Mango (Fresh & Dried) 47,561 861,757 Onion fresh/chilled 53,379 332,887 Dates (fresh and dried) 77,471 1,694,851 Vegetable dried 3,609 44,493 Banana fresh 3,689 11,330 garlic 2,479 94,575 Apple fresh 818 18,359 Brinjal 2,346 5,593 other fresh fruits 25,676 430,465 Other 8,884 59,535 Source: ASP

Table 69: Pakistan, major export markets of Kinnow (mandarin and oranges) – global exports in USD million Europe 2,002 Africa 570 North America 495 Asia 289 Oceania 101 Pakistan 140 Source: Small & Medium Enterprises Authority (SMEDA)

Table 70: Pakistan, major orange and mandarin producing countries (1999 figures) Country Area harvested (000Acres) Production (000MT) World 13,343 75,181 Brazil 2,615 20,079 USA 886 9,442 China 3,318 8,316 Spain 525 4,731 Mexico 818 3,788 Italy 343 2,544 Iran 384 2,476 India 321 2,000 Pakistan 473 1,990 Egypt 294 1,950 Source: SMEDA

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1.68.9.2 Domestic competition - Fruit and vegetable in Pakistan are only graded for exports; this practice seems to be very weak in the domestic market. Organised sector operating in Pakistan with proper grading appears to ensure high profits. - Demand for Dehydrated Vegetables exists with the defence forces, Pakistan International Airlines and hotels. Consumers demand will have to be created through marketing development. - Availability of tomatoes in the shape of tomato paste during off peak seasons for both export and local consumption.

The Mitchells and the Shezan groups are the market leaders in squashes with 44% and 31% share respectively.

The Fruit juice sector is dominated by Nestle with around 55% market share followed by Shezan International with 28% share.

The major players in the jam, tomato ketchup and marmalade segments are Mitchells, Shezan International, Salman’s (Pvt.) Ltd., and National Foods ltd.. The market share is not available but Mitchells is the clear leader.

The Vegetable Powder market is dominated by National Foods. Here again, market size and share are not available.

1.68.10 Listing of major local companies

Mitchell's Fuit Farms Ltd. Fax: 7590376 Block No.1-A,Sector G-7/4 E.mail: [email protected] Street No.40 Islamabad Ph: 92-051-8122669 Tops Food & Beverages Ltd. E.mail: [email protected] 3-National Park Road Rawalpindi Ph: 92-051-5567047 Ahmed Fod Idustries (Pvt) Ltd. Fax: 5565461, 5584420 D-112,Naurus Road,S.I.T.E. E.mail: [email protected] Karachi 75700 Ph: 92-021-2563524, 2563520 E.mail: [email protected] A.M.K. International 12,Sami Chambers,2nd Floor Bambino Food Industries (Pvt) Ltd. Corner Aram Bagh 75-K,Block-6,PECHS M.A. Jinnah Road Karachi 74400 Ph: 92-021-4543266 Karachi Ph: 92-021-2621623 Fax: 92-021-4545232 Fax: 2628290

Hamdard Laboratories (Waqf) Pakistan Al-Hamd Establishment III-E 5/8,Al-Majeed C-746,1st Floor,Block-2,PECHS Hamdard Centre,Nazimabad-III Tariq Road Karachi 74600 Ph : 92-021-6620945, 6616001 Karachi Ph: 021-92-4939747 Fax : 661755 Fax: 4939747 E.mail : [email protected] Scintilla International Popular Juice Industries SD-160,Askari Housing Complex 311-313,Chapal Plaza Gulberg-III Hasrat Mohani Road Lahore 54660 Ph: 92-051-5867014 Karachi 74000 Ph: 92-021-2420222-3 Fax: 5867057 Fax: 2426518 E.mail: [email protected] E.mail: [email protected] Shelta International Shezan Iternational Ltd. 130-E-1,Main Boulevard L-9/22,F.B Industrial Area Gulberg-III Karachi 75950 Ph: 92-021-6349222-3 Lahore Ph: 92-041-5759831 Fax: 6313790 Fax: 5752903 E.mail: [email protected] E.mail: www.jamals.com/shelta

Benz Industries Limited Subhani Trading Co. 10-K.M.Multan Road Ground Floor,Umer Plaza Lahore Ph: 92-021-5412413 1-Mozang Road Fax: 7226901 Lahore Ph: 92-042-7122009 Fax: 7122010 Cdl Foods Limited E.mail: [email protected] 135,Ferozepur Road Lahore 54600 Ph: 92-042-7581556-8 United Freshways

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#2,Sheikh Inayatullah Building Fax: 4529740 1st Floor,Liberty Market E.mail: [email protected] Gulberg Lahore Ph: 042-5750446 Pak Exports Traders Fax: 5750518 Flat No.208,2nd Floor E.mail: [email protected] Data Appt.137 Garden West Karachi 74550 M.A. Links 2583-E,Nishter Road Icepak Ltd. Zakaria Medical Centre Bldg. 720 Landmark Plaza, Jail Road, Multan Ph: 543524 Lahore, Pakistan Fax: 543524 Mansoor ARIFEEN Chief Executive E.mail: [email protected] Tel: + 92 42 571 46 90 King Citrus Trade Fax: + 92 42 571 22 31 1 K-14,Nazimabad [email protected] Karachi 74600 Ph: 92-021-4313494

1.68.11 Listing of European and other foreign companies present in the sector

Nestle Milkpak Ltd. Ph: 92-051-2271875, 2271874 1st Floor, Yasin Plaza Fax: 92-051-2821899 74-W, Blue Area, Islamabad

1.68.12 Main sources of information

Pakistan Agricultural Machinery and Implements Manf. Association Pakistan Beverage Manufacturers' Assn. 6/21-26, Nazar bagh M-318, Model town extension g. T. Road Lahore Tel: 042-5167316/021-2569801-5 Peshawar Tel: 091-211835 Fax: 042-5167306/021-2563119 Fax: 091-216723 All Pakistan Fruit & Vegetable Exporters Pakistan Agricultural Pesticides Assn. Importers & Merchants Association 909-910, Park avenue, p.e.c.h.s. 8/2 new onion & potatoes market Block 6, Shahrah-e-Faisal University road Karachi Tel: 021-4541562 Karachi Tel: 021-4937132/4937125 Fax: 021-4546131 Fax: 021-4937126

Croplife Pakistan Pakistan Metal Containers 909-910, Park avenue,block 6, p.e.c.h.s. Manufacturers Association Shahrah-e-Faisal d-114, Hill street Karachi tel: 021-4541562 Manghopir road Fax: 021-4546131 s.i.t.e., industrial area E.mail : [email protected] Karachi Tel: 021-2571951

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1.68.13 Import and export statistics

Table 71: Vegetables (fresh, chilled, frozen, preserved, preparated), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 10,569 34,410 55,594 37,233 36,740 174,546 Total import value 56,742 102,060 87,129 144,519 137,281 527,731

1997-2001 1997-2001 Exports by country Imports by country Value % Value % Sri Lanka 69,732 40.00% Australia 106,574 20.20% United Arab Emirates 36,727 21.00% China 92,807 17.60% India 17,013 9.70% Canada 87,761 16.60% France 12,695 7.30% Myanmar 50,131 9.50% Switzerland 8,846 5.10% India 26,853 5.10% others 16.90% others 31.00%

2001 SITC 054; 056 SITC 054 SITC 056 Exports by country Value % Value Value Sri Lanka 9,207 25.10% 9,198 9 India 8,364 22.80% 8,356 8 United Arab Emirates 7,523 20.50% 7,422 101 Afghanistan 3,132 8.50% 3,108 24 Saudi Arabia 1,552 4.20% 1,458 94 Switzerland 1,468 4.00% 1,468 France 968 2.60% 968 Malaysia 672 1.80% 672 United Kingdom 456 1.20% 283 173 Oman 446 1.20% 443 3 Canada 402 1.10% 364 38 USA 401 1.10% 389 12 Iran 336 0.90% 336 Qatar 315 0.90% 300 15

2001 SITC 054; 056 SITC 054 SITC 056 Imports by country Value % Value Value Canada 30,479 22.20% 30,453 26 Australia 30,175 22.00% 30,174 1 China 26,509 19.30% 26,342 167 Myanmar 11,459 8.30% 11,459 Singapore 8,913 6.50% 8,908 5 Iran 7,829 5.70% 7,767 62 Thailand 4,111 3.00% 3,883 228 Afghanistan 3,355 2.40% 3,353 2 India 3,064 2.20% 3,064 Netherlands 2,649 1.90% 2,031 618 USA 2,137 1.60% 1,685 452 Indonesia 1,108 0.80% 1,080 28 Italy 926 0.70% 926 Source: PC&A Calculations based on COMTRADE database

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Table 72: Fruits (fresh, dried, preserved, preparated, including juice), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 79,612 69,456 71,689 89,259 78,043 388,059 Total import value 52,774 46,981 73,170 67,628 53,125 293,678

1997-2001 1997-2001 Exports by country Imports by country Value % Value % India 110,504 28,5% Indonesia 152 399 51,9% United Arab Emirates 71,971 18,5% Afghanistan 40 631 13,8% Saudi Arabia 24,870 6,4% Iran 26 257 8,9% United Kingdom 20,512 5,3% Sri Lanka 21 782 7,4% USA 17,322 4,5% Thailand 17 115 5,8% others 143,015 36,9% others 35 493 12,1%

2001 SITC 057-059 SITC 057 SITC 058 SITC 059 Exports by country Value % Value Value Value India 23 331 29,9% 23 331 United Arab Emirates 15 976 20,5% 15 850 70 56 Indonesia 5 118 6,6% 5 118 United Kingdom 4 923 6,3% 4 834 12 77 Saudi Arabia 4 895 6,3% 4 847 18 30 Germany 3 600 4,6% 3 402 198 Philippines 2 378 3,0% 2 378 Sri Lanka 1 952 2,5% 1 903 49 Afghanistan 1 724 2,2% 1 498 226 USA 1 499 1,9% 1 385 114 Singapore 1 400 1,8% 1 364 2 34 Malaysia 1 049 1,3% 1 035 14

2001 SITC 057-059 SITC 057 SITC 058 SITC 059 Imports by country Value % Value Value Value Indonesia 23 729 44,7% 23 694 29 6 Afghanistan 10 010 18,8% 10 010 Sri Lanka 4 319 8,1% 4 319 Iran 4 167 7,8% 4 166 1 United Arab Emirates 4 091 7,7% 3 884 15 192 Thailand 3 102 5,8% 1 894 1 124 84 Malaysia 1 025 1,9% 887 55 83 India 540 1,0% 540 Singapore 374 0,7% 295 31 48 Philippines 207 0,4% 174 33 Yemen 203 0,4% 203 Myanmar 182 0,3% 182 Germany 133 0,3% 133 United Kingdom 114 0,2% 64 50 China 105 0,2% 90 15 Australia 105 0,2% 17 88 Source: PC&A Calculations based on COMTRADE database

1.69 Fisheries

1.69.1 Overview

Pakistan has a total coastal line of 1,050 km and a territorial water area of approximately 300,270 sq km. Pakistan’s fishing grounds are termed rich in marine life with a vast variety of species having

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commercial value. However, Pakistan’s consumption of fish is one of the lowest in the world: 1.6 kg per person per year, and thus, about 30% of the total production is exported, representing around USD 150 million, during the last decade. The stagnation of the production and export is mainly attributed to the highly unorganised nature of the sector, lack of focus in Government policies and little institutional investment in the sector.

The exports are mainly dependent on a few basic species, with very little value addition. Most of the fish catch is marine which comprises 71% of total fish exports. Pakistan’s main export markets are the EU, the USA, Japan and the Middle East countries.

1.69.2 General description of the sector

There are important post fishing losses due to the handling of the fish catch on board and long voyage time, including reaching the export facilities at Karachi airport for fresh fish from non Karachi fishing ports. Also the airport does not have cold storage facilities. Another drawback is the congestion at the with more than 16,000 fishing boats operating in Sindh zone. Finally, the boats are not equipped with flaking ice machine, therefore damaging the fish through the pouring of heavy blocks of ice on the catch.

Marine is non-existent contrary to India and Bangladesh.

There are 38 units in Pakistan having a freezing capacity of 800 tonnes per day and storage capacity of 10,000 tonnes. Out of these, most are located in Karachi and two in Pasni and Gwadar.

Total turnover Rs. 30 bn Exports: Rs. 5.2 bn % in GIP 0.80% Total No. of Companies Overall N/A 38 Processing units- 27 used for refrigeration Total Processing Capacity- 450 tonnes/day Summary of registered fishing vessels is given below:

YEAR 2001 SINDH BALOCHISTAN Sail Boats 6312 278 Trawlers 2610 - Gill Netters 3702 - Row boats Mostly unregistered -

Total No. of Employees Indirect- Over 1 mn Direct- Marine – 120,000 Inland - 240,000 Total turnover 620,000 tonnes p.a.(2001) Total Investment Rs. 10 bn (Industry Estimate)

1.69.2.1 Industry Structure This sector offers employment to over one million people, most of which work as fishermen. There are 38 processing units out of which 27 are used for refrigeration. Their total capacity is about 450 tones per day. The main fishing ports are Karachi, Gwadar and Pasni.

The Karachi harbour is the biggest and most important harbour for fishing in Pakistan. Infrastructure facilities available include 10 floating piers with a berthing capacity of 32 vessels on both sides. There is also an ice/ oil supply bunker available the for future accommodation of a 300 tons / day flake ice plant and an oil dispensing station. This harbour is handling over 2000 vessels.

The was constructed to promote deep-sea fishing. It has a 709-meter long jetty. The Gwadar fish harbour is the third important harbour in Pakistan and has a 416-meter long and 65- meter wide jetty.

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Table 73: Pakistan fish production (in '000 tons) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 MARINE 499 419 405 395 422 433 475 475 480 482 485 INLAND 123 140 136 160 168 164 180 180 185 172 170 TOTAL 622 558 542 555 590 597 655 655 665 654 655 Source: Karachi Chamber of Commerce and Industry (KCCI)

Table 74: Pakistan Exports of Fish & Fish Preparations, values in USD million 1997 1998 1999 2000 2001 2002 2003 171.6 122.6 138.9 137.8 125.6 106.8 110 Source: KCCI

1.69.2.2 Main industrial processes In line with the commonly used processes in the fisheries industry, in Pakistan, various processes are used including freezing which involves storage after decreasing the temperature of the fish product from 5 degrees to – 40 degrees.

Fish processing consists of the following processes: - Value Addition Process - Freezing - Packaging

1.69.2.2.1 Value Addition Process Based on the end markets for the fish products, selection of the is done upon landing of the catch in the port.

The market trends suggest that there is strong demand for quality oriented ready to eat fish products. Fresh and quality fish enjoys a premium market rate and sales are virtually guaranteed.

1.69.2.2.2 Freezing There are three major forms of freezing:

- Nitrogen Freezing: Nitrogen freezing technique is a very recently developed technique and is currently under experimental phase. The process preserves the quality and freshness of the product within a minute and the shelf life of the product is about 1 year. As the technique is in the experimental phase the operating costs are high and it is not used in Pakistan.

- Individual Quick Freezing (IQF): Individual quick freezing technique commonly known as IQF is the most cost effective and the most widely used method of freezing. The IQF process takes only 3 to 8 minutes (depending upon the product) to bring down the product temperature from 5 degrees to – 40 degrees and the shelf life of the product increases from a few days to about 6 to 8 months. IQF is the most recommended form of freezing and several countries, including the EU, are now planning to make IQF a pre requisite for imports. The final customer of an IQF product is the household individual who purchases it for his consumption. Such freezing method is not used in Pakistan, while a number of the people met did consider entering into this process eventually.

- Blast Freezing: Blast freezing technique is the most basic form of processing which is only used in developing countries. The process takes about 8 hours to freeze the product and is rather expensive. Furthermore, such product sells at a discount. Most customers for this kind of products, overseas, are re-processors who treat it through an IQF process. Blast freezing is the method presently used in Pakistan.

It is also worth mentioning that Pakistan is not equipped for Peeled, Deveined glazing (PUD Glazing), mostly applied to the individual freezing of small of which there are a very large supply locally. This hinders substantially the exports of these shrimps at added value. At present, most is exported frozen to Dubai, which has such PUD facility.

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1.69.2.2.3 Packaging Packaging is as important as processing. The products have to be packed in food grade, convenient, attractive, economical and market oriented packs with proper brand names on it. The broad packing requirements vary from product to product but some of the major types of packaging are: - Canning - Vacuum Bag Packing - Shrink Wrapping - Jumbo Packing

In Pakistan, there is only one canning factory specialising in meat, with the tin boxes imported from the USA. Most of the other deliveries are done through pack freezing, in plastic bags within carton boxes.

1.69.2.3 Current Status of the processing industry The fish-processing sector of Pakistan is in a far better shape than the fishing sector. But still the processing sector has not kept pace with the International technological advancements, the change in demand patterns and customer preferences, with as a consequence, lower prices and loss of market share.

Except for Blast freezing plants (so called processing units), there are no modern value added fish processing plants producing products like breaded filet, buttered shrimps, fish fingers, fish cakes, fish paste, fish sauce or surimi products.

The three major categories of exports oriented fish processing activities in Pakistan are freezing, canning (only one plant is operational for crab meat) and production.

In the traditional sector, curing is the most popular method of fish preservation which accounts for considerable quantities of finfish, fish maws and shark fins.

1.69.2.4 Main Raw Material/ Major Products

Table 75: Types of fish catch in Pakistan No F.A.O Group Percentage 1 Herrings, Sardines, Anchovies 33.3 2 Red fish, Bass, Congers 17.5 3 , Bonito, Bill fish 12 4 Jack mullet, Sauries 11.4 5 Shark, Ray, Cimaeras 6.3 6 Shrimp, Prawns 7 7 Squid, Cuttle fish, Octopii 1.2 8 Mackerel, Snoek, Cutlass fish 0.8 9 Flounders, Halibuts, Sole 0.4 10 Shads 0.2 11 , Spiny, rock Lobsters 0.1 12 Sea Spiders, 0.1 13 Diadromous fish 0.1 14 Miscellaneous marine fish 9.6 TOTAL 100 Source: FAO reports

Nitrogenous Chemicals used for freezing and processing are imported from China, Korea, Japan and USA.

1.69.2.5 Main Machinery and their origin The following type of vessels are currently operating in the fishing sector: – Trawlers – Gill netters – Long liners

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– Howra for fresh trash fish – Mechanical sail boats – Row boats

Most of the trawlers are equipped with modern electronic instruments like GPS, sonar and satellite telephones. The sanitary conditions have been improved further to a European Union mission, and the conditions are deemed satisfactory by the EU.

The Karachi Fishing port has been given the A grade by the EU, whereby, India has only a grade B rating.

