Other State Department Archive Sites

The State Department web site below is a permanent electronic archive of information released online from January 1, 1997 to January 20, 2001. Please see www.state.gov for current material from the Department of State. Or visit http://2001-2009.state.gov for information from that period. Archive sites are not updated, so external links may no longer function. Contact us with any questions about finding information. NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein.

Country Commercial Guides for FY 2000: Pakistan Report prepared by U.S. Embassy Islamabad, released July 1999 Note*

CHAPTER VII. INVESTMENT CLIMATE

A. Openness to Foreign Investment

The Government of Pakistan is open to foreign investment and offers a package of incentives to attract foreign investors.

Considering the openness of the investment regime, foreign investment activity to date has been relatively modest and in 1998-99 registered a substantial drop in new FDI. Possible reasons for this include inadequate infrastructure, lack of ideal foreign investment environment, perceptions of political instability, prevalent war hysteria including the nuclear threats between Pakistan and the neighboring India, law and order difficulties, policy inconsistencies, and resistance to the new policies by some elements of the bureaucracy who have not yet fully adjusted to the new, open economic environment.

Besides law and order problem, there is a need for continuity in economic policies, legal protection to foreign investment and upholding the sanctity of Agreements. Pakistan needs to follow procedures that instill confidence in foreign investors that contractual obligations are honored. A succession of investment promotion agencies, recently the Pakistan Investment Board and its successor, the Board of Investment (BOI), have lacked the bureaucratic authority or the continuity of leadership needed to implement its policies.

As part of an integrated investment promotion strategy, the GOP undertook during 1990 a comprehensive program of radical economic reforms including liberalization, privatization and deregulation to bring the economy into a fully market-oriented system. This was aimed at capturing the potential of the private sector in all areas of economic activity. The privatization process has been redesigned to make it more transparent. Power generation, telecommunication, highway construction, port development and operations, the oil and gas, services/infrastructure, 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, but enforcement of contracts can be difficult given the inefficiency of the court system. Foreign investment is generally subject to the same rules as domestic investment, with the exception of certain sensitive areas such as defense production, banking, and broadcasting.

There is little apparent denial of national treatment for foreign firms. There is also no evidence of statutory derogation of national treatment. In fact, the Foreign Private Investment (Promotion and Protection) Act, 1976, specifically provides that foreign investment shall not be subject to more taxation on income than investment made in similar circumstances by Pakistani citizens. In practice, the issue of extension of national treatment is tested on a case-by-case basis, but apart from sensitive industries, national treatment appears to be the norm. However, the new Investment Policy provides equal investment opportunities for both domestic and foreign investors.

In new policy (announced April 1999) foreign investment on repatriable basis has now been allowed in manufacturing, infrastructure, hotel/tourism, agriculture, services, and social sectors.

Key features of Pakistan's investment climate include the following:

- Relaxation of foreign exchange controls, and a general policy of permitting foreign investors to participate in local projects on a 100 percent equity basis.
- Allowing of foreign companies incorporated in Pakistan to undertake export and import trade.
- Provision of full safeguards to protect foreign investment;
- Withdrawal of work permit restrictions on expatriate managers and technical personnel working in an industrial undertaking and easing of remittance restrictions.
- Abolition of the ceiling on payments of royalties and technical fees. - Elimination of the requirement of obtaining a "No Objection Certificate" (NOC) from the appropriate provincial government, except for areas which are classified as negative areas (for reasons of environmental degradation, over-congestion, etc.).
- No requirement of government approval to set up an industry in any field, place and size, except for the following industries:
- Arms and ammunition
- High explosives
- Radio-active substances
- Security printing, currency and mint.

(Establishment of new units for the manufacture of alcohol, except industrial alcohol, is banned).

The Government of Pakistan is committed to providing full protection to foreign investment. The principal statutory vehicles for such safeguards are the Foreign Private Investment (Promotion and Protection) Act, 1976 and Economic Reforms Act of 1992.

Institutional Promotion of Investment - One hurdle to investment in Pakistan had been a bewildering series of approvals, permits, and licenses required from various levels of government in order to launch a project. Successive institutional entities have attempted to ease that process for prospective investors by functioning as a "one-window" interface between the investors and the relevant Pakistani authorities, and the situation is improving with special efforts by BOI.

Incentives for Investment - To keep Pakistan competitive in international market, exemptions or relief from import duties has been allowed on imported plant and machinery which is not manufactured locally. Tax relief in shape of first year allowance has been provided for category (A): value added or export industries, category (B): Hi-tech, category (C): Priority industries and category (D): Agro-based industries as well as other new industries. Tax relief has also been provided for expansion and balancing, modernization and replacement (BMR), in existing industries.

