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2012 Investment Climate Statement - Pakistan


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to Foreign Investment

Government of Pakistan (GOP) policy is to actively seek foreign investment and offer a broad array of incentives to attract new capital inflows. In the past, Pakistan had a wide-ranging privatization program in the financial services and telecommunications sector, which helped attract significant new investment flows from 2002 to 2007. However, deterioration in the security environment, a lack of privatization since 2008, and the global economic downturn have caused foreign direct investment to decline 66% from $5.15 billion in FY 2008 to $1.73 billion in FY 2011. The Government of Pakistan (GOP) has been tasked since 2008 with the challenge of phasing out food and fuel subsidies in the face of escalating price increases for imported food and fuel. Future foreign investment flows will depend on how the government copes with these challenges. The GOP will need to focus on structural issues - a massive subsidy burden, rapidly rising food and fuel prices, lack of competitiveness, export concentration in only a few sectors, an unskilled labor force, and insufficient infrastructure in some areas.

In FY 2007 and FY 2008, Pakistan attracted significant interest from overseas investors. In subsequent years the GOP has not been able to sustain this level due to macroeconomic instability and a downgrade in its sovereign credit rating. Other challenges to increasing FDI inflows include significant security threats to foreign interests in Pakistan, concerns about political stability, inadequate infrastructure, past protracted disputes between foreign investors and the federal government, substandard intellectual property rights protections, arbitrary and nontransparent application of government regulations, and resistance to reforms by some elements of federal and provincial bureaucracies. There is need for a clearly communicated economic policy, enhanced legal protection for foreign investment, and a clear and consistent policy of upholding contractual obligations.

Table 1

Foreign Direct Investment Inflows (in billions)

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

$5.13 $5.15 $3.17 $2.15 $1.73

Pakistan is currently a business environment in transition, with many significant policy improvements since 2000. However, some policies unfriendly to business still remain. A series of investment promotion agencies, most recently the Pakistan Investment Board and its successor, the Board of Investment (BOI), have lacked the bureaucratic authority and continuity of leadership needed to be effective. Further reforms are needed in policy formation and legislation, as well as implementation.


Table 2

Millennium Challenge Corporation/International Organizations’ Pakistan Ratings

Measure FY Year Score

MCC Government Effectiveness 2012 61 percent

MCC Rule of Law 2012 61 percent

MCC Control of Corruption 2012 27 percent

MCC Fiscal Policy 2012 11 percent

MCC Trade Policy 2012 66 percent

MCC Regulatory Quality 2012 59 percent

MCC Business Start-Up 2012 84 percent

MCC Land Rights Access 2012 54 percent

MCC Natural Resource Mgt. 2012 61 percent

The MCC score indicates the percentile achieved by Pakistan amongst the group of Low Income Countries.

Measure Calendar Year Score

TI Corruption Index 2011 134/183

2.5/10

Measure FY Score

Heritage Economic Freedom 2012 122/179

World Bank Doing Business 2012 105/183

In 1992, as part of an integrated investment promotion strategy, the GOP undertook a comprehensive program of economic reform, including liberalization, privatization, and deregulation, which was designed to steer the economy toward a fully market-oriented system. Power generation, telecommunications, highway construction, port development and operations, as well as the oil and gas, services and infrastructure, education, health, and agricultural sectors were opened to foreign investment to some degree. In 1997, this liberalization was significantly expanded, with restrictions on FDI eased and foreign investors allowed unrestricted profit repatriation in the agricultural, services, infrastructure, education, and health sectors. Full foreign ownership, already permitted in the manufacturing sector, was expanded to investments in infrastructure and the education and health sectors.