Table 76: Summary of registered fishing vessels, 2001 SINDH BALOCHISTAN Sail Boats 6312 278 Trawlers 2610 - Gill Netters 3702 - Row boats Mostly unregistered - Source: ASP

The vessels are locally made or sometimes imported as scrap and then refurbished in Pakistan. Local shipyards are fairly active, with a number of the wooden fishing trawlers exported to Iran.

The refrigeration and freezing plants also use machinery which has mixed components (imported as well as local). The machinery installed is inadequate and somewhat obsolete with relatively high energy consumption.

Industry sources their freezing equipment from various European countries, China being mentioned as a new potential supplier of equipment.

1.69.3 Cost factor analysis

1.69.3.1 Labour - Self employed work force - High level of skill not required - Easily and cheaply available, especially in Karachi, Gwadar, Pasni and other coastal areas of Sindh and Balochistan - Uneducated work force resulting in low productivity.

1.69.3.2 Raw Material - Abundant/low cost fishing vessels - Packaging material used is local as well as imported from USA, Germany etc. - Nitrogenous Chemicals used for freezing and processing are imported from China, Korea, Japan and USA.

1.69.3.3 Energy - Fuel costs are high for old and outdated fishing vessels. Fuel is easily available around the coastal fishing areas. - Electricity supply reliability also remains an issue like in most part of the country, implying added cost through the necessity of back up power generation.

1.69.3.4 Logistics Satisfactory equipment is available for the export of fresh fish. Refrigerated containers are in ample supply to accommodate sea transport. It is worth noting that there is no cold storage facility at the airport, while there are no export facilities for the fishing ports outside Karachi, with long road transport delays. This represents an important draw back for the export of these ports’ catches.

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1.69.3.5 Productivity The Fishermen Co-operative Society (FCS) has embarked upon an aggressive plan to upgrade the quality of the fishing vessels. Boats' fish holds have been modified with poly-urethane insulation and glass reinforced plastic (GRP) lining besides structural changes to accommodate fish crates. These boats are already registering a 40% saving in expenditure on ice. In terms of value, it is a saving of Rs 25,000 per month. Modification of the boats has helped reduce post harvest losses and increased exportable quantity of landed catch. These boats have been upgraded as per EU's recommendations, and to meet global quality standards.

Exports are mainly dependent on a few basic species, with very little value addition.

Finally the absence of implies a great dependence on the seasonality of the catches, with best months being August, September, as well as May and June.

1.69.3.6 R&D, quality controls and certification Due to better hygienic conditions at the harbour and improved seafood processing procedures, the number of certified seafood units allowed to export to the EU, has increased from seven at the end of 1999-2000 to 11 by the end of December, 2000, 14 by the end of 2001 and 16 at present.

- R & D is mostly carried out by exporters in the relatively organised segment of the fisheries sector. - The Government is sponsoring a campaign for promoting packaged and branded products, and awareness is being created for maintaining clean and hygienic conditions. - Quality controls and certification regulations has been regularly monitored by the EU and is deemed acceptable (Category A has been granted by the EU) and individual processing plants are regularly inspected and given EU accepted grading. There are sixteen approved plants at the moment.

1.69.3.7 Government incentives - Plant, Machinery and Equipment (PME), not manufactured locally can be imported subject to a 5% custom duty under SRO 439(1)/2001 dated 18.06.2001. - The tax relief (first year allowance) on investment in Plant, Machinery and Equipment (PME) is 90% of the Cost of the PME.

The following measures have also been taken for the fisheries sector: - Fishing/catching stage operators are being given the status of indirect exporters to facilitate duty- free import of machinery and equipment like navigational equipment, fish finders, storage and handling equipment. - A committee of stakeholders is being set up to pursue the commercial plan developed by the export promotion bureau, and implement its recommendations for the fisheries policy. - To promote aquaculture, suitable lands next to sea can be made available. - Duty-free import of shrimp’s meal and baby shrimps should be allowed. - To promote export of sea foods products (as against commodity), lowest withholding tax (0.75%) will be applied for fish and fisheries products packed in retail packs of 500gm to 2Kg.

1.69.4 Analysis of import and export flows

The European Union is the largest importer of fish/seafood from Pakistan, and its share in the Pakistan's total exports, is around 55%. Pakistan's total production of both marine and inland fish is approximately 650,000 tonnes out of which 73% is harvested from the marine resources and 27% from the inland sector.

Pakistan is the 27th largest producer of fish/seafood in the world with about Euro 150 million exports per annum.

India fish exports are estimated at about Euro 2 billion while Bangladesh exports reach Euro 300 million

For details, see section 1.69.11.

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1.69.4.1 Analysis of the main imports, per type of imports, per country of origin There are quasi no imports of fish and sea food into Pakistan which reflects the fact that the country local market is not very attractive. Pakistanis are among the people with the least consumption of fish per head.

1.69.4.2 Analysis of main exports, per type of exports, per country of origin Exports are rather evenly distributed among the following countries: UK (17%), Japan (14%) and a number of countries in the 10% range like China, The Netherlands, Sri Lanka, and the USA. This shall provide a good base for export development when and if the processing capacity of the country is improved.

1.69.5 Analysis of the main trends

The coastal areas of Sindh and Balochistan, Karachi, Gwadar, Pasni are the most suitable for the fisheries sector due to the concentration of players and their strategic location.

1.69.5.1 Location Major part of the fish catch in Pakistan is Marine, which forms about 73% of the total catch. The Arabian Sea, which washes the coast of Sindh and Balochistan, has rich fish deposits of commercial significance in close proximity. Pakistan has a very long range of coast-line with a number of bays and a broad continental shelf lying in front of the Indus delta and which prove ideal for growth of marine life in general and fisheries of commercial importance in particular.

The harbours and main landing points with their provincial location and relative importance are as follows:

Table 77: Pakistan main fishing ports No. Harbour Province Relative Importance 1 Karachi Sindh **** H 2 Korangi Sindh *** H 3 Ibrahim Haidery Sindh ** 4 Shams Peer Sindh * 5 Lath Basti Sindh * 6 Hawks Bay Coast Sindh * 7 Manjhar Sindh * 8 Sonari Sindh * 9 Mubarrak Village Sindh * 10 Kaitee Bandar Sindh ** 11 Shah Bandar Sindh ** 12 Kharo Chaan Sindh ** 13 Jatthi Sindh ** 14 Jhungi Sur Sindh ** 15 Badeen Sindh ** 16 Gwadar Balochistan *** H 17 Pasni Balochistan *** H 18 Ormara Balochistan *** 19 Gaddani Balochistan ** 20 Bhunda Wari Balochistan * 21 Beroo Balochistan * 22 Sonmiani Daam Balochistan ** Notes: * meets local users requirements ** Important *** Very important **** Most important H = Fishing Harbour Source: Smeda

It was observed that all the four fish harbours are under different administrative control. For example, the Karachi fish Harbour falls under the Government of Sindh, Korangi fish harbour falls under the Ministry of Fisheries and Agriculture, Gwadar is under the Ministry of Communication, and Pasni under

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the Balochistan Govt. This causes a lack of coordination and consistency in the Government policies towards harbour management.

An important factor common to three fish harbours namely Korangi, Gwadar, and Pasni is the lack of electricity connection from main transportation lines of KESC or WAPDA. The electricity obtained through generators is not sufficient for the needs of the harbours. The private sector is reluctant to construct processing plants due to shortage of power and other utilities.

There is no direct export facility from the Gwadar and Pasni harbours, the catch is brought to Karachi for export through poor road conditions and transportation takes 30 to 40 hours.

The Korangi port presents a very special case in the sense that it was developed at great cost through grants from the World Bank, and offers very modern and clean facilities. Unfortunately, the port remains idle in a catch 22 situation whereby nobody wants to settle processing facilities since the fishermen do not unload their fish there because of no takers and vice versa.

1.69.5.2 Trend, possible evolution The main investments which were regularly mentioned for possible co-operation with European investors have been the establishment of a glazing plant for small shrimps, the implantation of a canned plant with buy back agreement as well as quality processing plant/technological agreements to achieve the quality required by the developed markets.

Installation of a Surimi plant was also mentioned as a potential investment, as well as a facility to prepare scuttle fish rings.

Finally, shrimp farming was mentioned several times as an avenue for development, in view of the good performance of India and Bangladesh in the sector.

The installation of a cold storage depot at the airport is obviously a necessity to be also considered.

Several parties involved mentioned the very conservative attitude and low education of the people in the industry, hinting at their lack of entrepreneurship vision.

1.69.6 WTO rules and regulations

Major markets for sea-food and agricultural products are subsidised in countries like the EU and the USA and selected far-eastern countries. In the long term, and depending on the developed countries attitude towards subsidies, export opportunities might increase, however, subject to stringent quality concerns.

1.69.7 Local and regional competition

1.69.7.1 Competition in the export markets The fisheries sector has an enormous potential for exports. However, this potential is not reflected in the export earnings from the fisheries sector which has stagnated around USD 150 million, during the last decade. This scenario is mainly attributed to the highly unorganised nature of the private sector, the absence of required infrastructure and facilities, the lack of modern techniques, the lack of focus in Government policies and the absence of institutional investment in the sector. The products of the sector enjoy a great natural taste absent in fish products of many exporting countries around the globe.

1.69.7.2 Domestic competition There are no real entry barriers as far as domestic competition is concerned and a very large untapped potential is available for investors. Any new foreign investor can fully exploit this potential by using state of the art vessels, machinery and modern . Investment in related infrastructure appears also viable.

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1.69.8 Co-operation with foreign investors

Box 31: Britain to invest in seafood processing KARACHI: British investors are interested in setting up seafood processing plants and a modern shipbuilding yard at the Karachi Fish Harbour in joint ventures with local investors. A two-member delegation of traders from the United Kingdom visited the harbour on Saturday and held a meeting with seafood exporters and officials concerned. "Dr Muhammad Nawaz Baloch, MD Karachi Fisheries Harbour Authority along with Anwar-ul-Islam, Director Operations briefed the delegation about the ongoing and planned development projects of the authority," said a KFHA press release. The delegation comprising Stephen J Akelester and Rafael D Ory of Macalister Elliot and Partners UK also visited seafood processing plants at the harbour. "The delegation expressed satisfaction over working conditions at the harbour. The British traders really showed confidence in Pakistan’s seafood quality," said the release. Meanwhile, seafood exporters look confident that the visit of British entrepreneurs would prove fruitful in near future as both the visitors were keen to invest in processing plants and a modern shipbuilding yard. "They were quite satisfied and interested in setting up joint ventures as far as processing plants are concerned," said exporter Abrar Ahmed of Seagreen Enterprises when reached over telephone. "We had a detailed meeting during their (Britons) visit to our plant," he informed. However, he said it was too early to give an accurate figure of investment and time to materialise the project. "It is not decided yet. They will hold further meetings with local processors in this regard," Abrar said. Source: The News, Monday December 08, 2003

1.69.9 List of major local companies

Fauji Fish Farms B-1,Fish Harbour,West Wharf Near Khoski Sugar Mills,Khoski Karachi Tel: 92-021-2200200, 2200200 Tel: 261694, 263663 Fax: 2312476

A.g. Fisheries (pvt) ltd. Seagreen enterprises (pvt) ltd. B/5,Fish Harbour,West Wharf A/2,Fish Harbour Karachi 74000 Tel: 92-021-2312605-6 West Wharf Fax: 2310318 Karachi Tel: 92-021-2201866, 2310324 E.mail: [email protected] Mob: 0300-8232541 Fax: 2310939 Kanpa International Sales E.mail: [email protected] D-3,Fish Harbour West Wharf Road,P.O.Box: 6026 Seavita Fisheries Karachi Tel: 92-021-2312879, 2312290 B-1,Fish Harbour,West Wharf Tel: 2310044 Karachi Tel: 92-051-2202802 E.mail: [email protected] Fax: 2316206 E.mail: [email protected]

M.A. Mohamedi & co. Spectrum Fisheries ltd. 15-/A,Pak Chambers E-1,Fish Harbour,West Wharf 7,West Wharf Road P.O.Box: 6111 Karachi 74000 Tel: 92-021-2201668 Karachi 74000 Tel: 92-021-2313335, 31, 32 Fax: 2310962 Fax: 2314444 E.mail: [email protected] Marcon international (pvt) ltd. Web: www.jamals.com/spfish

No Joint Ventures have been reported in this sector.

1.69.10 Main sources of information

Deep Sea Fishing Trawlers Operators Pakistan Seafood Industries Association Association a-2, fish harbour, west wharf above Manchester house Karachi Tel: 021-2311117 Hotel Asia building, Zaibunnisa st. Fax: 021-2310939 Karachi Tel: 021-5214567/5211931 E.mail: [email protected] Fax: 021-2310601

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1.69.11 Statistics on Pakistan fish imports and exports

Table 78: Fish and seafood (SITC 03), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 176,864 131,879 140,945 149,618 129,462 728,768 Total import value 31 119 93 27 26 296

1997-2001 1997-2001 Exports by country Imports by country Value % Value % United Kingdom 119,205 16.40%Thailand 79 26.70% Japan 102,194 14.00%United Kingdom 59 19.90% Netherlands 80,958 11.10%China, Hong Kong 48 16.20% China 64,912 8.90%India 44 14.90% Sri Lanka 58,533 8.00%South African Customs U. 33 11.10% others 302,966 41.60%others 33 11.10%

2001 2001 Exports by country Imports by country Value % Value % United Kingdom 18,236 14.10% Thailand 20 76.90% Japan 15,896 12.30% Malaysia 3 11.50% Netherlands 13,340 10.30% China 1 3.80% USA 12,663 9.80% China, Hong 1 3.80% Sri Lanka 9,607 7.40% China, Hong Kong 7,268 5.60% China 7,148 5.50% United Arab Emirates 7,078 5.50% Rep. Of Korea 5,406 4.20% Belgium 5,237 4.00% Source: PC&A Calculations based on COMTRADE database

1.70 Business co-operation in the food sector (dairy, fruit & vegetable, fisheries)

1.70.1 Identification and assessment of major business co-operation, project and investment opportunities

Pakistan seems to be a golden country for Food Processing operations as mentioned by most of the persons met by the mission. Cross references to the Indian situation where often mentioned to enhance the attractiveness of Pakistan, compared to its neighbour.

The main investment opportunities were identified as follows: - Development and improvement of the collecting process, namely through the development of cold warehouses and transport chain; - Improvement of the manufacturing process (washing, waxing, grading, packing) through technical agreements, especially related to the quality of the products, the phyto sanitary constraints as well as the certification processes; - Co-operation for the marketing of the products through the major developed markets, while the less developed markets such as Central Asia, the Middle East or Africa shall be left to the responsibility of the local company; - Co-operation for brand manufacturing under specific guidelines.

1.70.2 Analysis of the most interesting forms of co-operation in the food processing sector

Contrary to the textile sector, the mission feels that the most promising form of co-operation in the Food Processing and Packaging sector shall be the establishment of joint ventures. This recommendation is based on the limited number of independent large local companies in the sector,

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its growth prospects, not only in the export markets but also in the local market to which a foreign partner would want to participate.

Contrary to the Textile sector which has a number of well established companies with which to enter into co-operation agreements, the Food Processing and Packaging Industry is a relatively new sector with only a limited number of companies, at this stage.

1.70.2.1 Subcontracting Simple contracting of orders by international firms, satisfied with the quality and ability to produce of the local manufacturers, along certain specifications, is of course the simplest arrangement for business. Providing more detailed specifications such as the packing design, the raw material to be used, or even the process to be utilised are just more sophisticated kind of trading contract, common in Pakistan.

However, the main drawback of this approach is the lack of independent suppliers with the ability to provide the quality products usually required in the developed markets.

1.70.2.2 Technical agreements Based on the available expertise in Europe, technical co-operation agreements could be implemented without the needs for investment by the international partner. These technical co-operation agreements would normally be of a limited time frame, based on a specific technical development. Due to the limited protection granted to property rights in Pakistan, it is thought that long term royalties on technical co-operation in this sector is an avenue to be considered, in view of the limited technical sophistication of this industry.

Such technical agreements should concern all size of operations in Pakistan on a short term basis.

1.70.2.3 Co-operation agreements This should be the best avenue when the local firm requires support to gain access to the developed markets, through a general and permanent improvement of its manufacturing and marketing capacities, on a long term basis. Advantages to the European partner should arise from royalties, access to goods manufactured under its trade mark as per its specifications, at a competitive price.

These co-operation agreements should concern mostly large companies, already active in the sector or eager to enter such added value markets. The main draw back of this approach is that there are only a handful of companies with such profile in this sector.

1.70.2.4 Joint Venture agreements This appears to the mission as the most promising form of development for the Food Processing and Packaging Industry in Pakistan, either with existing companies of a limited size eager to develop or with reputable firms interested to enter this market.

The advantage to the Foreign party will not only rest with the ability to source products for exports to the developed markets, but will also allow the Foreign investor a share of the domestic market which appears to present huge opportunities for development.

Advantages to the local partner are obvious in terms of obtaining, collecting and processing know how, quality and phytosanitary support as well as packing design and marketing expertise over the long term.

Despite the fact that investment finance is not an issue in Pakistan at the moment for most companies, it is felt that the important growth envisaged should provide an incentive for the local partner to accept a foreign equity in the Company.

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THE LIGHT ENGINEERING INDUSTRY

Traditionally the engineering sector in Pakistan is divided into: - Heavy Engineering - Light Engineering

The Heavy Engineering sector in Pakistan is engaged in producing cement and sugar plants, industrial boilers, construction equipment and transmission towers etc. This sector is mainly dominated by companies in the public sector.

The Light Engineering industry encompasses a wide range of product categories ranging from surgical instruments to bicycles. For our analysis, the following sectors have been chosen, on the criterion of having the highest potential for foreign investment: - Automotive - Power transmission/energy related equipment - Textile related engineering

1.71 The Auto part sector

Contrary to India, Turkey or other countries in the region, Pakistan has a car vendor industry only capable of manufacturing simple component parts. Pakistan has neither box nor engine producing facilities. In view of the huge recent increase in the local car market and the projected performance, consideration for such production should present opportunities for the local market as well as for exports.

However, three significant drawbacks might arise from the fact that: 1- Major car assemblers in Pakistan are Japanese, which may favour Japanese backed technology in their sourcing of auto parts; 2- The industry benefits from high tariff protection and local contents rules which might disappear soon due to WTO regulation; 3- The relatively low volume of production for the local market so far.