B. Right to Private Ownership and Establishment

Foreign and domestic private entities are free to establish and own business enterprises in virtually all sectors of the economy, with the exception of certain sensitive areas such as defense production, etc. Private entities are similarly free to acquire and dispose of their interests in business enterprises.

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 GOP has not adopted visibly unfair competitive practices in these public-private matchups, but the situation varies from industry to industry, and the privatization of the state-owned entities especially in industrial sector is top of the agenda.

Two state-owned banks, Allied Bank Limited (ABL) and the Muslim Commercial Bank (MCB) have been successfully privatized and are performing well. The privatization process has been slowed down during this year; however, political priority/inclination is for the privatization of the state-owned enterprises. The previous state monopolies such as civil aviation has now been opened up for private competition. Now three privately owned airlines are competing with the national carrier, PIA on national and international routes. The privatization of telecommunication giant, PTCL, a profit making government enterprise along with state-owned banks (Habib Bank Limited and United Bank Limited) may be privatized in next two years. The lucrative niche business of mobile phones having three international phone companies (Instaphone, Mobilink and Paktel) in the field is now being matched up by the PTCL. The other lucrative units such as Heavy Mechanical Complex, Taxila; Karachi Shipyard and Engineering Works; power generating units and power distribution components of WAPDA and KESC are being offered for privatization. However, the Government is gradually moving out of productive activities through a privatization program. It has largely succeeded in divesting such activities as cement production and vegetable oil refining and has begun the process of privatizing thermal power production, railways, telecommunications, remaining state-owned commercial banks and natural gas.

C. Protection of Property Rights

Pakistan's legal system protects and facilitates the acquisition and disposition of property rights.

Intellectual Property Rights - Pakistan is a member of the Universal Copyright and Bern Conventions. The copyright office is a department of the Ministry of Education. Copyright on a registered design is initially granted for a five-year period and may be extended for two additional five-year periods. Registration of patents and designs is administered by the Patents Office, a department of the Ministry of Industries. Patents are granted for up to 16 years from the date of application and may generally be extended for a five-year period and, under some circumstances, for an additional five years. Legal remedies such as injunctions are available in cases of patent infringement. Trade marks are registered under the Trade Marks Act, 1940, through the Trade Mark Registry, a department in the Ministry of Commerce. Trade marks are registered for seven years from the date of application and the registration may be renewed for an additional fifteen years.

The Office of the U.S. Trade Representative has Pakistan on the Special Section 301 Watch List under the Trade Act of 1988 because of inadequate intellectual property rights protection. Areas of specific concern include video piracy, unauthorized reproduction of U.S. printed works, and textile design piracy. Tens of thousands of video outlets in Pakistan deal almost exclusively in pirated products - and do so quite openly. U.S. pharmaceutical firms in particular have criticized Pakistan's patent law for providing process rather than product patent protection. Other firms have noted the absence of provisions for registering service marks. A more general complaint has been that, even where Pakistan's laws appear to provide adequate protection, enforcement is slow, sporadic, and ineffective.

The U.S. and Pakistan opened discussions some years ago on a comprehensive bilateral intellectual property rights agreement proposed by the United States, with the U.S. arguing that an IPR agreement would improve the investment climate in Pakistan. But, these talks stalled in 1995 and Pakistan remains reluctant to resume the dialogue. However, the three GOP ministries involved in this issue are revising the IPR legislation according to TRIMS Agreement.

D. Adequacy of Laws and Regulations Governing Commercial Transactions

The GOP subscribes to principles of international competitive bidding, but political influence on procurement decisions is common, and these decisions are not always made on the basis of price and technical quality alone. The sanctity of contracts also has been a major issue for some companies dealing with the government.

E. Foreign Trade Zones/Free Ports

Development of National Industrial Zones - A composite scheme of National Industrial Zones engulfing industrial estates, Free Industrial Zones, Free Trade Zones and Export-Oriented Units (EOU) and Estates for small and medium industries within areas of its boundary has been launched to promote exports. Also, establishement of export oriented units will be allowed to be set up all over the country. National Industrial Zones will be developed through private sector (domestic or foreign) under investor, developer and promoter (IDP) concept. However, parameters of the EOU have not been announced till now.

A single National Industrial Zone Authority (NIZA) will be set up with statutory powers to carry out the responsibility of the management of the NIZ. NIZA will extend one window facility to give permissions incorporating all required clearance of various departments and arrange utility and other related services for the investors to undertake industrial projects within the zone. A draft legislation for NIZA has been prepared by the BOI in technical assistance with UNCTAD, and is expected to become an Act within a year.