Foreign investors in the services sector currently may retain 100 percent equity “for the life of the investment.” The minimum allowable equity investment in the non-financial services sector is $150,000, and 100 percent repatriation of profits is allowed in the services sector. In the social and infrastructure sectors, 100 percent foreign ownership is allowed, with a minimum investment requirement of $300,000. In the agricultural sector, 60 percent foreign ownership is allowed. Corporate farming is permitted, though only companies incorporated in Pakistan can own land used for this use. The GOP allows remittance of full capital, profits, and dividends, and dividends are tax-exempt. There are no limits on the size of corporate farming land holdings and the sector is allowed to lease land for 50 years, with renewal options. The tourism, housing, construction, and information technology sectors have been granted “industry” status, which means they are eligible for lower tax and utility rates than banks, insurance companies, and other businesses that are considered a part of the “commercial sector.”

In FY 2007 Pakistan eliminated some tariff incentives provided for various manufacturing sub-sectors, specifically the value added, priority, and high-tech industries. Currently, the entire manufacturing sector pays up to five percent customs duty on imported plant and machinery. In its FY 2007 budget, the government also eliminated sales tax on all types of plant and machinery. Export industries are entitled to duty-free import of raw materials. There is no minimum equity investment or national ownership requirement for investments in the manufacturing sector and the GOP allows a 50 percent first-year depreciation allowance for all fixed assets. The agriculture sector is entitled to import of plant and machinery free of duty. The GOP also allows 50 percent of cost of plant and machinery as first year depreciation allowance in infrastructure and social sectors.

Foreign investors in Pakistan have complained of being subject to a confusing array of federal and provincial taxes and controls. These taxes have been assessed with considerable administrative discretion, resulting in discrimination among taxpayers, inefficiency, and corruption. The GOP is exploring ways to simplify the federal and provincial tax structure. In 2004, the World Bank assisted the GOP in launching a $73.9 million, multi-year tax reform program. This program was set to conclude in 2009, but was extended until December 2011 when it finally ended. It has assisted the GOP in reorganizing the Federal Board of Revenue (FBR), in establishing a large tax payers unit, and in introducing a self-assessment scheme. Nonetheless, Pakistan’s tax/GDP ratio still is among the lowest in the world.

A significant hurdle to investment in Pakistan in the past was the bewildering number of approvals, permits, and licenses required from various governmental entities prior to launching a business project. Most of these licenses and permits have been removed. Mandatory BOI investor registration is no longer required, but investors still must register with the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP).

Since 1997, the GOP no longer screens industrial sector foreign investment unless investors apply for special incentive packages or government tariff protection and price guarantees. Earlier requirements that foreign investors seek provincial government clearance for project location were eliminated in 1997.

The GOP is committed to providing full national treatment and legal protection to foreign investment in all but designated “sensitive” sectors, which include defense and broadcasting. The 1976 Foreign Private Investment Promotion and Protection Act specifically provides that foreign investment will not be subject to higher income tax levels than those assessed on similar investments made by Pakistani citizens. This Act and the 1992 Economic Reforms Act are the primary statutory safeguards for the rights of foreign investors. While Pakistan's legal framework and economic strategy do not discriminate against foreign investment, contract and other legal enforcement can be problematic given the domestic court system's inefficiency and lack of transparency.

The Securities and Exchange Commission of Pakistan regulates the insurance industry, while the Ministry of Finance oversees the banking sector. The GOP opened the insurance industry as part of its financial sector reforms, and in 2007 allowed foreign investors to hold up to a 100 percent equity share of companies operating in the life and general insurance sectors.

Pakistan improved its financial services commitments after signing the WTO Financial Services Agreement in December 1997. Foreign firms have the right to establish new banks, and foreign banks and securities firms can grandfather previously owned rights. Foreign banks are permitted to establish branches as well as wholly owned locally incorporated subsidiaries, subject to the condition that they have global tier-1 paid up capital of $5 billion or more, or they belong to countries which are part of regional groups and associations, of which Pakistan is a member (e.g., the Economic Cooperation Organization – ECO, and the South Asian Association for Regional Cooperation – SAARC). Foreign banks not meeting these conditions are capped at a 49 percent foreign equity stake.

Currently, foreign banks, like local banks, must submit an annual branch expansion plan to the SBP for approval. The SBP approves new branch openings based on the bank's net worth, adequacy of capital structure, future earnings prospects, credit discipline, and the needs of the local population. However, all banks, including foreign banks, are required to open 20 percent of their new branches in small cities, towns and villages.