1.71.1 General description of the sector

TOTAL TURNOVER Automobile Sector Assemblers – Rs. 59 billion (Exports USD6.5 million) Auto Vendors- Rs.10.9 billion (Exports USD 31 million) % IN GIP Assemblers- 1.6% Auto Vendors – 0.2% NO. OF COMPANIES Assemblers – 22 Auto Vendors- Organised and Tier one – 780 Tier Two – 380 Unorganised and after market suppliers 840 TOTAL – 2,000 NO. OF EMPLOYEES Assemblers- 5,600 Auto Vendors- 140,000 TOTAL TURNOVER (Volume) ASSEMBLY (no. of Units) Cars - 62,893 LCVs – 12,548 Buses – 1,346 Trucks – 1,954 Tractors – 26,501 Motorcycles – 176,591 AUTOPARTS – Individually N.A TOTAL INVESTMENT USD 1.5 billion (Assembly & Auto Parts) Auto Parts – Rs. 50 billion

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Local- USD 1 billion Foreign – USD 500 million

1.71.1.1 Description of main industrial processes A typical transport vehicle comprises about 2,200 various components, most of which are produced by subcontractors. 1.71.1.1.1 Material and processes involved to produce a typical auto part component: - Designing - Mould and Die manufacturing - Forging, Casting and Machining - Sheet metal, fabrication and Press work - Plastic & Rubber Mouldings - Electrical or Electronic components - Assembly - Sub Assembly - Raw Materials 1. Iron & Steel; 2. Copper & Aluminium; 3. High & Low Density Polypropylene

1.71.1.1.2 Functional / non functional / cosmetic components: - Trims – Plastic / Seats and allied - Engine Components including oil, Water Pumps and - Suspension & - Electrical, Electronic and Allied - and Allied Mechanisms - including cooling and Heating Mechanisms - Air conditioning - Add-on and accessories - Navigation Devices including Radar detection

The majority of the above stated materials and components is manufactured in Pakistan and used as OEM (Original Equipment Manufacturers).

The after sales market is catered by local as well as imported parts and components. These parts and components are being imported in large quantities from China, Korea, Japan, USA, Germany, Belgium, Saudi Arabia etc.

A Customs General Order (CGO), dated March 2003, detailing the auto parts manufactured in Pakistan, is available with the Central Board of Revenue.

1.71.1.2 Main machinery and equipment and their origin - Mould and die manufacturing machines - Forging and casting machines - Metal fabrication machines - Plastic injection machines - Rubber moulding machines - Lathe machines - Electronic or electrical assembly and sub assembly

The machinery and equipment is imported from USA, Germany, Belgium, France, Korea, Japan, China, and Thailand. Many a machines such as injection moulding and lathe machines etc. are being manufactured locally.

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1.71.2 Main parts manufactured locally

The problems confronted by the industry in Pakistan, among others, stem from the low quality of the steel produced locally (non High Strength Low Alloy), which implies that most of the steel required has to be imported. The plastic based industry is more advanced, while it depends on moulds being fabricated outside the country. On the electrical engineering side, the industry is still primitive with a lack of satisfactory production of generators, starters or distributors.

The parts most often mentioned as worth of development in partnership with a foreign partner are the metal and plastic components which lack in quality and reliability. Alloy wheel rims as well as rubber components seem to present good opportunities for development. Gearboxes, transmission and engines, while mentioned as potential area for development should come in a second stage when the industry is more established.

The “engine” behind the growth of the vendor industry in Pakistan is the vehicles’ assembly plants which consist of three Japanese car assemblers: Suzuki, Honda and Toyota, the Korean JV Hyundai Kia as well as the two truck assembly plants JV Nissan and Hino. It seems that Volvo is also involved in truck assembly through a technical agreement. Ford and Massey Ferguson are also present through technical agreement for the manufacturing of farm tractors.

It is worth noting the presence of a tyre JV with Continental tyres, as well as two JV with Japanese partners in the manufacturing of air con for cars.

Generally speaking, the country is producing rather non sophisticated equipment, a number of those through technical agreements with various Japanese, Korean or European firms.

The main recent developments in the industry have been the following:

Announcement of two Technical agreements with Chinese truck manufacturers for the assembly of trucks; during President Musharraf visit to china in November 2003, seven technical agreements were signed related to the car industry;

Dewan Farooque, a large local group, already a partner of Mitsubishi Corporation of Japan as well as of Sam Yang Company, Hyundai Motor Company and Kia Motor Company of Korea, for the manufacturing of cars, truck and SUV just announced an agreement with BMW for the production of a series 3 vehicle as well as a Jeep.

Finally it may also be worth noting the closure of the Fiat JV, after three years of operations, in 2002, due to the weakness of the local partner as indicated by local sources.

1.71.3 Cost factor analysis

Cost factor comparisons are not available for the auto part industry in the region. A 2002 price comparison established by the Japanese car manufacturers for India and Pakistan is attached hereafter. It shows that Pakistan has a slight cost advantage in the manufacturing of similar cars.

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Table 79: Pakistan / India Japanese cars price comparison India (Annual Car Production: 750,000) Pakistan (Annual Car Production: 100,000) Model in On Rd. Price NOGL Price Equivalent On Rd. Price NOGL Price India Indian Rs USD Model in Pakistan Rs USD Pakistan Honda Honda Atlas City 1.3 LXI 727,000 10,414 City EXI 729,000 9,033 City 1.3 EXI 732,000 10,486 City EXI-S-MT 779,000 9,652 Maruti (Suzuki) Pak Suzuki 800 Euro-II 237,000 3,395 Mehran 800 297,000 3,585 Motor Corolla J 1,065,200 15,259 Corolla GLI 939,000 11,635 Corolla G Auto 1,241,433 17,783 Corolla SE 1,169,000 14,484 Auto NOGL: Net of Government Levies (excluding taxes and duties) 1 USD = Pak Rs 58.00, Indian Rs 45.33 Source: Japanese External Trade organisation (Jetro)

1.71.3.1 Cost breakdown for different automotive segments

Table 80: Pakistan auto part cost breakdown Cost Factor Cars% CVs% Tractor% Motor Cycle% Raw- Material & Parts 53 60 57 49 Overheads 15 19 14 13 Labour 5 3.5 10 9.5 Utlities 2 0.5 3.5 3.5 Sales & Marketing, Advertising 1.5 1.5 1 2.5 Research &Dev. 0.5 0 0.5 0.5 Financial Cost 2 2 1 2 Profit 4 2 8 4 Govt. Levies 17 12 5 15 Source: Engineering Development Board, Ministry of Industry

1.71.3.2 Installed capacity and production of vehicles/automobiles The production of cars has exceeded all expectations in the last two years, to achieve about 100 000 units in the year 2003. This is causing a strain on the industry, as well as the local vendor industry which has difficulties in meeting the demand.

Table 81: Pakistan auto manufacturing installed capacity Automobile Installed Capacity 1999-00 2000-01 2001-02 2002-03 Cars 100,000 32,461 39,573 40,601 62,893 LCVs 23,000 5,502 6,924 9,055 12,548 Buses 1,900 1,460 1,296 1,086 1,346 Trucks 12,500 913 512 1,134 1,954 Tractor 40,000 34,559 31,635 23,801 26,501 Motor Cycle 340,000 86,959 108,850 120,627 176,591 Source: Board of Investment

1.71.3.3 Forecasted Production

Table 82: Pakistan auto manufacturing forecasts Automobile Installed Capacity 2003-04 2004-05 Cars 100,000 92,149 115,186 LCVs 23,000 17,779 21,335 Buses 1,900 2,640 3,168 Trucks 12,500 1,473 2,210 Tractor 40,000 28,864 30,307 Motor Cycle 340,000 277,905 416,857 Source: Ministry of Commerce of Pakistan

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1.71.3.4 Estimated required Investment

Table 83: Pakistan auto manufacturing required investments Rs. In billion Assemblers Vendors Total Current Investment 14.8 50.0 64.8 Estimated Investment in 2 yrs 4.0 15.0 19.0 Total after 2 yrs. 18.80 65.0 84.8

Current direct Employment 5,600 140,000 145,600 Additional direct employment 3,000 110,000 113,000 Total after 2 yrs. 8,600 250,000 258,600 Source: Ministry of Commerce of Pakistan

1.71.3.5 Research & Development The research and development is mostly restricted to OEMs as they have to achieve high quality targets. The vendor industry is feeling a dire need of research and development facilities as they have to successfully achieve the quality targets set by the OEMs, which is a prerequisite to be able to compete with imports.

Due to technological advancement in the automobile industry, the absence for skilled and educated workforce is strongly felt, though the Government has introduced automobile engineering in the major universities. However, there is still a long way to go to fulfil the demand of the rapidly growing sector.

More information in this regard can be sourced from the Pakistan Industrial Training & Automation Corporation (PITAC), the Automotive Training and Testing Corporation (AT&TC), Lahore, and the Pakistan Machine Tool Factor (PMTF), Karachi.

1.71.3.6 Regulatory Framework/Government Policies Up to the year 1995, the Deletion Cell of the Ministry of Industries was formulating and monitoring the Deletion Programmes for the car and automobile industry. These deletion programmes were product specific, that is one deletion programme for each make and model.

Otherwise, import duties have been kept extremely high ranging from 100 to 350% till 2002. Only recently in the financial bill 2002-03, the tariff has been brought down to 75% for up to 1000cc to 200% for above 1800cc. The import duty on CKD has been retained at 35%. Thus, since its inception, the automotive industry has enjoyed heavy protection. This protection was granted to the assemblers in return for the commitment to indigenise up to a 75% level in five years from the inception of each product. Unfortunately this undertaking has not been fulfilled.

Table 84: Pakistan auto manufacturing local content Automobiles Car Motorcycles Tractors Trucks/Buses 3-Wheelers % deletion level achieved 53-70 80-85 50-85 42-65 80-85 * The% deletion level is given in range for different categories of the Automobile Sector Source: Engineering Vision 2010, EDB

In 1995, the Government constituted the Engineering Development Board (EDB) under the Ministry of Industries, to form a long-term Engineering policy leading to transfer of technology, human resource development and management of transparent deletion programmes. The EDB later chalked out a road map for the automotive industry: “VISION 2010” which outlined the growth strategy for the industry.

Specific tariff as far as import of raw material for auto parts is concerned can be obtained from CBR and Pakistan Customs CGO March 2003.

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1.71.4 Analysis of import and export flows

1.71.4.1 Analysis of the main imports, per type of imports, per country of origin Imports of Auto parts are mostly sourced from Japan which is understandable in view of the quasi exclusive set up of the car assembly plants through Japanese joint ventures.

The other main suppliers are other Asian countries. European countries are not represented in a big way, but there exist, up to a limited extend, imports from Europe which could serve as a base for further development (see section 1.71.12 for details).

1.71.4.2 Analysis of main exports, per type of exports, per country of origin Exports are limited in amount (about € 4 Millions) but have been growing fast over the last few years. Main destinations of exports are the USA, Europe and the Middle East.

It is therefore confirmed that the main reason for any investment in Pakistan would be to serve the domestic industry with a view, when quality reaches international standards, to target exports. Also, statistics confirm that one of the main draw back for investment in this sector might be the difficulty to achieve rapidly, economies of scale.

1.71.5 Analysis of the main trends

1.71.5.1 Location Most of the auto vendors are located around Karachi and Lahore due to their proximity to assemblers, urban commercial markets, seaport and raw material sourcing centres.

1.71.5.2 Role of local importers Apart from supplying parts to assemblers, a large after sales market for existing and discontinued vehicles offers a huge potential to the auto vendor industry. It is reported that the size of the after sales market is estimated at over Rs. 36 billion, mostly catered by imports and smuggled auto parts.

Many authorised dealers and distributors operate in big urban markets in Karachi, Lahore, Faisalabad, Multan, Rawalpindi, Gujranawala. The network of these auto part vendors is fairly organised. Manufacturers like Honda, Toyota, Nissan etc. have their presence in the market through these representatives.

The assemblers too are involved in the sale of imported spare parts through their service centres.

1.71.5.3 Competition from imports The auto parts industry faces a tough competition from imports, but there are examples where a few locally manufactured products are successfully competing with imported parts both in terms of quality and price. However, the auto parts industry faces a serious threat from smuggled and misdeclared imports. The estimated amount of such imports is reported to be around Rs. 18 billion per annum.

The concerned Government authorities are doing their best to curb such practices but still a lot has to be done.

The following parts are currently imported: – equipment including pumps and injectors – Gear box – – & rings – Ball, roller and plain bearings – Miscellaneous hardware items including springs

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1.71.5.4 Auto-Part Pakistan after sales market The market represents a total of Rs. 36 billion, as estimated by the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM).

Total Documented Imports represented Rs. 10 billion as per the Federal Bureau of Statistics (FBS) in 2002 and the locally manufactured portion around Rs.4 billion, while the balance according to the industry would be misdeclared/smuggled imports.

Figure 27: Market share of local manufacturers

12%

88%

Local production Imported Smugled & Misdeclared

Source: Industry estimates/PAAPAM

1.71.5.5 Competition in export markets As the Pakistani auto parts exporters are up against exporters from developed countries which have far more advanced technological resources, they are only able to compete in basic and low-end parts. The local vendors desperately need technological know-how to improve upon their quality and hence penetrate into higher-end markets. However, it appears that a number among them manage to achieve exports, which should reach nearly Euro 60 million in 2003, according to Indus Motor.

The list of auto parts exported from Pakistan can be sourced from the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM: www.paapam.com ).

1.71.5.6 Competition in the domestic market As the auto parts sector is not well organised, the technological know-how and expertise is only available to a few large exporting vendors. This should offer a huge potential for new entrants with technological know-how and modern production facilities.

1.71.6 WTO

Conformity to the WTO rules and regulations in term of protective tariffs and local components requirements are the main issues facing the industry. The ensuing competition which would affect the domestic market further to the potential reduction of the tariffs, increases the needs for improved technology, know how and productivity, for the industry to remain competitive. This is the main draw back of this sector as far as a foreign investor is concerned.

The post WTO regime is a major threat for the automotive industry as the industry / assemblers and the auto vendors enjoy Government protection (Tariff and Deletion) since its inception.

Pakistan is currently violating WTO rules No. 1 & 6, mostly concerned with the required local content. The situation is similar to India which is also in violation of a number of clauses.

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At present, the deadline for the elimination of TRIMs was December 31st, 2003. The Automobile Industry is unanimous in asking this date to be extended to December 31st, 2005. The Government of Pakistan is seeking this extension from the WTO. It is not clear yet, what kind of measures should be taken by Pakistan to continue to protect a much needed and strategic Automobile Manufacturing industry. Negotiations are going on between the manufacturers and the Government in this regard.

1.71.7 Identification and assessment of major business co-operation, project and investment opportunities

Millat Tractor, under an old technological agreement with Massey Ferguson is a very successful example of such possible co-operation between a local group and a foreign enterprise. This local group is very keen in developing further into the auto part sector, or even in the car assembly, and it has held discussions with important European potential partners in these sectors. It appears however that due to the reluctance of advanced countries potential partners, the group might settle for a technological agreement with a less advanced country counterpart.

A number of other large groups are also interested in joining forces with European technology to enter the vendor industry, such as the Habib Group, already a partner in the Toyota JV.

Apart from the existing car, truck or tractor assemblers, all linked to a foreign partner, either through Joint Ventures or technical agreements, there does exist a number of technical agreements with auto parts manufacturer in the country (see list here after).

Most of these existing technical agreements are linked to the main car / truck / tractor / assemblers’ sub contractors; therefore, the importance of the Japanese technical agreements.

The car industry, based on the much improved general situation of the country is enjoying very active developments, with new entrants, such as Hyundai and Kia recently, and BMW in the near future. To accompany these developments, local components are required in increasing number and quality. The vendor industry at present is facing difficulties to supply the requirements.

In such context, the mission is of the opinion that there are a number of opportunities to co-operate with local enterprises with a view to increase production and quality, in the following fields: - Special alloy wheel rims; - Rubber components, such as door seals, etc.; - Plastic components, such as inside door panels, etc.; - Steel components such as feet plate, etc.

Opinion has been expressed by the industry that due to the existing technicality of the industry as well as the volumes assembled, it appears somehow premature to consider transmission, gearbox or engine manufacturing. A time frame of 5 years was mentioned as the time when such complex part manufacturing should be envisaged.

Commercial fairs to establish contacts are a fairly new phenomenon in Pakistan. Let us mention however the AUTOMEX 2004 which is to be held in March 4-6 at the Karachi Expo Centre and which shall focus on automobile, motorcycles, auto parts manufacturing and use of CNG, particularly popular in Pakistan.

1.71.8 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint venture, transfert of know-how, sub-contracting etc.

In view of the size and technicality of the industry, both technical co-operation and joint ventures should be the best avenues for FDI in the country.

Evidently, the local market shall be the main target of the investment, with a view to gain market share from competitors thanks to better quality products, as well as import substitution.

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In a second stage, when the quality reaches international standard, exports shall complement the domestic activity.