Free Industrial Zones will be multi-product zones where a variety of export products can be manufactured, traded, exported or re-exported.

Free Trade Zones will serve as an effective instrument to boost export trading. Private bonded warehouses will be permitted to be set up in the Zones to meet the requirements of the industrial units in the Free Industrial Zones or other EOUs in the country.

An Export Oriented Unit (EOU) is an industrial unit which exports its entire production excluding permitted level of Domestic Tariff Area sales and reject.

According to new Investment Policy, the incentives for free Industrial Zones, free Trade Zones and Export Oriented Units will be as follows:

(a) Local DFIs/Banks may be allowed project financing in Zone.
(b) Sale upto 20% of exports may be allowed to Domestic Tariff Area subject to payment of duties and taxes.
(c) Export of waste and defective items be allowed to tariff area are as also to bonded manufacturing units.
(d) Exporters of a zone may be treated at par with tariff area counterparts for freight subsidy on certain items.
(e) Inter-unit transfer of finished goods among exporting units may be allowed.
(f) Import duty and provincial tax exemption on imported machinery and raw materials.
(g) Duty free import of two vehicles for the projects located in NIZs.

The GOP also established an Export Processing Zone (EPZ) in Karachi, in 1989, where special fiscal and institutional incentives, are available to encourage the establishment of exclusively export-oriented industries. The Government has established two new EPZs -- in Sialkot and Rawalpindi. The incentives are as follows:

- Complete exemption from all federal, provincial and municipal taxes, any foreign exchange control and insurance regulations as applicable in Pakistan up to the year 2000.
- income accruing outside Pakistan exempted from tax;
- the losses, if any, on an industrial unit set-up in the Zone may be carried forward indefinitely;
- import of equipment machinery and materials (including components, spare parts and packing material) for enterprises set-up in the Zone is exempted from all federal and provincial taxes and duties including customs, excise, sales tax and municipal taxes;
- "One Window" service and simplified procedures - import permits and export authorizations are issued by the Export Processing Zone Authority (EPZA).

F. Performance Requirements/Incentives

Government policies strongly favor investment proposals in the engineering/capital goods manufacturing sector that have large export or value addition and local content components, but amounts are negotiable. The local content policy, known as the deletion policy, requires that all investments based on local assembly of imported parts, and that wish to enjoy favorable tax rates accorded to new investments, have a deletion program to raise local content. The Ministry of Industries monitors the deletion schedule closely and must approve any deviation.

Some projects that have been sanctioned and are operating in Pakistan have had considerable difficulty meeting their deletion program timetables, which often prove too tight for investors to organize a system of dependable, quality-conscious local suppliers. Relatively high duties discourage the import of automotives and other finished products, although the Government is reducing duties across the board to force the Pakistani economy to become more internationally competitive.

The Government's investment policy provides that all incentives, concessions, and facilities provided to domestic investors for industrial investment are also available to foreign investors without discrimination. A number of concessions, such as exemption from customs duties, sales tax concessions and a tax exemption on investment, as well as guaranteed repatriation facilities, have been introduced to accelerate industrial development in the country.

G. Transparency of the Regulatory System

Enforcement of the competition law in Pakistan is under the jurisdiction of the Monopoly Control Authority, an independent regulatory authority which lacks enforcement muscle. The Authority had its heyday during the populist period of Z.A. Bhutto in the 1970s, but even then it was notable more for its good research than its enforcement efforts. Pakistan formerly had a relatively high degree of industrial concentration, with widespread licensing procedures restricting entry and serving as vehicles for creating monopolies and oligopolies. The end of the licensing regimes, the decline in bureaucratic controls, and the liberalizing trend of the last five years have reduced industrial concentration by bringing down barriers to entry. Certain industries remain relatively concentrated, but for industry-specific rather than systemic reasons.

In a bid to deal effectively with environmental degradation, the Government of Pakistan, on December 6, 1997, has promulgated a major Environmental Act entitled "Pakistan Environmental Protection Act, 1997" which provides a comprehensive legal framework for addressing environmental problems including prevention and control of pollution, management of the health impact of climatic changes; import of chemicals and other toxic substances; management, handling and transportation of hazardous substances; and management of industrial, municipal, and agricultural wastes as well as promotion of sustainable development.