The SBP revised the minimum paid up capital (usually shareholder equity) requirements for all locally incorporated banks in 2009, increasing banks’ paid up capital requirements to $115 million (net of losses) by 2013. Banks were required to have $92 million as paid up capital by December 2011, and this will increase by $12 million each year as part of the transition process. Branches of foreign banks operating in Pakistan are also required to increase their assigned capital to $115 million (net of losses) by December 31, 2013. However, with the prior approval of the SBP, foreign banks whose headquarters hold paid up capital (free of losses) of at least $300 million and have a capital adequacy ratio of at least 8 percent are allowed to maintain the following minimum capital requirements: foreign banks operating up to 5 branches are required to maintain their assigned capital at $35 million and foreign banks operating 6 to 50 branches are required to maintain assigned capital at $70 million.

All new banks, including branches of foreign banks operating more than 50 branches, are required to meet the paid up/assigned capital requirement of $115 million by 2013 like their local counterparts. In 2009, the SBP also raised the required minimum capital adequacy ratio for banks and development finance institutions to 10 percent. Pakistan permits most-favored-nation (MFN) exemptions in the financial and telecom sectors, with a view to preserving reciprocity requirements and promoting joint ventures among Economic Cooperation Organization countries (Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Afghanistan, Iran, Turkey and Pakistan). Islamic banks in Pakistan face the same regulatory environment as other banks.

The privatization of substantial government holdings in the energy, financial services, and telecom sectors several years ago attracted considerable foreign investor interest. Foreign investors are permitted to bid on state-owned industries and financial institutions on terms equivalent to those offered to local investors. The GOP has limited government powers to oversee or investigate privatization transactions for up to one year following execution. The GOP’s privatization program is now stalled following a series of Supreme Court decisions against the privatization of Pakistan Steel Mills in 2006. The GOP did not earn any money through privatization in FY 2011.

The lack of a sound privatization plan and investor interest (attributable to the investment climate and security concerns) has led to a halt in privatizations of SOEs. On August 5, 2009, the Cabinet approved the Benazir Employees Stock Option Scheme (BESOS). This 12 percent divestment of ownership in 80 SOEs to the employees of those firms will cost $1.35 billion, GOP money some suggested was needed to reduce the fiscal deficit and fund increased development spending. These divestments have decreased the GOP’s annual SOE dividend receipts by an estimated $ 17.9 million, and obligated the government to pay dividends from the treasury to employees holding shares in money-losing firms (the vast majority of recipients). The GOP estimates the annual cost of assuming such dividend payments to be $19.5 million. So far 50,000 employees have benefitted from this scheme and dividends measuring $19.5 million have been distributed in 25 organizations including Oil and Gas Development Company Ltd, Pakistan Petroleum Ltd, Pakistan State Oil and Pakistan National Shipping Corporation.

Mergers are allowed between multinationals, as well as between multinationals and local companies. The 1984 Companies Ordinance governs mergers and takeovers.

Conversion and Transfer Policies

Pakistan has a liberal foreign exchange regime with few restrictions on holding and transferring foreign exchange. There are no limits on dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported inputs. Though there are no restrictions on payment of royalties and technical fees for the manufacturing sector, there are some limitations on the non-manufacturing sector, including limiting initial royalty payments to $100,000 and capping subsequent royalty payments to 5 percent of net sales for 5 years. Royalty and technical payments are subject to 15 percent income tax. Investor remittances can only be made against a valid contract or agreement that must be registered with the SBP within 30 days of execution.

Seeking to support cross-border payments of interest, profits, dividends, and royalties, in 2002 the SBP eliminated the requirement that commercial banks notify it before issuing foreign exchange. Banks still have to report loan information to the SBP, which then verifies that remittances match the repayment schedule. Typically, such remittances also take less than one week.