1.71.9 Listing of major local companies

Agriauto Industries Ltd Manan Shahid Forgings Private Limited 5th floor, Siddique sons tower, Mominpura Road, DaroghaWala off GT Road Lahore- 3 j.c.h. Society, block 7/8, Karachi 54920 Tel: 92-21-4541540-43 Tel: 92-42-6550330 E.mail: [email protected] E.mail: [email protected] Manufacturers of: & struts (all vehicles) Manufacturers of: connecting rods, axles, hubs, gear, sleeves (hard chrome plated), , , hydraulic lift arms, lock bars. steering box. Synthetic Products Enterprises Alsons Industires (Pvt) Ltd. 127-S, SIE Township, Kot Lakhpat, Lahore. S/18, s.i.t.e. Karachi-75730 Tel: 92-42-5115506-7 Tel: 92-21-2562060 E.mail: [email protected] E.mail: [email protected] Manufacturers of: steering wheels, door handles, Manufacturers of: , assembly for two grills & wheel trims etc. wheelers as well as four wheelers, fuel, temp battery gauges, instrument clusters for four wheelers and tractors, Thermosole Industries Pvt Ltd. brake assembly for automobile. 140 main industrial area, Kot Lakhpat, Lahore Tel: 92-42-5117859, 5118512 Allwin Engineering Industries Ltd. E.mail: [email protected] National highway landhi Karachi-75120 Manufacturers of: air ducts, tank, grills, bumpers, Tel: 92-21-5015527 plastic injection and blow mouldings auto parts. Emali: [email protected] Manufacturers of: , pistons pins, cylinder liner Thal Engineering sleeves, radiator cores, radiator assemblies and cast iron, Plot 1-2, sector 22, Korangi, Karachi. fully machined parts. Tel: 92-21-5885696-8 E.mail: [email protected] Balochistan Wheels Limited Manufacturers of: Car A/c, wire harness. 1st floor, State life building, #3 Dr. Ziauddin Ahmed Road, Karachi-75530 Rastgar Engineering Company Pvt Ltd. Tel: 92-21-5682528 307 street no. 3, sector I-9/3, Industrial Area Islamabad Manufacturers of: automotive steel wheels for all type of Tel: 92-51-4-433544-5 vehicles. E.mail: [email protected] Manufacturers of: Wheels, hubs, brake disks and tractor Bolan Casting Ltd. components. F-1 SITE, Hub River Road Karachi-75730. Tel: 92-21-2579891 Exide Pakistan Ltd E.mail: [email protected] 40-K. Block-6. P.E.C.H.S Dr Mahmood Hussain Road. Manufacturers of: cylinder block, center hosing, Karachi-75400 casing, axle support, brake drums. Tel: (021) 4536750-52. 4536759 Fax: (021) 4538948

1.71.10 Listing of European and other foreign companies present in the sector

1.71.10.1 Vendor industry -Technical Collaborations

Table 85: List of technical agreements in the vendor industry Components Vendors in Pakistan Collaborating Partners Shock absorbers M/S Honda Atlas Ltd Showa, Japan Radiators M/S Allwin Engg. U.E. Radiators, Japan Car A/C M/S Sanpak Sanden, Japan Shock Absorber M/S Agri Auto Ind. Kayaba, Japan Radiator M/S Loads Pvt. Ltd Toyo Radiator, Japan Radio Cassette Player M/S Automate Ind. Panasonic Thailand Car A/C M/S Thal Engg. Denso, Japan Lamps M/S Techno Pak Koito, Japan Spart Plugs M/S Shaigan Electric NGK, Japan Air conditioners M/S Thal Engg. Denso, Japan Glass M/S NGS Pak NGS, Japan Steering case set M/S Polymer & Precision I.S. Seiseki, Japan Brake Drum Assembly M/S Alsons Auto Ltd. Nissin Kogyo, Japan

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Source: BOI

1.71.10.2 Car assembly plants Assembly plants have been setup through joint ventures with the leading auto manufacturers of the world e.g. Toyota, Honda, Suzuki, Hyundai, Kia etc. Complete list of these companies is available and can be sourced on www.paapam.com

1.71.10.3 Others Millat Tractor Ltd (Massey Ferguson) Fax: 021-5689387 Sheikhupura Road P.O Box 12023 M/S Sigma Motors (Pvt.) Ltd. (Land Rover, Discovery) Shahdara. Lahore 1-B, Street 55, F/8-4, Tel: (042)7925383-7911021-5 Islamabad. Fax: (042)7924166, 7925835 Tel: 2264243, E-mail: [email protected] Al-Ghazi Tractor Ltd. (Fiat Tractors) Manufactruing Plant at Dera Ghazi Khan. M/S Adam Motors Ltd. (Chrysler Jeep) Fiat Tractors Model 480 (48HP) Fiat Tractors Model 640 DSU-10, Pakistan Steel Downstream Industrial Estate, (65 HP) Bin Qasim, Karachi. 11TH Floor, NIC building Abbasi Shaheed Road Tel: 0201-4750777 Tel: 021-5660881-5

1.71.11 Main sources of information

Pakistan Agricultural Machinery and Implements Manf. Pakistan Association of Automotive Association Parts & Accessories Manufacturers 6/21-26, Nazar bagh 894-circular road G. T. Road near Nigar cinema Peshawar Tel: 091-211835 Lahore Tel: 042-7312452 Fax: 091-216723 Fax: 042-7237613 E.mail: [email protected] All Pakistan Tyres Importers and Dealers Association The Pakistan Automobile Spare Parts 7/12, Rimpa plaza Importers & Dealers Association M. A. Jinnah road 4/18, Rimpa plaza, plaza square Karachi Tel: 021-7729129/7722366 M. A. Jinnah road Fax: 021-7722815 Karachi Tel: 021-7721883/7728774 Fax : 021-7761938 Pakistan Automotive Manufacturers E.mail: [email protected] Association 11, Ilaco house All Pakistan Two/tri Wheelers Assemblers Abdullah Haroon road Cum-progressive Manufacturers Assn. Karachi Tel: 021-5662493/5672349 129/130, Murree road Fax : 021-5687247 Rawalpindi Tel: 051-5532301 E.mail: [email protected] Fax : 051-5556804

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1.71.12 Import and export statistics

Table 86: Auto parts import and export statistics (SITC 784), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 1 518 3 175 1 943 2 579 4 747 13 962 Total import value 38 968 44 044 39 655 56 581 67 465 246 713

1997-2001 1997-2001 Exports by country Imports by country Value % Value % USA 2 284 16,4% Japan 97 462 39,5% Bangladesh 2 184 15,6% Thailand 18 709 7,6% United Arab Emirates 1 937 13,9% other Asia 17 293 7,0% Nigeria 1 280 9,2%Rep. of Korea 16 846 6,8% United Kingdom 978 7,0%United Kingdom 10 907 4,4% others 5 299 38,0% others 85 496 34,7%

2001 2001 Exports by country Imports by country Value % Value % USA 1 252 26,4%Japan 23 565 34,9% United Arab Emirates 763 16,1%Thailand 10 555 15,6% Bangladesh 540 11,4%Rep. of Korea 6 847 10,1% Saudi Arabia 437 9,2%other Asia 3 310 4,9% Oman 404 8,5% China 2 858 4,2% United Kingdom 375 7,9%United Kingdom 2 692 4,0% Germany 271 5,7% Philippines 2 439 3,6% Morocco 203 4,3% United Arab Emirates 1 788 2,7% Sri Lanka 168 3,5% Italy 1 662 2,5% Tanzania 137 2,9% Malaysia 1 644 2,4% Belgium 132 2,8% Indonesia 1 504 2,2% Kenya 122 2,6% Singapore 1 329 2,0% Japan 106 2,2% USA 1 216 1,8% Turkey 1 059 1,6% Hungary 923 1,4% Germany 871 1,3% Brazil 578 0,9% Australia 433 0,6% Source: PC&A Calculations based on COMTRADE database

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1.72 Textile related engineering

The Pakistan’s textile engineering sector is underdeveloped and under utilised. The major engineering developments in the past years have been concentrated into: - Spinning Frames - Conventional Weaving Looms - Conventional Wet Processing Machines.

The sector currently caters for spares, components for modernisation and parts for machines used in cottage or small scale enterprises.

1.72.1 General description of the sector

TOTAL TURNOVER Rs. 55-60 billion

% IN GIP 1.6% ( Import Substitution of USD 1 bn) NO. OF COMPANIES 500 Companies 80% Small workshops 15% Medium engineering units 5% Large units The large units are mainly in the public sector. NO. OF EMPLOYEES 50,000 TOTAL INVESTMENT Rs. 18-20 billion

It is very difficult to have a precise overview of the sector structure and capacity. No significant association does exist and the sector is not well organised.

1.72.2 The Industry in Asia

The rate of investment in the textile industry is the highest for Pakistan (in Asia) mainly in the spinning and weaving sectors. Most of the new investments went into replacement of old machinery rather than enhancing capacity11

1.72.2.1 Spinning machinery The spinning machinery is the most important machinery segment in the industry.

Among the three major categories of spinning machinery, the short staple (cotton-type) is for producing ring spun cotton yarns and yarns made from other fibres. The long staple (wool-type) is for producing ring spun wool yarn and yarns made from other fibres. Open end is the newest technology perfected over the last 25-30 years giving higher productivity and a more even yarn. It is however more capital-intensive and has limitations in terms of finer count yarns. Short staple machinery therefore continues to maintain a market share nearly five times that of open-end machinery.

World shipment of short staple spindles totalled 3.56 million, of which 82.5% were shipped to Asia. A cumulative shipment estimate over the last decade (1993-2002) shows a predominantly large share of India in total shipments (36%). China lags behind India, accounting for 8.9% share of total shipments, while Pakistan represented 5% and Bangladesh 3.4%.

Shipments of technologically advanced open end spinning machines have picked up from all over the world though Asia remains the largest destination with a 70% share.

11 Quoted from a paper by Dr Sanjay Gupta, an Associate Professor at the National Institute of Fashion Technology, New Delhi, India.

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In spite of the high growth in machinery shipments, the installed capacity in spinning (net of total installations and closures), did not register an impressive growth in Pakistan. This implies that most of the fresh investments have gone into replacement of old machinery and the rate of replacement is high. On the other hand, installed capacity for China showed a remarkable 12% growth indicating massive re-equipping happening in spinning capacity.

1.72.2.2 Weaving machinery In weaving, the changeover to the faster and more productive shuttleless loom technology has been far more pronounced than the shift in spinning to open end technology. In 2002, shuttleless looms accounted for 81.5% of the total number of looms shipped. Asia accounted for 87.5% of all shuttleless and 98.9% of all shuttle looms shipped. Shuttleless technology is further categorised into four different weft insertion methods, i.e. air jets, water jets, rapier (rigid and flexible) and projectile. The preference patterns are somewhat erratic; however, the Asian countries tend to prefer water jet looms owing to the prevalence of filament weaving using synthetic yarns.

India and Pakistan show a high growth rate of installed capacity of 13-16% indicating growing investments in shuttleless machines. The ratio of shuttleless loom to total installed loom (the "technology quotient") gives a fair idea of the level of technology. Korea and Taiwan have a quotient well over 80%, Pakistan around 6% and India 0.6%.

An estimate of the number of looms to be replaced in Pakistan in the coming years was estimated by one of the industry participant at about 200 000 looms, which represents a substantial investment requirement on the part of the industry, and probably a significant business opportunity for FDI.

1.72.2.3 Knitting machinery The growth in shipment of knitting machines continued in 2002. The increase was however mainly due to the increase in shipments of hand knitting and semi automatic flat knitting machines. Shipments of larger circular knitting machines actually registered a drop.

1.72.2.4 Impact of domestic machinery manufacturers Most of the modern mills in Pakistan are equipped predominantly with textile machinery imported from Japan, Western Europe or North America. The impact of the local industry is not easy to estimate, being mostly concerned with parts rather than complete machinery.

1.72.3 Material and processes involved to produce a typical textile part /component

The different steps in the manufacturing process are no different from the usual techniques used to manufacture steel based components. The process uses similar techniques like the one employed for the manufacturing of certain auto parts: - Designing - Mould and Die manufacturing - Forging, Casting and Machining - Sheet metal, and Press work - Plastic & Rubber Mouldings - Electrical or Electronic components - Raw Materials 1. Iron & Steel; 2. Copper & Aluminium; 3. High & Low Density Polypropylene

These parts, components and raw-materials are being imported in large quantities from China, Korea, Japan, USA, Germany, Belgium, Saudi Arabia etc.

1.72.4 Main machinery and equipment and their origin

Similar remarks as above; machinery utilised is fairly standard. - Mould and Die Manufacturing machines - Forging and Casting machines - Metal Fabrication machines - Plastic Injection Moulding machines

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- Rubber mouldings machines - Lathe Machines

The machinery and equipment is imported from the USA, Germany, Belgium, France, Korea, Japan, China, and Thailand. Many a machines such as injection moulding and lathe machines etc. are being manufactured locally.

1.72.5 Main parts manufactured locally

List of parts manufactured in Pakistan are attached here after in paragraph 8.7.4. Details about such list can be sourced from the Central Board of Revenue, Customs General Order N° 10/2003 dated October 7, 2003. Unfortunately this big document is not available electronically.

1.72.6 Cost factor analysis

1.72.6.1 Labour It must be stated here that any improvement in the quality of the machines manufactured shall imply an important training effort of the workforce. - Skilled labour is mostly required, it is available but at relatively higher price. - Skilled labour concentrates around urban centres. - Links by the industry are being developed with specialised educational institutions for sourcing skilled labour. These links have to be further strengthened to keep abreast with the modern advanced technologies in the industry. - More engineering universities are being established or restructured.

1.72.6.2 Raw-material - Iron & Steel; - Copper & Aluminium; - High & Low Density Polypropylene.

These raw-materials are being imported in large quantities from China, Korea, Japan, USA, Germany, Belgium, Saudi Arabia etc.

1.72.6.3 Research & Development The research and development is mostly restricted to large public sector units as they have to achieve high quality targets. The textile engineering industry is feeling a dire need of research and development facilities as they also have to successfully achieve the quality targets set by the large state of the art composite units. These quality standards are essential in order to be competitive vis a vis imports.

Due to technological advancement in the textile industry, the absence of skilled and educated workforce is really felt, though the Government has introduced textile engineering in the major universities but there is still a long way to go to fulfil the demand of the rapidly growing textile industry.

1.72.6.4 Quality control - There are few units which have their own material testing facilities or have access to any such facilities externally. Although “reverse engineering technology” is practiced, such copying is used without adequate material testing facilities, which results in sub-standard quality. - The products manufactured locally appear of low quality, primarily because of improper finishing of welding seams, electroplating, paintings and other surface treatments.

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1.72.7 Analysis of import and export flows

1.72.7.1 Analysis of the main imports per type of imports, per country of origin The statistics show clearly the huge investments which have been undertaken in the Pakistan textile industry in the last three years, with import figures of textile machinery nearly multiplied two fold and reaching about USD 450 million per annum.

The main suppliers of machinery have been Germany and Japan, followed by China, Switzerland and Italy (for details see section 1.73.11)

1.72.7.2 Analysis of main exports per type of exports, per country of origin The export markets for the textile engineering industry are not the engine of growth that it could be if the technology was up to standard. This is reflected in the low amount of equipment exported (USD 3 million) mostly to Bangladesh and the Middle East (for details see section 1.73.11).

1.72.8 Analysis of the main trends

1.72.8.1 Location Most of the textile engineering industries are located around Karachi, Lahore and Faisalabad due to their proximity to the textile manufacturing units, urban commercial markets, seaport and raw material sourcing centres. It has been indicated that the industry is moving towards Punjab over the years to the detriment of Karachi.

1.72.8.2 Role of local importers Apart from supplying parts to newly set-up manufacturing units, a large market exists in the Power Loom sector. The textile parts sector is mostly catered by imports and smuggled spares and parts, as reported.

Many authorised dealers and distributors operate in big urban markets in Karachi, Lahore, Faisalabad and Multan. Manufacturers like Sulzer, Toyoda, NGK etc. have their presence in the market through these representatives. The network of dealers involved in supplying machinery and spares is fairly organised.

1.72.8.3 Competition from imports The textile engineering industry faces a tough competition from imports, but there are examples where a few locally manufactured products are successfully competing with imported parts both in terms of quality and price. But the textile engineering industry faces a serious threat from smuggled and misdeclared imports as reported by some of our contacts.

One of the main sources of such competition is routed through the Second Hand Machinery imports where there is little or no check at all.

1.72.9 WTO

Conformity to the WTO rules and regulations in term of protective tariffs and local components requirements are the main issues facing the industry. The ensuing squeeze on the domestic market further to the potential reduction of the tariffs increases the needs for improved technology, know how and productivity, for the industry to remain competitive.

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1.72.10 Identification and assessment of major business co-operation, project and investment opportunities

In the future, the mission is of the opinion that attractive opportunities exist to upgrade existing facilities for the textile engineering industry, in terms of technology and quality, based on a long-term strategy. It is recommended that such co-operation should start either as an assembly plant, incorporating increased local components as and when the local supplies are available, or as a technological transfer, with geographical market restriction for the local company. Such agreement would be eventually followed when quality is recognised as satisfactory by a more significant involvement of the foreign partner, possibly through a joint-venture, the aim being then to expand exports.

The main textile engineering parts which were mentioned during the mission visits as worthy of FDI were the spinning frame, the industrial sowing machines as well as the cutting machines.

However, it has been mentioned several time that competition from Chinese imported machinery might be difficult to face since more and more Chinese and Indian companies benefited from European technology transfers which rendered there products more and more technologically competitive.

The future of the industry will therefore be difficult unless there is an active involvement of the players to secure co-operation agreements with more advance countries.

1.72.11 Listing of major local companies

1.72.11.1 Machinery Manufacturers - Public Sector Pakistan Machine Tool factory Pakistan Engineering Co. Ltd. (temporally closed) PMTF Rd., off National Highway, Karachi 75030 Shahrah-e-Quaid-e-Azam Tel: 92-21-508 24 51/4 Lahore, Pakistan Contact: Javaid Sahibzada, Managing Director Tel: 92-42-7356292; 7324338; 7320225-6 Fax: 92-42-7323108

1.72.11.2 Loom Manufacturers - Private Sector

Siddiq Brothers Engineering Works Contact: Maqsood Ahmed, Managing Director Bea WAODA Steam Power Station Tel: 92-41-754141; 751111 Sheikhupura Road Fax: 92-41-751119 Faisalabad, Pakistan Contact: Abdul Waheed, Chief Executive Bashir Engineering Works Tel: 92-41-750594; 754668 Jinnah Road Fax: 92-41-754921; 754669 , Pakistan Contact: Muhammad Bashir, Managing Director Mumtaz Foundry and Engineering Works (Pvt.) Ltd. Tel: 92-431-214758; 216196 Nishatabad, Sheikhupura Road Fax: 92-431-222893 Faisalabad, Pakistan

1.72.12 Listing of European and other foreign companies present in the sector

No Joint venture has been identified in this sector, while it appears that a number of technical agreements are in force.