The Pakistan Environmental Protection Agency (PEPA) is responsible for enforcing the laws related to the protection of the environment. PEPA, a relatively new agency still developing its professional staff, is responsible for national environmental policy, development and implementation of environmental standards, and monitoring compliance with those standards. To date, PEPA has developed standards for municipal and liquid industrial effluent and waste, industrial gaseous emissions, motor vehicle exhaust and noise and air pollutants.

Public sector projects that are likely to adversely affect the environment are required to file with PEPA a detailed Environmental Impact Statement when the project is in the planning stage; other projects may be required to file short descriptions of their effects on the environment. Potential investors should contact PEPA at an early stage of the planning process to ensure compliance with environmental standards. The review process for Environmental Impact Statements should take 90 days and may lead to approval, rejection, or request for modification. Each province also has its own environmental protection agency; provincial Directorates of Industry may refer a project to the provincial agency when there are concerns about environmental impact.

The Securities Exchange Commission and the Registrar of Companies share responsibility for outside regulation of securities markets. They and the members of the exchanges have cooperated in streamlining processes for registration and listing of securities. The equity market is regulated by the Securities and Exchange Ordinance 1969 and the Securities and Exchange Rules 1981. The Companies Ordinance 1984 regulates stock exchanges by setting out the provisions under which listed companies must operate.

H. Labor

Estimated on the basis of existing population of 134.0 and its annual growth at 2.3 percent, the total labor force is estimated at 38.6 million as of January 1, 1999. The unemployment rate is estimated at about 6.1 percent during 1999.

I. Efficiency of Capital Markets and Portfolio Investment

The pattern of capital market development in Pakistan has been similar to several Asian markets. Bond market development has lagged as elsewhere in the region. However, the equity market in Pakistan has registered phenomenal growth in terms of size of the market and institutional development, but the fixed income securities market has not developed as quickly. At around 15 percent of GDP, Pakistan's savings rate is one of the lowest among developing Asian economies. The bond market in Pakistan covers debt and debt like securities issued by the government, statutory corporations and corporate entities. The market for bonds of statutory corporations and corporate entities is at an early stage of development.

The capital market reform package introduced new measures to encourage the development of capital markets in Pakistan. The financial institutions reforms have paved the way for the banks to operate on professional lines under the supervision of the State Bank of Pakistan, which is now an autonomous body.

There are three stock exchanges in Pakistan -Karachi, Lahore and Islamabad. At present the Karachi stock exchange has about 780 listed companies with trading volume increasing from 1.1 million shares a day in 1990, to about 95 million at present. Lahore and Islamabad stock exchanges are substantially smaller than Karachi.

In a major move to attract foreign portfolio investment the GOP in its new investment policy 1997 has announced a liberalized economic reforms package introducing new measures to encourage the development of capital markets in Pakistan. The package, among other incentives, extends a capital gains exemption for three years, exempts bonus shares from income tax, exempts foreigners for payment of tax for investing in Fixed Income Securities and removes the turnover tax on shares.

J. Conversion and Transfer Policies

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.

The average delay period currently in effect for remitting investment returns such as dividends, return on capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels is only a week to ten days. The delay for remittances by shipping companies is approximately one to three weeks and airlines generally experience delays of one to two months. It is also possible to remit funds through a legal parallel market by using Foreign Exchange Bearer Certificates (FEBCs), which may be purchased in the secondary market.

K. Expropriation and Compensation

Direct foreign investments are protected against expropriation by the Foreign Private Investment (Promotion and Protection) Act of 1976 and by an investment and guarantee agreement. The Government's record with respect to expropriation of foreign investment has generally been good. Although a number of nationalization of private concerns took place between 1972 and 1975 under the populist government of the late Prime Minister Zulfikar Ali Bhutto, they primarily affected domestic Pakistani companies. The current government of Prime Minister Muhammad Nawaz Sharif (and its predecessors since 1988) have credibly emphasized the great importance of the inflow of direct foreign investment and pledged to facilitate such investment. This implicit pro-foreign investment consensus among recent governments and the two major political parties makes nationalization or expropriations an extremely unlikely course in the foreseeable future.

L. Dispute Settlement

Legal System - Pakistan's legal system is based on British law, with a more recent overlay of Islamic law. The 1956 Constitution established Islamic principles to serve as a guide to state authorities. Article 198 provides that no law shall be repugnant to Islam. Statutes are a mixture of laws carried over from British rule and updating amendments and laws enacted since Partition.