1.72.13 Main sources of information

All Pakistan Cotton Power Looms Assn. E.mail: [email protected] P-107, st. No. 5, first floor Montgomery bazar Pakistan Small Units Powerlooms Assn. Faisalabad Tel: 041-612929/639383 2nd floor, Waqar plaza Fax: 041-613636

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Aminpura bazar, p.o. box 8647 Faisalabad Tel: 041-714371 All Pakistan Textile Processing Fax: 041-33567 Mills Association E.mail: [email protected] 213-main Soosan road, 1st floor Ibrahim motor plaza, Madina town All Pakistan Solvent Extractor's Assn. Faisalabad Tel: 041-721013-14 C-38, Estate avenue, s.i.t.e. Fax : 041-718982 Karachi Tel: 021-2561724 E.mail : [email protected] Fax: 021-2564536

1.72.14 List of textile parts manufactured in Pakistan

Table 87: List of Textile machinery parts/components manufactured in Pakistan

Spinning Name of machine Details of locally manufactured components % in value % in value (imported) (local) 1 Blow room 1. Conveyors 70% 30% 2. Transportation pipes (raw mat) 3. Fans 4. Dust extraction 5. Humidification 6. Gears 7. Shafts 8. Motors (not specialised) 2 Carding 1. Card wire (tops only) 60% 40% 2. Dust extraction & waste collection 3. Web belts 4. Card coilers 5. Under casings 6. Stationary flats, c.r.c. Rollers 7. Crush rollers 8. Gears 9. Shafts 10. Stop motions 11. Motors (not specialised) 12. Chains 3 Draw frames 1. Creels 90% 10% 2. Rubber cots 3. Gears 4. Chains 4 Combers Rubber cots 98% 2% 5 Ring frames Spinning machinery corporation. 40% 60% 1. Head stock parts - 350 2. Tail stock parts - 41 3. Section assembly - 113 4. Drafting system - 11 5. Creel assembly - 20 535 additionally - pmtf 105 accessories like costs, aprons, bobbin, etc. are also available locally 6 Winding: 80% 100% (6a) manual manual cone winders 20% (6b) automatic bobbing conveyors + drums+ other accessories 7 Humidification plant+ chilling All parts manufactured locally except controls 20% 80% which are imported

Weaving No Name of machine Details of locally manufactured components %in value % in value (imported) (local) 1 Warping machine All guide rollers 40% 60% gears pumps frame comb (expanding) + accessories including: tie rods-(comb holders oscillating fans - chains tension device, cutters. Motors (not specialised) 2 Sectional warping machines Specialised design-full machine. Parts almost as above 20% 80% and accessories

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3 Multiple cylinder 1. Creel 30% 70% sizing machine 2. Size boxes 3. Squeezing rollers 4. Guide rollers 5. Drying cylinders 6. Frame work 7. Rubber rollers 8. Exhaust fan 9. Pneumatic control parts 4 Pirn winders Complete local machine exchine except critical parts 20% 80% 5 Semi & automatic cop 1. Automatic cop change mechanism & cutter - 100% change looms 76" - 126" 2. Temple cutter reed width 3. Feeler motion 4. Take up motion 5. Positive warp let-off motion 6. Back rest sensitivity control 7. Drive & brake arrangement 8. Weft stop motion 9. Warp stop motion 10. Reeds + healds 11. Picking system 12. Beams 13. Shuttles 14. Electric motors 6 Semi automatic terry towel All above parts/components + terry motion and pile - 100% looms 76"-116" reed width beating system 7 Shuttleless looms type 170-180 rpm, reed space 76 (26 inches) total assemblies 30% 70% rapier locally manufactured except rapiers, stop motions, specialised motors, panels. 8 Cloth inspection Full machine-rollers, guiding rollers, light box, plaiter, 30% 70% welding cutting, cloth inspection machines-cloth rolling machines - except inverters, cloth guiders, meter counter gear boxes, roller felt/rubber coverings, ultra-violet lighting systems. 9 Cloth folding & palleting All components manufactured locally except - selvedge 30% 70% guide, inverters, panels, specialised electrical equipment 10 Cloth rolling All components are manufactured locally - 100% 11 Humidification plant All components except controls manufactured locally. 20% 80%

Textile wet processing (conventional) Pre treatment Name of machine Details of locally manufactured components %in value % in value S.no. (imported) (local) Singeing Complete singeing machine with brushing units 1 machine (cloth) except control & panels 30% 70% High pressure 1. Pressure vessel kiers 2. Circulation system 3. Spreading guides 4. Pumps 2 5. Motors, except control panel & valves 30% 70% Rope washing 1. Squeezing mangles machine 2. Washing chambers 3. Guiding rollers 4. Pumps 3 5. Motors (except control) 20% 80% 1. Washing chamver 2. Entry system squeezing mangle 3. Guiding 4. Batch forming system 5. Roles Open winding 6. Pumps washing & 7. Motor 4 soaping machine except sel vedge guides, control panels, expanders 30% 70% 5 Chainless mercerising machine 1. Entry frame 2. Expander unit 3. Mercerising com 4.bottom rollers 5. Top rollers 6.squeezing unit with rubber rules 7.sted rollers 8.drainage pipe 9. Stabilising composcaling separator 10.caustic soda dissolving device 11.oscilsating separator except, compressor, liquor filter, valves cooling 40% 60%

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plant, , expansion valve, cabinet, diaphragm shut off valves , lye - pump 6 Desizing machine (rope type) Except controls, special motors 10% 90%

Dyeing S.no. Name of machine Details of locally manufactured %in value % in value components (imported) (local) 1 Jt-10type jigger machines Except control panel, special motors 10% 90% 2 Jumbo dyeing jigger machine Except control panel, special motors 10% 90% 3 Open jigger Except control panel, special motors 10% 90% 4 Close jigger machine Except control panel, special motors 10% 90% 5 Dyeing paders Except control panel, special motors 20% 80% 6 Jet dyeing machine (double tube) Except control valve, control panel, jets 30% 70% 7 Jet dyeing venture a type Except control valve, control panel, jets 10% 90% 8 Continuous/ thermosal dyeing machine Except infra red light plc control panel 10% 90% 9 High pressure chamber rotary jigger Except control valve, control panel, jets 10% 90% 10 Cone dyeing machine - 100%

Drying section S.no. Name of machine Details of locally manufactured %in value % in value components (imported) (local) 1 Vertical/horizontal drying range - 100% 2 Closed high heat drying range - 100% 3 Centrifugal hydro extractors - 100% 4 Steam ager 20% 80% 5 Mini boilers - 100% 6 Cone dryer machines 30% 70%

Finishing section S.no. Name of machine Details of locally manufactured %in value % in value components (imported) (local) 1 Felt calender - 100% 2 Cotton calender - 100% 3 Stentering machine 9 pin & clips 50% 50% 4 Comfit machine - 100% 5 Shrinking machine - 100% 6 Sanforizing machine - 100%

Hosiery and towel S.no. Name of machine Details of locally manufactured %in value % in value components (imported) (local) 1 Hosiery kier Bleaching of fabric - 100% 2 Dyeing winches Except control valve, control panel, jets 10% 90% 3 Hosiery rope washing machine 100% 4 Sample winches 100% 5 Calendering machine Except control valve, control panel, jets 10% 90% 6 Hydro extractors - 100% 7 Hi-temperature dyeing machine Except control valve, control panel, jets 10% 90% 8 Dryers Except control valve, control panel, jets 20% 80% 9 Soft flow Except control valve, control panel, jets 10% 90%

Section: textile wet processing (conventional) High tech machines S.no. Name of machine Details of locally manufactured components % in % in value value (imported) (local) 1 Shearing/ cropping Sophisticated machine in order to remove bars from cloth before going machine in for wet finishing process. It requires burners, cloth guiding rollers, temperature control, etc. This process lays the foundation for smooth & quality processing. Only few quality manufacturers all over the world. 80% 20% 2 Cloth singeing Entry frame, beating & suction can be made locally. Also impregnation machine & tanks, batcher and plaited is possible. Brushing unit, complete singeing desizing unit dry fire extinguisher, panels and controls are imported. 60% 40% 3 High pressure kier Pressure vessel stainless steel with jacket - circulation system, spreading - guide rollers, pumps, motors locally manufactured except controls, panels, valves. 30% 70% 4 Rope washing Squeezing mangles, washing chambers, guiding rollers, pumps, motors, machine locally made. Except controls and panel which are imported. 20% 80% 5 Open width Various roller widths required entry frame - take up rollers, washing washing and chambers- padding mangles, squeezing mangles etc. Batch formation - soaping machine pumps - motors, all mechanical parts can be locally made except squeezing rollers, guiding rollers, selvedge guiders, expanders, tension controls, panels, controls. 75% 25% 6 Dyeing jiggers Through - guide rollers - heating system - mechanical parts - general 50% 50%

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motors, locally manufactured. Except controls - guiding system - digital drive - plc controls & panels. 7 Vinches for dyeing All parts local - raw material stainless steel except special drives and controls. 25% 75% 8 Dyeing padders Specialised manufacturers for specific application. Only 4/5 manufacturers in the world like "kusters" - monforts" etc. 90% 10% 9 Jet dyeing Raw material is stainless steel all chambers - tubes ad mechanical parts local manufactured except pumps - control - pneumatic valves - reduction gear motors. 90% 10% 10 Continuous Highly sophisticated - works on infrared system. thermosole dyeing Few specialised manufacturers like "monforts" & "bruckner" machine 90% 10% 11 Cone dyeing and Very specialised and sophisticated. Only very few manufacturers in the hydro extractor world. plus drying range 95% 5%

1.72.15 Import and export statistics

Table 88: Textile/leather machinery (SITC 724), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 2 713 2 602 972 2 409 2 871 11 567 Total import value 174 891 235 390 180 424 333 908 465 036 1 389 649

1997-2001 1997-2001 Exports by country Imports by country Value % Value % Bangladesh 2 882 24,9% Germany 245 828 17,7% United Arab Emirates 1 695 14,7% Japan 245 330 17,7% Bahrain 1 554 13,4% China 134 649 9,7% Brunei Darussallam 1 414 12,2% Switzerland 120 418 8,7% Singapore 735 6,4% Italy 112 781 8,1% others 3 287 28,4% others 530 643 38,2%

2001 2001 Exports by country Imports by country Value % Value % Bangladesh 767 26,7% Germany 85 734 18,4% United Arab Emirates 455 15,8% Belgium 81 498 17,5% Tanzania 380 13,2% Japan 79 444 17,1% Bahrain 187 6,5% China 37 973 8,2% Iran 168 5,9% Netherlands 29 458 6,3% Turkey 166 5,8% Italy 27 603 5,9% Saudi Arabia 114 4,0% Switzerland 23 121 5,0% USA 20 460 4,4% Source: PC&A Calculations based on COMTRADE database

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1.73 Electrical capital goods

1.73.1 Description of the size and nature of the sector

- Yearly market volume averages Rs. 8,250 million. - Share in the GIP is 0.02%. - Direct/Indirect Employment in this sector is about 6000 persons - Total investment in the sector is about Rs. 10.3 billion.

1.73.2 Main products and manufacturers in the market

Box 32: Main products and manufacturers in the market Products Key Players Key Players Market Share Siemens Distribution 75% Pel } Transformers Siemens Power 100% HEC } Siemens Switchgears Alstom 75% PEL } Siemens PECO Motors 45% Chinese } (Imported) D.G. Sets Siemens 14% Pakistan Cables HM Cables Pioneer Cables Cables/Conductors 45% Age Cables Newage Cable Atlas & Others PEL Energy Meters Escorts 90% Syed Bhais Source: Market estimates

The box above shows the strong presence of large European groups in the industry, notably Siemens. However, the less sophisticated a product is (e.g. cables or electrical engines) the more local groups are present in the sector. Often these groups have technical agreements with Western suppliers.

It is also worthwhile to note the increasing presence of the Chinese suppliers, mostly through imports in the medium range of the market, starting to represent a severe competition for the European industry.

1.73.3 Cost factor analysis

1.73.3.1 Labour - Level of skill involved is high. It is available at a relatively higher price - Skilled Labour is concentrated around urban centres. - Links by the industry are being developed with specialised educational institutions for sourcing skilled labour. These links have to be further strengthened to keep abreast with the modern advanced technologies in the industry.

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1.73.3.2 Raw material/Imports Major raw material/components of the industry are imported as described hereafter: - Distribution Transformers : Electrical steel, transformer oil, insulating material; - Power Transformers : Electrical steel, special copper, insulating material & components; - Switchgear : Major components, copper bus bar, steel sheet; - D.G. Sets : Engine, electrical steel, insulating material & components; - Cable / Conductor : Copper rod and AL rod.

1.73.3.3 Energy As already discussed, the energy costs are high but available at all locations for the setting up of the industry, subject to a reliability problem.

1.73.3.4 Finance - Debt/equity ratio requirements: 70:30 - Project financing is available at around 8-9% p.a., while short term bank facility is below 5% p.a. for prime borrowers.

1.73.3.5 Logistics Rail, road and sea links are satisfactory; transportation of every type is available at very low rates.

1.73.3.6 Research & Development The companies mentioned above have internal R&D departments but with limited facilities. The Government is trying hard to enhance R&D in every field, through the establishment of Industry/ University linkages.

1.73.3.7 Government Policy towards the Sector Duty Structure for the industry is covered under SRO-357 - Raw material 5% - Sub-Components 10% - Components 20%

SRO 435(I) 2001 defines the benefits to the Industries:

The Raw material, Sub Components and Components imported for the Electrical Capital Goods (ECG) will attract Zero Rate of duty if supplied to: - Projects with International Tender; - Electric Power Generation; - Export Sector or Exporting Purpose; - Exempted Industrial Units, Projects, Agencies (e.g. Tax Free Areas, Industrial Processing Zones etc.).

Since growth in the ECG sector is directly linked with the growth in the Power Generation Sector, extracts of the present Power Policy, and incentives offered to the private sector is quoted below:

Salient Features of the Power Policy 2002 - Scope of the Policy covers private, public-private and public sector projects; - Invitation of bids through International Competitive Bidding (ICB); - Encourage exploitation of indigenous resources including hydel, coal, gas and renewable resources through active involvement of the local engineering, design and manufacturing capabilities; - Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally; - To enhance share of Renewable Energy Sources, hydel and fuels other then oil-based fuels, full levy of income tax is imposed on oil-fired power projects; - For projects above 50 MW One – Window support to be provided at the Federal level. For projects below and up to 50 MW One Window support to be provided at the respective Provincial/Azad Jammu and Kashmir (AJK) level.

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- Ministry of Water and Power (through the Private Power & Infrastructure Board (PPIB) to remain the focal point at the Federal level). - To develop raw sites whose feasibility studies are not available, unsolicited bids are welcome. The sponsors of feasibility studies on raw sites will have first right of refusal. - Two-part tariff structure consisting of fixed capacity and variable energy component is recommended with the proviso that fixed capacity payment for hydel projects would fall between 60% to 66% of the total tariff; - Hydrological Risk to be borne by the power purchaser: WAPDA, the National Transmission & Despatch Company (NTDC) or the Karachi Electrical Supply Company (KESC).

1.73.4 Analysis of the Import and Export Flows

1.73.4.1 World export market - 40 billion $ world market growing at an annual average rate of 4.5%; - Niche markets such as Africa growing at an annual average rate of 9% (currently at USD 1.1 billion);

The industry has envisaged the following growth and investment in the sector:

Table 89: Pakistan power generation equipment sector Description 2001/02 Short Term Mid Term 2006/07 2011/12 Export(Value/Volume) USD 7.0 M USD 80.0 M USD 170 M Domestic production capacity (80% of utilisation) Rs.15,650 M Rs. 20,000 M Rs. 35,000 M Investment Rs.1,000 M Rs.1,500 M Source: Industry estimates

1.73.4.2 Imports of power generating equipment At around USD 200 million per annum, and on a reducing trend, imports originate mostly from the USA (20%), Japan (16%), Germany (13%), China and Italy. However, the share of China in these imports has been growing strongly recently.

1.73.4.3 Exports of power generating equipment Exports are still small at USD 20 million on average per annum with the EU being the main importer, notably Holland.

1.73.4.4 Competition from imports Due to the growth of the local industry, the import of ECG is consistently falling and local customers are shifting towards locally manufactured items (see Figure 28).

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Figure 28: Import of ECG, 1995-2001

450 400 350 Transformers 300 Switchgears 250 Electric Motors 200 Gensets

US $ Millions US $ 150 Energy Meters 100 Cables 50 0 95-96 96-97 97-98 98-99 99-00 2000-01

Source: Industry estimates

1.73.4.5 Competition in the export markets Export in ECG has seen a sustainable growth during the last six to seven years, with annual growth rate of around 4.4%. Competition however is significant, especially from China which appears to have an advantage in securing know how transfers and technological agreements with more developed industries.

Figure 29: World export trends in ECG, 1995-1999

40 6.32 6.11 7.44 6.47 5.78 30 8.41 Transformers 8.24 8.25 8.5 7.57 Switchgears Elec. Motors 20 9.59 10.44 10.29 9.02 9.64 GenSets

US billion Elec. Meters 4.66 4.75 5.24 10 4.64 4.6 Cables 6.98 8.11 8.33 8.46 8.54 0 1995 1996 1997 1998 1999

Source: Industry estimates

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Figure 30: Pakistan – ECG exports, 1995-2002

7

6

5

4 Total 3 Transformer

Millilon US $ Millilon Switchgears 2 Electric Motors GenSets 1 Energy Meters 0 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02

Source: Industry estimates

1.73.4.6 Domestic competition To meet the future electricity requirements, an estimated USD 2 billion is likely to be invested in generation, transmission, expansion and distribution.

Competition in the industry is mostly between the main European suppliers and cheaper imports from China. Local production through technical agreements is usually efficient and eventually exports successfully to a number of markets, as exemplified by the Syed Bhais Group manufacturing Electrical Meters, lighting and liaison controls under the G.E. Company technology. This group appears successful in exporting its products even to the USA.

1.73.4.7 Market development In line with the needs to fulfil existing shortfall in the power generation industry, as well as to accompany the increasing needs of the country, the following investment projections in the growth of the industry has been estimated by the Government.

Table 90: Pakistan power generation equipment market Description 2001/02 Short Term Mid Term 2006/07 2011/12 Domestic Market (Avg) Rs.8,250 M Rs.14,000 M Rs.18,000 M Source: WAPDA

For each additional load of 100 MW, the following equipment is required:

Table 91: Pakistan power generation equipment projected per 100 MW Quantity Value (Rs.) Power Transformers 8 Nos. 100 M Distribution Transformers 1,000 Nos. 90 M MV Switchgear 100 Panels 60 M LV Switchgear 1,000 Panels 200 M Electricity Meter 50,000 Nos. 60 M Cable / Conductor 100 M Total (for 100MW) 610 M Source: WAPDA

ECG requirement for 1000 MW of power requirement represents Rs.6.1Billion.

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Table 92: Average additional power required per year Period Additional Power/ Year 2000-2007 1000 MW 2008-2012 3500 MW Source: WAPDA

1.73.5 Identification and assessment of major business co-operation project and investment opportunities

Opinion has been expressed through the various meetings held with companies and sector associations that the industrial components linked with the energy production, the transmission and the distribution sector are the most promising.

However, it was mentioned several time that up to date technology was offered by Chinese firms in an aggressive way, which might present an attractive venue for local companies to improve their technology. Chinese technology was best for the smaller generator, up to 50 Kw, while Europeans retained an advantage on the larger units, with good after sale service. Similarly, competition from China was mentioned as significant in the lighter features like circuit breaker, switch gears, etc.

Opportunities have also been mentioned in the metering industry, for electricity, but also for the gas and water delivery, in the area of automatic controls for buildings and industry, such as close circuit TV, card access controls and fire alarm systems, as well as a niche market in the area of alternative energy such as solar cells and wind farms (Pakistan Council for Renewable Energy Technologies, PCRET).

Finally, Uninterrupted Power Supply equipment was also mentioned as an area worth investigating.

1.73.6 Analysis of the most interesting forms of co-operation in addition to direct investments such as joint venture, transfer of know-how, sub-contracting etc.

It is considered that the easiest form of co-operation in the sector shall be through technical agreement with existing enterprises in the form of a quality assistance programme. Further to such confidence building relationship, establishment of a joint venture could be envisaged to start the manufacturing of a new product range, starting with a simple assembly plant which would in due course increase the sourcing of local components.

In view of the size of the market, exports should be made a significant part of the strategy. As discussed previously in this report, the Middle East, Central Asia, and South Asia should be the privileged export markets left to the responsibility of the local partner, while the OECD countries should be the foreign partner responsibility.

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1.73.7 Siemens, a success story

Box 33: SIEMENS PAK LTD. Summary of Operations Siemens Pakistan Engineering Company Ltd., was founded in 1953 as a private limited company. In 1963 the company was converted into a public limited and in 1978 it was listed in the Stock Exchange. Siemens Aktiengesellschaft (Siemens AG) Germany holds 64% of the total shareholding. The Company manages its business and manufacturing activities through its head office in Karachi and two regional branches at Lahore and Islamabad, contributing to the local economy through substantial indigenous content and transfer of state-of-the- art know how in several engineering fields and in many other ways. It operates through four functional divisions: Power Engineering Division, Telecommunication Division, Systems and Project Division, Products and Services Division In Pakistan, Siemens' sphere of activities covers the major fields of Power Engineering, Telecommunication Engineering, Medical Engineering and Transport System Engineering, Engineering, Supply and Installation of Electrical Equipment, Complete Plant Electrification including instrumentation and control systems and Information Technology. A large manufacturing complex at Karachi, provides support to the company's marketing and engineering activities, turning out a vast range of high quality electrical engineering. Management Report Although the Government's economic reforms have resulted in some improvements in key economic indicators like the appreciation of the rupee, significant increase in foreign currency reserves and check on inflation, the regional tension and political uncertainty kept the investors confidence low. The infrastructure projects in the public sector remained at a low priority due to expected privatisation of public entities. In the private sector, textiles remained active though not at the level of last year. The oil and gas sector received an encouraging boost from the overseas investors. With intensified competition in the challenging environment Siemens Pak Ltd. continued their efforts in diversification through exports and service business. Their exports increased by 21% over the previous year. New Orders increased by 19%. The main contribution comes from orders for PTCL and other private operators in the field of Information and Communication, orders for transformers from local utilities and from abroad as well as orders for large oil and gas installations Profit before tax, however, was adversely affected by exchange losses suffered on export business due to appreciation of the rupee against major currencies. Capital investment of Rs.117 million was made for modernisation and for keeping the facilities at the highest standard to maintain their competitive edge. Human Resource Their success depends in part on their continued ability to recruit, assimilate and retain qualified management and other technical personnel. To attract and retain their personnel, Siemens Pak Ltd. maintains intensive contact with universities through university liaison programme and offer scholarships within and outside of the country. Siemens Pak Ltd. provides continued educational support as well as technical and managerial training programmes for personnel development and better job placements within the company. Several training programmes were attended by their employees during the year. These programmes covered technical, commercial and managerial training as well as seminars on topics covering quality systems, safety and health etc. Quality Adherence to Quality in every facet of their activities ensures customers' satisfaction and is the cornerstone of all their corporate policies. Periodic and continuous surveillance audits coupled with management's commitment and employee’s participation ensure that all their processes and their output are in full conformity with their Quality Management System. Steps have been taken to further model their Quality Management System in line with the current and future market demands and to meet and exceed the requirements of the new relevant ISO standards. Setting the objectives of higher productivity, accelerated innovation, optimisation of various process and growth, their company wide top+ programme resulted in a considerable savings directly reflecting in profit. Awards (a) Top 25 Companies Awards, (b) Export Trophy Award, (c) Best Presented Accounts Environment, Safety and Health Siemens Pak Ltd. works continuously towards reducing the burden on environment and use of energy and resources, above and beyond the legal requirement and take appropriate precautions to prevent damage to the environment by controlling and monitoring emission to air, water and land reducing or eliminating safety and health hazards and minimising the generation of waste to a practical level. Financial Performance of The Company (2 (Rupees ‘000) Net profit for the year 390,882 Unappropriated profit b/f 410 Available for appropriation 391,292 Source: BOI

1.73.8 Listing of major local companies

PEL Pak Elecktron Ltd. Fax: 4529553 507 & 508 Fortune Centre 45-A/6. PECHS, Sharae Faisal Karachi 754000 Web Site: http://www.pel.com.pk/ Tel: 4548728, 4548725

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Pakistan Cables Ltd B/21, SITE Newage Cables (Pvt) Ltd PO Box 5050 Newage Mansio, Macload Road Karachi 75700 Lahore Tel : 2561175, 2561170 Tel: 6312153, 6312150 Fax : 2564614 Fax: 6363081 Email : [email protected]

1.73.9 Listing of major foreign companies

Siemens Pakistan Engineering Co. Ltd Alstom Pakistan Ltd. B/72, Estate Avenue, S.I.T.E D163, SITE, Karachi 75700 P.O. Box 7158 Tel: 2576005-9 Tel: 2574919, 2574910 UAN : 111777888 Mob: 0300-8224987 Fax: 2560449 Fax: 2577790 Email: [email protected] Email: [email protected]

1.73.10 Main sources of information

Pakistan Electrical & Electonics Pakistan Steel Smelters Association Merchants Association (peema) 30-s, Gulberg centre, 84-d/1 3/10, Arkay square Main boulevard, Gulberg iii Shahrah-e-Liaquat Lahore Tel: 042-5759284/5712028 Karachi Tel: 021-2425933 Fax: 042-5712028 Fax: 021-2427496 E.mail: [email protected] E.mail : [email protected] The Pakistan Steel Re-rolling Pakistan Electric Fan Mills' Association Manufacturers Association Rashid chambers Pefma house (gorali), p.o. Box 53 6 - link Mcleod road G. T. Road Lahore Tel: 042-7227136 Gujrat Tel: 04331-521429/520301-3 Fax: 042-7231154 Fax: 04331-521427 E.mail: [email protected] Pakistan Electrical Manufacturers Assn. 84-Shadman colony Pakistan Electronic Manufacturers Lahore Tel : 042-7569201/7569202 Association Fax: 042-7569203 1st floor, Rizvi chambers Akbar road Karachi Tel: 021-7766912 Fax: 021-5874546

Engineering Components & Machinery Manufacturing Association of Pak. 10 Nargis block, Iqbal town Lahore Tel: 042-7841300/6364065 Fax: 042-7832456/7632456 E.mail: [email protected]

All Pakistan Cables & Conductors Manufacturers Association 103, Uni centre i. I. Chundrigar road Karachi Tel: 021-2414065-66/2417052/2419275 Fax: 021-2412014

Pakistan Petroleum Exploration and Production Companies Association House no 1, street 49 Sector f-6/4 Islamabad Tel: 051-823928/826105 Fax : 051-276084 E.mail : [email protected]

Pakistan Iron & Steel Merchants Assn. Corner house, second floor Preedy street, Karachi Tel: 021-519994/5660270-71 Fax: 021-5682724

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1.73.11 Import and export statistics

Table 93: Trade statistics SITC 71 (power generating equipment), 771 (power transmission equipment), values in USD '000 1997 1998 1999 2000 2001 1997-2001 Total export value 19 076 6 675 20 677 16 275 12 663 75 366 Total import value 1 039 226 287 169 218 124 188 845 197 105 1 930 469

1997-2001 1997-2001 Exports by country Imports by country Value % Value % Netherlands 28 323 37,6% USA 377 475 19,6% Kuwait 10 287 13,6% Japan 319 367 16,5% United Kingdom 7 058 9,4% Germany 255 918 13,3% Germany 5 584 7,4% China 194 418 10,1% United Arab Emirates 4 886 6,5% Italy 184 350 9,5% others 19 228 25,5% others 598 941 31,0%

2001 SITC 71; 771 SITC 71 SITC 771 Exports by country Value % Value Value Kuwait 6 313 49,9% 6 313 Saudi Arabia 1 681 13,3% 1 331 350 United Arab Emirates 901 7,1% 509 392 Bangladesh 747 5,9% 624 123 Germany 718 5,7% 686 32 Italy 356 2,8% 356 Netherlands 353 2,8% 353 China, Hong Kong 291 2,3% 291 Spain 244 1,9% 244 Oman 142 1,1% 142 Philippines 141 1,1% 35 106 United Kingdom 139 1,1% 135 4 Sri Lanka 136 1,1% 136 Libya 136 1,1% 136

2001 SITC 71; 771 SITC 71 SITC 771 Imports by country Value % Value Value China 31 194 15,8% 30 316 878 Japan 26 315 13,4% 24,040 2,275 USA 24 942 12,7% 24 823 119 United Kingdom 21 172 10,7% 20 570 602 Germany 18 134 9,2% 16 733 1 401 Switzerland 14 861 7,5% 14 797 64 Italy 11 635 5,9% 11 472 163 Sweden 5 450 2,8% 5 413 37 Belgium 4 780 2,4% 4 760 20 Canada 4 701 2,4% 4 562 139 Netherlands 3 915 2,0% 3 532 383 Brazil 3 634 1,8% 3 625 9 Finland 3 447 1,7% 2 876 571 United Arab Emirates 3 123 1,6% 2 732 391 Singapore 2 968 1,5% 2 738 230 France 2 408 1,2% 2 014 394 Bulgaria 1 979 1,0% 16 1 963 Iran 999 0,5% 999 Source: PC&A Calculations based on COMTRADE database

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NICHE SECTORS

1.74 Surgical and dental equipment

The industry is a major world exporter for a number of metal surgical instruments for the USA and Europe with about USD 150 million exports per annum. The number of pieces produced annually reaches about 100 million. It is felt that there is clearly an opportunity for expansion of production in instruments to be identified. Quality, brand name as well as technology are required for expansion of export markets. However, it is still a low technology and labour intensive industry. Opportunities for Joint Ventures would be in the forging, milling and grinding process. The final steps in the process should also provide opportunities for investment: Heat treatment, Ultrasonic cleaning and final grading. Certification has been a problem in the past but it has been addressed successfully with a number of companies obtaining ISO 9000 certification. Production is spread among 40 to 50 large companies (employing about 200 people), 130 medium size companies with an average of 75 people and about 180 small companies considered as “cottage industry”. The USA absorbs about 50% of the exports, and the EU about 40%. Most exports to the USA concern low priced bulk orders of disposable items such as Operating/Bandage Scissors, Haemostat Forceps, Towel Clamps, Needle Holders, Dressing Forceps and Probes etc. Exports to Europe, of which Germany represents about 50%, are made of higher quality and higher priced items.

1.74.1 Pakistan surgical industry structure

The total number of surgical instruments manufacturers including traders, registered with the Surgical Instrument Manufacturers Association (SIMA) is more than 1500 but the Association does not have detailed information regarding its members. The individual industrialists, due to severe competition within the industry have limitations to share any kind of information. It is therefore difficult to classify the industry on the basis of investments in plant and equipment, number of employees, etc. The only other variable that can be used to classify the industry is the sales turnover. Usually the sales figure is directly related to the size of the manufacturing units.

1.74.2 Classification of Pakistani surgical instruments

The surgical instruments manufactured in Pakistan (mainly in Sialkot) can be classified into three broad categories:

1.74.2.1 Disposable instruments This particular category represents instruments, which are for a single use. These instruments constitute around 50% of the total export volumes of surgical instruments from Pakistan. Being single use instruments, they are manufactured from low quality stainless steel, which is produced locally and is available at nearly half the price of imported stainless steel. America is the largest market of these single use instruments that are packed in sets.

1.74.2.2 OR (Operating Room) instruments This category of surgical instruments represents the instruments, which are used in operating rooms to carry out complex surgical procedures. This segment includes over 30,000 different types and varieties. The OR instruments have to be reused and to maintain a desired level of sterility they are sterilized very frequently. This requires that the raw material used in the manufacture of OR instruments should be of proper grade so as to sustain the rigor of sterilization process. For Pakistani made OR instruments, Europe is the biggest market. Most of the manufacturers of OR instruments use imported stainless steel. Due to the nature of the usage, special skills and precision is needed to produce an instrument, especially in the finishing process.

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1.74.2.3 Manicure, pedicure and veterinary instruments Another category of instruments, which is also exported as surgical instruments, is the manicure, pedicure and veterinary instruments.

1.74.3 Global trade of surgical instruments

According to the domestic industry sources, surgical instruments are only manufactured in Germany or Pakistan and a few other countries such as Japan, United Kingdom, etc. Among these, Germany is considered to be the market leader considering all the attributes such as range of instruments, quality, innovation, etc. The Pakistani surgical instrument manufacturers consider only Germany to be their competitor. This perception is somewhat contradicted, however, by UNIDO statistics, according to which Pakistan is not a major global player in the industry (see Figure 31).

Figure 31: World export share 2000 of surgical and dental equipment

Source: UNIDO

The world total import market for the Medical Instruments is around USD 30 billion, 40% of which is taken by Surgical Instruments. Syringes and Catheters, and Other Optical Instruments have 22% and 16% share respectively (Figure 32).

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Figure 32: Global import market for medical instruments

other breathing Other optical appliances medical,dental & instru Therapeutic 2% surgery furniture dental drill engines 16% respiration 3% 0.5% apparatus Lasers 4% 3% other dental instru 4%

mechano-therapy syringes,catheters appl. other medical opthalmic instru etc 3% instru 3% 22% 40%

Source: UNIDO

1.74.4 Pakistan's exports of surgical instruments

Pakistan started exporting surgical instruments in the late 1940s. At that time Pakistan’s exports comprised of only a few thousand dollars. In 2000-01, Pakistan’s export value of surgical instruments amounted to USD 124 million (Figure 33), increasing to USD 150 million in 2003 (Table 94). Surgical instrument exports contribute 1.35% to the total export earnings of the country.

Figure 33: Pakistan and world exports, surgical and dental equipment, 1993-2000 (USD million)

Source: SMEDA

Table 94: Pakistan exports of surgical and dental equipment Product 2000 2001 2002 2003 Surgical Instruments & Medical Instruments 120.2 138.7 141.7 145.6 Dental Equipment 3.8 2.90 3.3 3.4 Total 124.0 141.6 145.0 150.0 Source: State Bank Annual Report

Pakistan's surgical exports are dominated by surgical instruments reported under SITC 87229, followed by the dental instrument category reported under SITC 87219. The share of traditional surgical instruments (such as surgical scissors forceps, scalpel, bone rongers, etc.) comes to around 97%. Only 1% of other items such as stethoscopes, sphygmomanometers, etc. are also being exported from Pakistan.

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Figure 34 presents the major destinations of Pakistan's exports in surgical instruments. The low-cost market segment (surgical instruments with a value of less than USD 1), which constitutes 50% of the total market, is basically the disposable instruments, the majority of which are exported to the USA. The major destination of the USD 1-2 market segment, which consists mainly of OR instruments, is the European countries.

Figure 34: Pakistan export destinations of surgical instruments (a) all exports Others 20%

Denmark 1% Australia 2% USA Netherlands 46% 2% Brazil 2%

Japan Italy 3% 4% France 4% UK Germany 5% 11%

(b) product value Rs <50 (c) product value between Rs 50 and Rs 100 Others Australia, Others 21% South 2% Korea & Eas t A s ia Hongkong 6% 6%

USA 92% South Europe America 63% 10%

Sources: Federal Bureau of Statistics and Experts Advisory Cell

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Box 34: SWOT analysis of surgical instrument manufacturing in Pakistan STRENGTHS OPPORTUNITIES – Geographical Concentration in Sialkot – Diversification of Product range – Economies of Scale – Manufacturing Flexibility – Availability of Inputs locally – Unexplored Markets – Skilled Labour Force- cheaply available – Joint Ventures – Technical Expertise – Use of modern manufacturing techniques – Concentration on Core Competencies – Wide Product Range catering the lower end market WEAKNESSES THREATS – Minimal Involvement of Brand Names – Child Labour – Branding – Stiff regional competition – Marketing and Distribution – Increasing quality awareness amongst major – Management buyers – Lack of proper training facilities

1.74.5 Tax Structure for Surgical Instrument Industry

1.74.5.1 Income Tax As 95% of the total production of the surgical instrument industry is exported, the industry is exempt from income tax. The exporters, according to the Eighth Schedule of the income tax ordinance, pay only a token tax. The range of the token income tax varies from 0.50% to 1.00% depending on the level of value addition in the products.

1.74.5.2 Export Development Fund (EDF) The export development fund contribution is made by every exporter at the rate of 0.25% of the total value of goods exported.

1.74.5.3 Sales Tax Sales tax has been levied on all the sectors at the rate of 15%. It is not applicable to exported goods.

1.74.5.4 Rebate Rebate is the amount that is reimbursed by the government to the exporter as compensation for the duty paid by him on imported components used in manufacturing a product. The rate of rebate, to be paid on different products, is determined by the Ministry of Production and Industries.

The Surgical Instrument Manufacturers Association of Pakistan Kutchery road, Sialkot Tel: 0432-263016/266240 Fax : 0432-265978/554217 E.mail : [email protected]

1.75 Gems and jewellery

Pakistan has a considerable quantity of naturally available gems including an unmatched quality of Emerald, Ruby, Pink Topaz, Lapis Lazuli, Roze Quartz, Tourmaline, Moonstone, Zircon, Aquamarine, Garnet, Kunzite and Peredot. Most of the precious stone mines in Pakistan are located in the badly accessible Northern areas, which provides conducive conditions for smuggling (Table 95). Jade is found in Gilgit, Florite in and , with most expensive Ruby deposits in Hunza producing blood Red Ruby. The Mingora Emerald is transparent sea green making it the most precious gem of Pakistan. Topaz and Pink Topaz as well as the other previous stones are found in various northern regions.

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Table 95: Gemstone productive areas Gemstones Occurrences /Showing Areas Emerald Swat, Gilgit, Mohmand & Bajour Agency Ruby Hunza, Neelam Valley() and Upper Hunza Pink Topaz Mardan Light Pink Topaz Mardan Peridot Kohistan Spinel Hunza Valley Aquamarine Eastern Part of Gilgit, Chitral Tourmaline Neelum valley-Azad Kashmir, Chitral, Bulechi – Nortern Tribal areas Feldspar Skardu, Gilgit, Chitral Quartz Skardu, Lasbela, Nagarparkar, Azad Kashmir, Gilgit, Chitral Topaz Shingus and Bulechi in Gilgit District Dusso in Skardu District Zircon Chilas, Gilgit Agate Nagarparkar - Sind, Dir Kohistan Garnet Swat, Malakand Agency, Targhao - Bajaur Agency, Skardu Turquoise Chagai Hills - Baluchistan

Actual export statistics for gems show a total value of aroung USD 2 million (Table 96); actual export values, i.e. including the value of smuggled gems, are estimated to be sugnificantly higher. It is estimated that the export market for gems if properly exploited can be very significant. Gem exports can be categorized into two categories i.e. precious stones worked and un-worked. In the period 1998- 2002 the export share of un-worked gems was 90%. Some of the leading importers from Pakistan include Hong Kong (40% of Pakistan’s gem exports in 2001) the USA (20%) and Germany (Table 97).

Table 96: Pakistani exports of gems and precious stones 2000-2002, USD 000 2000 2001 2002 Gems and Precious stones 2,871 1,636 1,748 Source: Experts Advisory Cell (MOI & P)

Table 97: Pakistan's gem exports by destination Country % share in total exports HONG KONG 41 USA 20 GERMANY 18 INDIA 5 UAE 4 THAILAND 4.5 FRANCE 3 UNITED KINGDOM 2 Source: Experts Advisory Cell (MOI & P)

In Pakistan most of the jewellery is produced manually using expertise of skilled workers and mostly relying on the lost wax casting procedure as opposed to more modern techniques. This causes substantial waste levels. Likewise, processing of gems is based on outdated procedures.

Various capacity building initiatives have been launched including cluster development under a project being executed with the help of UNIDO. Also the Export Promotion Bureau has taken initiatives to organise training in this sector. It has established three training institutes in Karachi, Lahore and Peshawar. Currently the Export Promotion Bureau is working on the idea of establishing a Dazzle Park in Karachi where all modern facilities will be provided to the jewellers.

It remains however a low technology, labour intensive industry.