The tiers of civil and criminal courts begin at the tehsil (sub-district) level and range up to the Supreme Court. The Supreme Court, based in Islamabad hears: appeals from the four provincial High Courts and the Federal Shariat Court (i.e. Islamic)

Court; references from the federal government; and 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). The High Courts hear 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. District and Sessions judges sit at the district level; often the same individual sits as both a district and sessions judge, depending on whether the matter at hand is civil or criminal. There are also a number of special courts and tribunals to deal with specific types of cases (Customs, Banking, Environmental, Labor, etc.).

All of Pakistan's constitutions have provided that all laws should conform to the injunctions of Islam, but there was little focused effort on this subject until General Zia ul-Haq made Islamization of Pakistan's laws a priority. In 1979, Zia reactivated the Council of Islamic Ideology (CII), which vets legislation for compatibility with Islam, and codified the four Hadood Ordinances in an attempt to make the Penal Code more Islamic.

Pakistan established an Ombudsman in 1983 to deal with public complaints against the Federal Government. The Ombudsman is a non-partisan individual appointed by the President for a four-year non-renewable term and may not be removed for any reason. The ombudsman's purpose is to deal with cases of mal-administration and to enforce some bureaucratic accountability.

Commercial law follows British and British Indian precedents. The Contract Act is, in effect, a codification of the English law of contract; Pakistan adopted the Indian Companies Act of 1913 at independence and has built on it since. Pakistan does have a concept of bankruptcy law, again using the British model. Bankruptcy petitions involve corporations and businesses; personal bankruptcy is not currently a widespread concept. In general, the court appoints a liquidator to sell off and account for the property of the bankrupt.

Security Interests in Property - The establishment of a market-oriented housing finance system in Pakistan's private sector is in its infancy. Until 1993, private firms were not permitted to lend for housing, and the sole source of formal sector housing loans was a highly-subsidized public lender, House Building Finance Corp. (HBFC). Recent regulatory reforms have led to the establishment of a legal framework for licensing and regulating private housing lenders. At present, two private housing companies are operating in a regulated environment and offering a variety of loan instruments. In order to mobilize funds, private housing companies may issue certificates of investment. Corporate Law Authority is responsible for licensing and regulating new companies in the housing finance sector.

Membership in ICSID/Domestic Arbitration Statute - Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). The Center provides facilities for conciliation and arbitration of investment disputes between contracting states and nationals of other states under a Convention for the settlement of investment disputes. The Pakistan Arbitration Act, 1940, also provides a mechanism for the arbitration of commercial disputes under which the parties either jointly appoint a single arbitrator or each appoint an arbitrator who join a neutral arbitrator on a three-person panel.

Pakistan became a member of the Multilateral Investment Guarantee Agency (MIGA), an arm of the World Bank, in April 1992, and MIGA's first local initiative was to provide coverage for several banking projects.

GOP record on Investment Disputes - There have been no significant recent investment disputes involving U.S. investors or contractors.

M. Bilateral Investment Agreements

Pakistan has bilateral investment treaties with the Peoples Republic of China, France, Germany, the Republic of Korea, Kuwait, the Netherlands, Romania, Sweden, U.K., Spain, Portugal, Turkmenistan, Tajikistan, Kyrghistan, Kazakhistan, Turkey, Kuwait, Malaysia and Singapore. A draft proposal for a Business Development Forum to facilitate business development between the United States and Pakistan was initiated in 1996, but has not yet been finalized so far.

N. OPIC and other Investment Insurance Programs

With the removal of U.S. economic sanctions against Pakistan, the Overseas Private Investment Corporation (OPIC) is now allowed to offer coverage to Pakistan; however, given the country's current financial ratings, OPIC has yet to extend its coverage to Pakistan.

O. Capital Outflow Policy

Pakistan has no restrictions on capital outflow. Those seeking to transfer funds out of the country need only comply with the procedures administered by the State Bank. This liberalized approach to capital outflow is part of Pakistan's effort to integrate itself into global capital markets. Although specific statistics are not available, there is very little outgoing foreign direct investment (FDI). Pakistan experienced some capital flight in September/October 1996 and again in May 1998, just before the government imposed a freeze on the foreign Currency Accounts (FCA's) but flows have stabilized since then.

P. Major Foreign Investors

The United States is the top ranking direct foreign investor in Pakistan. According to the GOP Ministry of Finance, cumulative direct foreign investment from the U.S. now totals $1,248.6 million. The American Business Council, whose membership is drawn from major U.S. firms, has over sixty members. After dropping off somewhat in 1992-93, probably as a result of the political uncertainty which gripped the country during much of that year, investment from the U.S. has been on the upswing. However, foreign investment has again dropped substantially since October 1996, and in FY 98-99 will probably be only 50 percent of the amount in FY 95-96.