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Box 35: SWOT Analysis of the gem and jewellery sector Strengths/Opportunities Threats/Weaknesses – Abundance of raw materials specially gems – Uneducated entrepreneurs and semi precious stones. – Cut throat regional competition. – Skilled labour – Rudimentary Methods. – Comparative advantage in the studded – Modern techniques not being implemented Jewellery. – Labour is skilled but relatively costly. – State’s liberalized policies i.e. Zero percent – High rate of utility charges and tax duty on Import of Gold, and export regulations facilitation. – High Entry barriers – Availability of Finance, which can be utilized – Traditional Designs and no innovations by SMEs. – Export is nominal as compared to the – Availability of Technical Skill through potential training Institutes. – Absence of any affiliation with International – Large number of Entrepreneurs. Gold Organization. – Wide local market for consumption. – Smuggling – Use of Information Technology in the – Under invoicing industry. – Lukewarm response of Association. – Easy Access to International markets. – Law & Order situation – Recognition in the Global market.

All Pak Commercial Exporters Association of Rough & Un-polished Precious & All Pak Gem Merchants & Jewellers Assn. Semi-precious Stones Gems & jewellery trade centre 2, al-Jalil market, Nimak Mandi 1st floor, Blenkin street Peshawar off Zaibunnisa street, Saddar Tel: 091-213396/2568801 Karachi Tel : 021-5210400/5657777/5678888 Fax: 091-213520 Fax : 021-5682970 E.mail: [email protected]

1.76 Marble production

Existing quarries are operating on the basis of explosion, which does not allow large marble pieces to be exploited. Specific expertise and know how should prove very useful, with a view to the local construction market, booming at present, as well as exports. The main drawback for the successful implication of a foreign investor is the small size of the existing operations. However, demand for foreign partnership has been expressed by some of the contacts made during the course of this study.

All Pakistan Marble Industries Assn. Flat # 6, block 16/a i/9 Markaz Islamabad Tel: 051-430519/433508 Fax: 051-435002 E.MAIL: [email protected]

Pakistan Mine Owners Association Barnas road Quetta Tel: 081-64792/75171/821792 Fax : 081-821802

1.77 IT software, call and financial services centres, specific software development (animated films, video games…)

Despite the efforts made by the Government to develop this sector through the improvement of IT education, this sector shall be retained as a niche market only, in view of its emerging situation compared to India. Still, call centres seem to have been created in numbers recently while statistics are not available. Similarly, a handful of companies are being created in the software industry, with more value added than call or service centres. There may be a future for some, while it cannot yet be considered as a full fledged sector development.

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PART IV: SOURCES OF INFORMATION

USEFUL ADDRESSES

1.78 Addresses in Member States

Business associations, trade and export credit Swedish Trade Council agencies Infocenter Storgatan 19 GEPCI Box 5513 European Group for International Trade Promotion SE 11485 Stockholm World Trade Centre Tower Tel: 46 8 783 8500 Boulevard General Jacques 162/36 Fax: 46 8 783 8550 B 1040 Brussels E-mail: [email protected] Tel: 32 2 206 36 44 Website: http://www.swedishtrade.com Fax: 32 2 206 3645 E-mail: [email protected] Italy - Istituto Nazionale per il Commercio Estero Website: http://www.obcebdbh.be/en/Services/gepci.html (ICE) Via Liszt, Orgalime (Engineering Industry Federation) 00144 Roma Diamant Building, Blvd Reyers 80B Tel: 39 06 599 292 02 1030 Brussels Fax: 39 06 596 474 41 Tel: 32 2 706 82 35 E-mail: [email protected] Fax: 32 2 706 82 50 Website: http://www.ice.it E-mail: [email protected] Website: http://www.orgalime.be OAV (German Asia-Pacific Business Association) Neuer Jungfernstieg 21 CEFIC, European Chemical Industry Council D20354 Hamburg Avenue Van Nieuwenhuyse, 4 box 1 Tel: 49 40 357 559 15 B 1160 Brussels Fax: 49 40 357 559 25 Tel: 32 2 676 7211 E-mail: [email protected] Fax: 32 2 676 7300 Website: http://www.oav.de E-mail: [email protected] Website: http://www.cefic.be Austria WKOe – Austrian Economic Chamber Tel: 43 1 501 05 43 11 Confederation of Food and Drink Industries of the EU Fax: 43 1 501 05 240 (CIAA) E-mail: [email protected] 43, avenue des Arts Website: http://wko.at/awo B-1040 Brussels Tel: 32 2 514 1111 Belgium OBCE/BDBH – Belgium Foreign Trade Board Fax: 32 2 511 2905 Tel: 32 2 206 35 11 E-mail: [email protected] Fax: 32 2 203 18 12 Website: http://www.ciaa.be E-mail: [email protected] Website: http://www.obcebdbh.be/ Eurochambres Rue d’Archimèdes 4 Denmark MFA – Danish Trade Council / Danish B 1000 Brussels Ministry of Foreign Affairs Tel: 32 2 231 0715 Tel: 45 33 92 00 00 Fax: 32 2 230 0038 Fax: 45 33 54 05 33 Website: E-mail: [email protected] http://www.eurochambres.be/3members/ec0030.htm Website: http://www.um.dk

Union of Industrial and Employers Confederation of Finland Finpro Europe (UNICE) Tel: 358 204 6951 Rue Joseph II 40 Bte 4 Fax: 358 204 695 535 B 1000 Brussels E-mail: [email protected] Tel: 32 2 237 65 11 Website: http://www.finpro.fi Fax: 32 2 231 14 45 Website: http://www.unic.org France CFCE – Centre Français du Commerce Extérieur Denmark DI – Confederation of Danish Industries Tel: 33 1 40 43 38 88 Tel: 45 3377 3377 Fax: Fax: 45 3377 3300 E-mail: [email protected] E-mail: [email protected] Website: http://www.cfce.fr Website: http://www.di.dk/ Germany BFAI – German Office for Foreign Trade Tel: 49 221 2057-359

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E-mail: [email protected] Fax: 39 06 678 9835 Website: http://www.bfai.com E-mail: [email protected] Website: http://www.isace.it Greece HEPO – Hellenic Foreign Trade Board S.A. Tel: 30 1 99 82 100 ECGD-Export Credits Guarantee Department Fax: 30 1 99 69 100 2 Exchange Tower E-mail: [email protected] Harbour Exchange Square Website: http://www.hepo.gr London E14 9GS Tel: 44 20 7512 7000 Ireland Enterprise Fax: 44 20 7512 7649 E-mail: [email protected] E-mail: [email protected] Website: http://www.enterprise-ireland.com/ Website: http://www.ecgd.gov.uk

Italy ICE – Italian Institute for Foreign Trade CREDITO Y CAUTION-Compania Espanola de Tel: 06 59 921 (Roma) Seguros de credito y Caution S.A. E-mail: [email protected] Paseo de la Castellana, 4 Website: http://www.ice.it E-28046 Madrid Netherlands EVD – Netherlands Foreign Trade Agency Tel: 34 91 432 6300 Tel: 070 37 988 11 Fax: 34 91 432 6511 E-mail: [email protected] E-mail: [email protected] Website: http://www.evd.nl Website: http://www.creditoycaution.com

Portugal ICEP – Investment,Trade and Tourism of OND-Office National du Ducroire Portugal 40 square de Meeus E-mail: [email protected] 1000 Brussels Website: http://www.portugalinbusiness.com Tel: 32 2 509 42 11 (under construction) Fax: 32 2 513 50 59 E-mail: [email protected] Spain ICEX – Spanish Institute for Foreign Trade Website: http://www.ducroire.be or Tel: 91 349 61 00 http://www.delcredere.be Fax: 91 431 61 28 E-mail: [email protected] FINNVERA-Finnvera Plc Website: http://www.icex.se PO Box 1010 FIN-00101 Helsinki Sweden STC – Swedish Trade Council Tel: 358 204 6011 Tel: 46 8 783 85 00 Fax: 358 204 607 220 Fax: 46 8 662 90 93 E-mail: [email protected] E-mail: [email protected] Website: http://www.swedishtrade.com HERMES-Hermes Kreditversicherungs- Aktiengesellschaft United Kingdom TPUK – Trade partners UK D-22746 Hamburg Website: http://www.tradepartners.gov.uk Tel: 49 40 8834-0 Fax: 49 40 8834 9175 Major export credit agencies in EU member States: E-mail: [email protected] Website: http://www.hermes-kredit.com OeKB – Oesterreichische Kontrollbank Aktiengesellschaft NCM-Nederlandsche Creditetverzekering Export Guarantee Department / International Relations & Maatschappij Cover Policy Postbus 473 Postfach 70 NL 1000 AL Amsterdam A-1011 Vienna Tel: 31 20 553 9111 Tel: 43 1 53127 – 0 or Ext. Number Fax: 31 20 553 2811 Fax: 43 1 53127 – 693 E-mail: [email protected] E-mail: [email protected] Website: http://www.ncmgroup.com Website: http://www.oekb.co.at COSEC-Companhia de Seguro de Creditos S.A. EKN – Exportkreditnämnden Avenida da Republica 58 Box 3064 1069-057 Lisbon Codex S-103 61 Stockholm Tel: 351 21 791 3700 Tel: 46 8 788 0000 Fax: 351 21 791 3720 Fax: 46 8 411 8149 E-mail: [email protected] E-mail: [email protected] Website: http://www.cosec.pt Website: http://www.ekn.se EKF-Eksport Kredit Fonden COFACE-Compagnie Française d’Assurance pour le Dahlerups Pakhus Commerce Extérieur Langeline Allé 17 92065 Paris La Défense Cedex 2100 Copenhagen Tel: 33 1 4902 2000 Tel: 35 46 6100 Fax: 33 1 4902 2741 Fax: (45) 35 46 61 11 E-mail: [email protected] E-mail: [email protected] Website: http://www.coface.com Website: http://www.ekf.dk

SACE-Istituto per i Servizi Assicurativi del credito all’Esportazione C.P. 253 Roma Centro Tel: 39 06 67 361

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EU supporting facilities and contact in Europe FMO (Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden n.v.) Asia-Invest Programme Tel: +31 70 314 96 96 European Commission, Fax: +31 70 324 61 87 EuropeAid Co-operation Office, Asia, Economic E-mail: [email protected] cooperation Website: http://www.fmo.nl Rue de la Loi / Wetstraat 200 B 1049 Brussels IFU (Industrialisation Fund for Developing Countries) Tel: 32 2 299 1111 IO (Investment Fund for Central and Eastern Europe) Fax: 32 2 299 1062 IFV (Investment Fund for Emerging Markets) E-mail: [email protected] Tel: +45 33 63 75 00 Website: http://www.asia-invest.com Fax: +45 33 32 25 24 E-mail: [email protected] European Investment Bank or [email protected] 100 Boulevard Konrad Adenauer Website: http://www.ifu.dk L 2950 Luxembourg Tel: 352 4379 3122 NORFUND (Norwegian Investment Fund for Fax: 352 4379 3189 Developing Countries) Website: http://www.eib.org Tel: +47 220 19 393 Fax: +47 220 19 394 Europe Venture Capital Association E-mail: [email protected] Tel: 32 2 715 00 20 Fax: 32 2 725 07 04 PROPARCO (Société de Promotion et de Participation E-mail: [email protected] pour la Coopération Economique) Website: http://www.evca.com Tel: +33 1 53 44 37 37 Fax: +33 1 53 44 38 38 EDFI E-mail: [email protected] 21 Rue d’Arlon Website: http://www.afd.fr 1050 Brussels European Development Finance Institutions SBI (Société Belge d’Investissement International) - Tel: +32 2 230 23 69 BMI (Belgische Maatschappij voor Internationale Fax: +32 2 230 04 05 Investering) Website: http://www.edfi.be Tel: +32 2 776 01 00 Fax: +32 2 770 66 38 APAD (Agencia portuguesa de apoio ao E-mail: [email protected] desenvolvimento) Website: http://www.bmi-sbi.be CDC (CDC Capital Partners) Tel: + 44 171 828 44 88 SIMEST (Societa Italiana per le Imprese all’Estero Fax: +44 171 828 65 05 SpA) E-mail: [email protected] Tel: +39 06 686 35 1 Website: http://www.cdcgroup.com Fax: +39 06 686 35 220 International Business & Marketing Strategy Dept. COFIDES (Compania espanola de Financiacion del Mr. Carlo Barbieri Desarrollo, SA) E-mail: [email protected] Tel / Fax: (+525) 280 95 77 Ms. Luisella Picciaia Contact person: Mr. Abelardo de la Torre E-mail: [email protected] E-mail: [email protected] Website: http://www.simest.it Website: http://www.cofides.es SWEDFUND (Swedfund International AB) DEG (Deutsche Investitions und Tel: +46 8725 94 00 Entwicklungsgesellschaft mbH) Fax: +46 8 20 30 93 Tel: +49 221 49 86 0 E-mail: [email protected] Fax: +49 221 49 86 290 Website: http://www.swedfund.se E-mail: [email protected] Website: http://www.deginvest.de

FGG (Finanzierungsgarantie-Gesellschaft mit beschränker Haftung – Ost West Fonds) Dept. for Corporate Development and External Relations Mr. Matthias Bischof Tel: +43 1 501 75 0 Fax: +43 1 501 75 360 E-mail: [email protected] or [email protected] Website: http://www.fgg.at

Finnfund (Teollisen yhteistyön rahasto Oy) Tel: +358 9 34 84 34 Fax: +358 9 34 84 33 46 E-mail: [email protected] Website: http://www.finnfund.fi

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1.79 Web sites about Pakistan

1.79.1 Web sites of multilateral organisations

United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) http://www.unescap.org Website abstract: The website presents information about the UNESCAP and its projects. A few reports and surveys on the economic and social development can be downloaded. No specific country information.

Asian Development Bank (ADB) http://www.adb.org/Pakistan/default.asp Website abstract: The website provides a range of relevant information including economic trends, key indicators, projects and news releases.

Investment Promotion Network (IPAnet) http://www.ipanet.net/index.cfm Website abstract: The website provides an extensive searchable database of over 10,000 web-based documents which include research on economies and product markets, investment-related laws and treaties to specific investment opportunities.

International Trade Centre (ITC) http://www.intracen.org/index.htm Website abstract: The website gives detailed information on ITC’s development programmes and contains a searchable country database presenting trade specific statistics.

United Nations Conference on Trade and Development (UNCTAD) http://www.unctad.org/ Website abstract: The website presents a wide range of general information about investment and trade as well as statistical data. UNCTAD’s Division on Investment, Technology and Enterprise Development (DITE) publishes the World Investment Report, for which a link is provided.

United Nations Industrial Development Organisation (UNIDO) http://www.unido.org/ Website abstract: The website provides information about UNIDO’s services and programmes. Downloadable documents and reports as well as country information are also available.

International Labour Office www.ilo.org/childlabour Website abstract: The website provides information about the child labour issues in the worl and in Pakistan. Downloadable documents and reports as well as country information are also available.

The European Union http://www.europa.eu.int Website abstract: The website provides information about the EU services and programmes. Downloadable documents and reports as well as country information are also available.

Asia Invest http://www.europa.eu.int/comm/europeaid/asia-invest Website abstract: The website provides information about Asia Invest involvement with Asia. Downloadable documents and reports as well as country information are also available.

The World Bank Group http://www.worldbank.org/ Website abstract: The website presents information on projects and programmes of the World Bank as well as general country information. It also includes news items and press releases and a wide range of publications and economic and social data.

International Finance Corporation (IFC) http://www.ifc.org/ Website abstract: The website contains information about IFC projects and how to apply for IFC financing as well as press releases and publications.

Foreign Investment Advisory Service (FIAS) http://www.fias.net/index.html Website abstract: The website presents information on the services and projects of the FIAS and includes useful links to other providers which offer economic data and assess the investment climate of many countries.

SAARC(South Asian Association for Regional Cooperation Secretariat) http://www.saarc-sec.org/ Website abstract: Provide information on the development of the cooperation among the member states.

Economic Cooperation Organisation http://www.ecosecretariat.org Website abstract: The website presents information on the cooperation achieved among the members of the ECO, agreements measures taken to increase trade.

1.79.2 Web site of U.S. official sources of information

CIA World Factbook http://www.cia.gov/cia/publications/factbook/geos/pk.html Website abstract: The website presents an overview of the country and gives general information about various aspects like geography, people, economy, etc.

Overseas Private Investment Organisation (OPIC) http://www.opic.gov/ Website abstract: The website contains information for U.S. firms which want to invest overseas in less developed countries. There is an interesting section called Investors’ Info that provides a wide range of useful country specific links.

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1.79.3 Web site providing information on investment promotion/FDI in general

Multilateral Investment Guarantee Agency (MIGA) http://www.miga.org Website abstract: The website presents an overview of MIGA and its activities, provides guidance for potential applicants of the Guarantee scheme, and offers recent studies and activity reports for download. MIGA was created in 1988 as a member of the World Bank Group to promote foreign direct investment into emerging economies to improve people's lives and reduce poverty. MIGA fulfills this mandate and contributes to development by offering political risk insurance (guarantees) to investors and lenders, and by helping developing countries attract and retain private investment. For investors, MIGA provides investment guarantees against certain non-commercial risks (i.e., political risk insurance) to eligible foreign investors for qualified investments in developing member countries. MIGA's coverage is against the following risks: Transfer Restriction Expropriation Breach of Contract War and Civil Disturbance

1.79.4 Websites of EU and EU Member State representations in Pakistan:

Delegation of the European Commission to Pakistan http://www.delpak.cec.eu.int Website abstract: The website presents information related to the bilateral relationship of Pakistan and the EU.

Embassy of Belgium http://www.economist.com/countries/Pakistan/index.cfm Website abstract: The website presents the services offered by the embassy. No country information on Pakistan contained.

General Consulate of France http://www.consulfrance-karachi.org.pk/ Website abstract: The website provides information on services offered by the consulate. No English version of the website.

Embassy of Germany http://www.german-embassy.org.pk/de/home/index.html Website abstract: The website presents information on bilateral relationship between Germany and Pakistan. Some press releases are available in English.

Embassy of Greece http://greekembassy.netfirms.com/index.html Website abstract: The website offers information only on Greece except from some links to Pakistani institutions.

Embassy of Italy http://www.italia.com.pk/ Website abstract: The website contains information on the Italian embassy like staff and opening hours. No specific information on Pakistan available.

British High Commission http://britainonline.org.pk/ Website abstract: The website provides information on Britain. No specific information on Pakistan.

1.80 Internet sources in Pakistan

1.80.1 Pakistan Government entities web sites

Pakistan Development Gateway http://www.pdg.org.pk/index.asp Website abstract: Pakistan's first and only development gateway - envisioned as a one-stop website for all significant development information about Pakistan on the Web. Information is indexed in 25 categories, including "industry", "trade and development" and other business relevant categories.

• The Official Web Gateway to the Government of • Pakistan Council of Research in Water Pakistan Resources http://www.pakistan.gov.pk/ http://www.pcrwr.gov.pk

• The Official Government of Sindh Web Site • Privatisation Commission http://www.sindh.gov.pk/index.shtml http://www.privatisation.gov.pk/

• UN Pakistan Page • Private Power and Infrastructure Board http://www.un.org.pk/ http://www.ppib.gov.pk/

• The Government of Pakistan Home Page • Pakistan Trade Office http://www.pak.gov.pk/ http://www.paktrade.org/

• The Constitution • National Reconstruction Bureau http://www.pakistani.org/pakistan/constitution/ http://www.nrb.gov.pk/

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• Pakistan Software Export Board • Ministry of Petroleum and Natural Resources http://www.pseb.org/ http://www.mpnr.gov.pk/

• Office • National Highway Authority http://www.pakpost.gov.pk/ http://www.nha.gov.pk/

• Overseas Employment Corporation • Pakistan Institute of Quality Control http://www.oec.gov.pk/ http://www.piqc.com.pk

• Sustainable Development Policy Institute • National Accountability Bureau http://www.sdpi.org/ http://www.nab.gov.pk/

• Sustainable Development Networking • NADRA Programme http://www.nadrapk.com/ http://www.sdnp.org/ • Ministry of Women Development, Social • State Engineering Corporation Welfare & Special Education http://www.sec.gov.pk/ http://www.most.gov.pk/

• Space and Upper Atmosphere Research • Ministry of Science and Technology Commission (SUPARCO) http://www.most.gov.pk/ http://www.suparco.gov.pk/ • Ministry of Information Technology • Securities and Exchange Commission of http://www.moitt.gov.pk Pakistan http://www.secp.gov.pk/ • Ministry of Foreign Affairs http://www.forisb.org/ • Pakistan Sports Board, Ministry of Sports http://www.sports.gov.pk/ • Ministry of Finance http://www.finance.gov.pk/ • Pakistan Tourism Development Corporation http://www.pta.gov.pk/ • Export Promotion Bureau http://www.epb.gov.pk/epb/index.jsp • Pakistan Telecommunication Authority http://www.pta.gov.pk/ • Ministry of Environment, Local Government & Rural Development • Pakistan Meteorological Department http://www.environment.gov.pk/ http://www.met.gov.pk/ • Geological Survey of Pakistan (GSP) • National Tariff Commission http://www.gsp.gov.pk/ http://www.ntc.gov.pk/ • Central Board of Revenue • Pakistan Computer Bureau http://www.cbr.gov.pk/ http://www.pcb.gov.pk/ • Board of Investment • Pakistan Agricultural Research Council http://www.pakboi.gov.pk/ http://parc.gov.pk/ • Ministry of Industries and Production, Experts • National Savings Organisation Advisory Cell http://savings.gov.pk/ http://www.eac.gov.pk

1.80.2 The Pakistan web directory www.webs.com.pk/

1.80.3 Commercial information providers web sites

The Economist http://www.economist.com/countries/Pakistan/index.cfm Website abstract: The website presents basic information about the political and economic structure and includes the latest country related article from the print edition.

The Institute of Chartered Accountant http://www.icap.org.pk Website abstract: The website presents a list of quality controlled chartered accountants in Pakistan. The Institute of Chartered Accountant is the industry’s association.

Designerz (Pakistan Law firms) http://pakistan.designerz.com/pakistan-lawyers-corporate

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Website abstract: The website presents a list of Pakistan lawyers with their respective area of expertise. The provider is an international private organisation.

Associated Press of Pakistan (APP) http://www.app.com.pk/ Website abstract: The website presents national, international, business and sports news items. The Associated Press of Pakistan is the country’s premier news agency. APP was taken over by the Government in 1961 for financial reasons.

Online International News Network http://www.onlinenews.com.pk/ Website abstract: The website provides news items on politics, business and sports. Online International News Network is an independent news agency.

World Trade Review http://worldtradereview.com Website abstract: The website provides business news, especially related to trade and investment. Fortnightly The World Trade Review is the only newspaper, which exclusively provides coverage to WTO, Globalisation, Intellectual Property Rights, Investment, Regional trade, Development, Environment and other allied matters. It was launched on 1st March 2001 and since then it is regularly published on 1st and 15th of each month.

News Network International http://www.nni-news.com/current/main/index.html Website abstract: The website presents national, world, business and sports news. The News Network International is Pakistan’s largest independent news agency.

Pakistan News http://www.paknews.com/ Website abstract: The website offers news items on national and international issues, business and sports. The Pakistan News is an independent online news agency.

Business Recorder http://www.brecorder.com/ Website abstract: The website provides detailed business and finance related news on a wide range of sectors. It also contains an archive covering the last 90 days. The Business recorder is a daily business newspaper from Karachi.

The Dawn http://www.dawn.com Website abstract: The website offers sections for national and international politics, business, capital markets and sports. The Dawn is a daily newspaper printed in English

The News International http://www.jang.com.pk/thenews/index.html Website abstract: The website presents the internet edition of the newspaper covering politics, business, capital market, sports and local themes. The International News is an English daily newspaper from Karachi, Lahore and Islamabad.

The Frontier Post http://www.frontierpost.com.pk Website abstract: The website presents the internet edition of the newspaper covering politics, business, sports and local issues. The Frontier Post is a national daily newspaper from Peshawar.

The Nation http://www.nation.com.pk/ Website abstract: The website presents the internet edition of the newspaper covering national and international topics, business and sports. The Nation is an English daily newspaper from Lahore and Islamabad.

Daily Times http://www.dailytimes.com.pk/ Website abstract: The website presents the internet edition of the newspaper covering national and international news, business and sports. The Daily Times is a daily newspaper printed in English.

The Daily Mail http://dailymailnews.com/ Website abstract: The website presents the internet edition of the newspaper covering local and international news and sports. No business section included. The Daily Mail is an English daily newspaper from Islamabad that started its publication in 2002.

Pak Tribune http://paktribune.com/ Website abstract: The website presents updated news on a wide range of topics including business. The Pak Tribune is an independent online newspaper.

The Times http://www.times.com.pk Website abstract: The website provides the latest Pakistan news and updated news and views from Pakistan and Kashmir. The Times of Pakistan is an independent web newspaper.

Herald http://www.dawn.com/herald/ Website abstract: The website presents some articles about politics and business which originate from the printed version. The Herald is Pakistan’s most widely read and respected monthly news magazine.

The Pakistan & Gulf Economist http://www.pakistaneconomist.com/ Website abstract: The website comprises articles and information on various economic and business topics. The Pakistan & Gulf Economist is Pakistan’s leading business magazine.

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1.80.4 Business associations web sites

1.80.4.1 Chambers of commerce The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) http://www.fpcci.com.pk/ Website abstract: The website presents statistical data on trade. It also contains a virtual marketplace where offers to buy or sell goods can be posted. Provider: The Federation of Pakistan Chambers of Commerce & Industry is licensed by the Government. Its primary aim is to promote, encourage and safeguard the interest of private sector in Pakistan and to serve as a bridge between the business community and the Government.

Lahore Chamber of Commerce & Industry (LCCI) http://www.lcci.org.pk/ Website abstract: The website gives an overview of the chamber’s services, economic sectors and business opportunities and presents economic data Provider: LCCI is committed to making an effective contribution to the nation’s economic development through the promotion of trade and industry.

Karachi Chamber of Commerce & Industry (KCCI) http://www.karachichamber.com/ Website abstract: The website provides the key economic and social indicators and facilitates trade by presenting Provider: The Karachi Chamber of Commerce and Industry was founded in 1959 and aims to protect and promote trade, commerce and industry in Karachi.

Sarhad Chamber of Commerce & Industry (SCCI) http://www.scci.org.pk/ Website abstract: The website promotes business by displaying trade enquiries. No specific information. Provider: The Sarhad Chamber of Commerce & Industry.

Gujranwala Chamber of Commerce & Industry (GCCI) http://www.gcci.org.pk/ Website abstract: The website informs about the chamber in general and offers trade opportunities. Provider: The Gujranwala Chamber of Commerce & Industry was founded in 1978 in order to promote the interests of Pakistan in general and of those engaged in industry, agriculture, commerce, trade, banking and insurance.

Islamabad Chamber of Commerce & Industry (ICCI) http://www.icci.com.pk/ Website abstract: The website contains information about commerce and trade. Provider: The Islamabad Chamber of Commerce & Industry

Gujrat Chamber of Commerce & Industry (GTCCI) http://www.gtcci.com.pk/ Website abstract: The website offers information about the chamber. Provider: The Gujrat Chamber of Commerce & Industry.

1.80.4.2 Sector associations All Pakistan Textile Mills Association (APTMA) http://www.aptma.org.pk/ Website abstract: The website presents detailed information on the textile industry including many statistical data. Provider: The All Pakistan Textile Mills Association, established in 1959, is comprised of more than 400 members of the whole Pakistani textile industry. The association serves as a central platform that can assure a liaison between all the sectors of the textile industry.

Pakistan Readymade Garments Manufacturers & Exporters Association (PRGMEA) http://www.prgmea.org/ Website abstract: The website provides some information on the industry and a list of the association’s members. Provider: The Pakistan Readymade Garments Manufacturers & Exporters Association is recognised by the Government and aims to provide guidance and generate supporting services in order to encourage exports.

Pakistan Knitwear and Sweater Exporters Association (PAKSEA) http://www.paksea.com.pk/ Website abstract: The website provides basic information on the sector and offers lists of successful exporters. Provider: The PKSEA, founded in order to promote and protect the business interests of Pakistan’s Knitwear and Sweater Exporters, has over 300 members.

Towel Manufacturers Association of Pakistan http://www.towelassociation.com/ Website abstract: The website contains press releases and information on the members of the association. Provider: The Towel Manufacturers Association is recognised by the Government and affiliated with the Federation of Pakistan Chambers of Commerce and Industry.

Pakistan Hosiery Manufacturers Association (PHMA) http://www.phmaonline.com/default.asp Website abstract: The website offers member services and a list of the members. Provider: The PHMA is a trade organisation representing the hosiery and knitwear industry.

Karachi Cotton Association http://kcapak.org/ The Karachi Cotton Association (KCA) has launched this web site containing information regarding the KCA, cotton policy, cotton crop estimates and spot rates. The Web site provides information about raw cotton prices, domestic and international prices. Market reports, cotton statistics, brokers information are also present at the site.

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1.80.4.3 Bilateral chambers Pakistan German Business Forum (PGBF) http://www.pgbf.com.pk Website abstract: The website provides information about PGBF and offers some trade opportunities and the member’s list. Provider: The Pakistan German Business Forum is comprised of about 140 members from both Pakistan and Germany and aims to encourage and promote German investment in Pakistan and vice versa as well as German-Pakistani business cooperation.

Pakistan France Business Alliance (PFBA), http://www.pfba.org 307 marine Point, Block 9, Schon Circle, Clifton, Karachi 75600. Tel: + 92 21 58 66 363; Fax: + 92 21 58 31 713 Website abstract: The website provides information about PFBA and offers some trade opportunities and the member’s list. Provider: The PFBA comprises about

1.80.5 Private consulting firms

Associated Consultancy Center (Pvt) Ltd., Pakistan [email protected] Coopers & Lybrand Consulting (Pvt) Ltd., Pakistan [email protected] Engineering Consultants Iinternational (Pivate) Lmited, Pakistan [email protected] Financial Consultants, Pakistan [email protected] Rowbotham & Company Llp: International Accounting and Consulting www.rowbotham.com/affiliatescontent.html KPMG Pakistan (Services) www.kpmg.com.pk

1.80.6 Foreign banks in Pakistan

ABN Amro Bank N.V. www.abnamro.com Al-Baraka Islamic Bank B.S.C.(E.C.) www.albaraka.com.pk American Express Bank Limited www.aexp.com Credit Agricole Indosuez (to close by end 2003) www.ca.indosuez.com Citibank N.A. www.citigroup.net Deutsche Bank AG www.db.com Habib Bank A.G. Zurich www.habibbank.com Mashraq Bank psc www.mashreqbank.com Oman International Bank S.O.A.G. www.obioman.com Standard Chartered Bank www.scb.com Standard Chartered Grindlays Bank Limited www.scb.com The Bank of Tokyo-Mitsubishi Limited www.btm.co.jp The Hongkong and Shanghai Banking Corporation Limited www.hsbc.com.pk

1.81 Useful addresses of public entities in Pakistan

Ministry of Commerce Fax: 92-51-9202108 Pak Secretariat, 'A' Block, Islamabad Board of Investment (BOI) Tel: 92-51-9203999, 9202257 Ataturk Avenue, Fax: 92-51-9205241 Sector G-5/1, Islamabad Ministry of Foreign Affairs Tel: 92-51-9221826 Constitution Avenue, Fax: 92-51-9206160, 9203281 Sector G-5, Islamabad Tel: 92-51-9210971, 92004365 Small & Medium Enterprises Development Authority Fax: 92-51-9213795 (SMEDA) 43-T, Gulbderg-II, Ministry of Labour & Manpower Lahore Pak Secretariat, Tel: 92-42-111-111-456 5th & 6th Floors, Fax: 92-42-5753545, 5753587 "B" Block, Islamabad Tel: 92-51-9209223, 9203167 Export Promotion Bureau Fax: 92-51-9201823 Finance & Trade Centre, Block-A, FTC Bldg.,Shahrah-e-Faisal, Ministry of Industries & Production Karachi 'A' & 'D' Blocks, Tel: 92-21-111-444-111 Pak Secretariat, Fax:92-21-9206497 Islamabad Tel: 92-51-9201992, 9203427 State Bank of Pakistan Fax: 92-51-9205130, 9202165 Main Building, Experts Advisory Cell (EAC) I.I. Chundrigarh Road, Karachi House No. 25, Street 26, Tel: 92-21-9212400-09 Sector F-6/2, Fax: 92-21-9212436, 9212433 Islamabad Tel: 92-51-9206372, 9205595 Security & Exchange Commission of Pakistan

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NIC Building, House No. 25, Street 13, Jinnah Avenue,Islamabad Sector F-7/2, Islamabad Tel: 92-51-9204841, 9205310 Tel: 92-51-9204074 Fax: 92-51-9205692 Fax: 92-51-9204075

Federation of Pakistan Chamber of Commerce & Pakistan International Airlines Industries PIA Head Office Building, Federation House, Karachi Airport, Shahrah-e-Firdousi, Karachi-75200 Main Clifton, Karachi Tel: 92-21-4572011 Tele: 92-21-5873694,5873691 Fax: 92-21-4570419, 4572225 Fax: 92-21-5874332 British Airways National Insurance Corporation of Pakistan Marriott Hotel, NIC Building, Abdullah Haroon Road 63, Jinnah Avenue, Karachi Blue Area, Islamabad Tel: 92-21-5686076-7 Tel: 92-51-9216421, 9216429 Fax: 92-21-5684302 Fax: 92-51-9216424 Air France Water & Power Development Authority Marriott Hotel, WAPDA House, The Mall, Abdullah Haroon Road, Karachi Lahore Tel: 92-21-5681071-5 Tel: 92-42-9202211-60 Fax: 92-21-5684815 Fax: 92-42-920200 Pakistan Post Office Department Sui Northern Gas Pipelines G-8/4, Gas House No.21, Islamabad Kashmir Road, Tel: 92-51-9261571 P.O. Box. 56, Fax: 92-51-9261577 Lahore Tel: 92-42-9201451-60, 9201490-99 DHL Pakistan (Pvt) Ltd Fax: 92-42-9201314 8-BangloreTown, Shahrah-e-Faisal, Pakistan Railways Karachi Pakistan Railways Headquarters, Tel: 92-21-4542470-89 Empress Road, Fax: 92-21-4547871, 4543261 Lahore Tel: 92-42-9201700, TCS Fax: 92-42-9201669 I-E/37, Block-6, PECHS, Shahrah-e-Faisal, Pakistan National Shipping Corporation (PNSC) Karachi PNSC Building, Tel: 92-21-4541000 Moulvi Tamizuddin Khan Road, Fax: 92-21-4546639 P.O. Box. 5350, Karachi Tel: 92-21-9203980-99 OCS Fax: 92-21-9203974, 9204018 World-wide House, C-17, Korangi Road, KarachiPort Trust (KPT) Karachi P.O. Box. 4725, Tel: 92-21-5803201-11 Karachi Fax: 92-21-5880606 Tel: 92-21-9214530-40 (10 lines) Fax: 92-21-9214329-30 Pakistan Standards and Quality Control Authority (PSQCA) Pakistan Telecommunication Corporation Block # 77 PTC Headquarters, Pakistan Secretariat G-8/4, Islamabad Karachi 74400 Tel: 92-51-4844463, 2251939 Pakistan Fax: 92-51-4843991 Tel : +92 21 920 62 61 Fax : +92 21 920 62 63 Internet Service Provider (Paknet) Email : [email protected] 85-West Rizwan Centre, Islamabad Pakistan Institute of Quality Control Tel: 111-222-117 304, Eden Centre Fax: 92-51-2873057 43 Jail Road LAHORE Internet Service Provider (COMSATS) Pakistan H. No. 30, Attaturk Avenue, Tel : +92 42/ 756 3645/+92 42/ 756 2260 G-6/4, Islamabad Fax : +92 42/ 755 2656 Tel: 92-51-9206604-7 E.mail : [email protected] / [email protected] Fax: 92-51-9214124 URL : http://www.piqc.com.pk UAN: 111-700-800

Pakistan Software Export Board

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1.82 Recent relevant publications

1.82.1 Practical guides for investment in Pakistan

Pakistan Investment Guide, Ministry of Industries and Production, 2003 Pakistan Investment Policies, Incentives & Facilities, Board of Investment, January 2003 Pakistan Investment Guide, Research & Economic development Cell, Chamber of commerce & Industry, Karachi, 2002 Physical Infrastructure, Pakistan, Ministry of Industries & Production, September 2003 Privatisation Commission, Annual Report, 2002 Securities and Exchange Commission of Pakistan, Annual Report 2002 US Commercial Service 2002: Country Commercial Guide Pakistan ADB publication: Financial Management and Governance Issues in Pakistan, 2000.

1.82.2 Pakistan – general country/economic analyses

Global Economic Prospects, Realising the Development Promise of the Doha Agenda, the World Bank, 2004 Trade Policies in South Asia: An Overview, the World Bank, June 2003

1.82.3 Pakistan – investment climate/investment environment

Improving the Investment Climate in Pakistan, an investment climate assessment prepared by the World Bank Group in collaboration with The Small and Medium Enterprise Development Authority of the Government of Pakistan May 30, 2003 Pakistan: Selected Issues and Statistical Appendix, November 2002, IMF (International Monetary Fund), Washington, D.C. Pakistan Development Policy Review: A New Dawn? April 2002, World Bank, Washington D.C. Pakistan Trade Sector Assistance Strategy Note, June 2002, World Bank, Washington, D.C. Pakistan Investment Climate: Statement US Commercial Service Pakistan 2002 Labour force Situation in Pakistan (Based on labour survey, 1999-00), International Labour Organisation, Area Office, Islamabad

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