In June 2004, the State Bank of Pakistan required informal money changers to register as foreign exchange companies, and these companies became subject to auditing by the SBP. This resulted in the consolidation of the foreign exchange regime, subjecting it to more stringent regulations, including higher minimum capital requirements and stricter monitoring. These exchange companies are permitted to buy and sell foreign exchange to individuals, banks, and other exchange companies, and can sell foreign exchange to incorporated companies for remittance of royalties, franchises and technical fees. In recent years there has been an increase in workers’ remittances sent through these companies.

Expropriation and Compensation

Direct foreign investment in Pakistan is protected from expropriation by the 1976 Foreign Private Investment Promotion and Protection Act, and by the 1992 Furtherance and Protection of Economic Reforms Act.

Dispute Settlement

Pakistan’s legal system is based on British law, with an overlay of Islamic legal precepts. Tiers of civil and criminal courts begin at the tehsil (sub-district) level and end at the Supreme Court, with each province having a high court. The provincial high courts hear appeals from judgments of the district courts (for civil cases) and session courts (for criminal cases). Often the same individual sits as both a district and sessions judge. The Supreme Court hears appeals from the provincial high courts, referrals from the federal government, and cases involving disputes between provinces or between a province and the federal government. There are also a number of special courts and tribunals to deal with specific types of cases, such as taxation, banking, and labor. Pakistan does not have a bankruptcy law. Bankruptcy is usually handled through court-appointed liquidators who sell off the property of a bankrupt company, but this process is slow and can take many years.

In 2004, Pakistan’s Cabinet approved Pakistan joining the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The New York Convention was then ratified by Pakistan’s Cabinet in 2005, but the ordinance implementing the Convention expired in August 2010. Held up in the Senate for several months, Parliament reenacted The New York Convention on July 15, 2011.

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 the Convention for the Settlement of Investment Disputes. The Pakistan Arbitration Act of 1940 also provides a mechanism for arbitrating commercial disputes.

A previous dispute between a major U.S. multinational and its local Pakistani partner raised concerns in the international investor community over how arbitration clauses are handled in Pakistan. In 1998 this company filed a lawsuit, and despite a 2000 ruling of the International Chamber of Commerce (ICC) Arbitral Panel in favor of the U.S. investors, and a 2005 pronouncement by a Lahore civil court upholding the ICC decision, local parties continued litigating the matter in Pakistani courts for many years. The Lahore High Court eventually ruled in favor of the U.S. multinational company and upheld the original arbitration settlement. The case was finally resolved when the local party withdrew their appeal of the decision in June 2009.

Performance Requirements and Incentives

Current GOP investment policy provides that all incentives, concessions, and facilities for industrial development be equally available to domestic and foreign investors. Prior year budgets have contained some additional incentives for export industries. For example, sales taxes on plant and machinery were abolished as were customs duties on imported agricultural machinery. Customs duties for machinery imported by the manufacturing and social service sectors range between zero and five percent. Export oriented industries have also been granted customs duty exemptions on the import and purchase of raw materials. The FY 2011 budget retained all these incentives. The GOP, however, imposed sales taxes ranging between 4 percent to 6 percent on unregistered supply chain goods of export oriented sectors including textiles, surgical, sports, leather, and carpet sectors. Zero sales tax will continue to apply to the registered supply chain goods of these sectors; however, retailers in these sectors will be charged a 4 percent sales tax irrespective of registration.

There are no conditions imposed on the transfer of technology. Foreign investors are allowed to sign technical agreements with local investors with no requirement to disclose proprietary information.

The 2007-08 trade policy duplicated export processing zone (EPZ) incentives. Existing enterprises exporting at least 80 percent of their production are eligible for incentives under this program, but new enterprises are required to export 100 percent of their production in order to be eligible. In 2009, the GOP issued a Medium Term Trade Policy for 2009-2012, which also retains these measures. For new investments, a 50-percent first-year depreciation allowance for plant, machinery, and equipment can be used to offset taxable income, and unused allowances can be carried forward. An investment tax credit of up to 50 percent of the cost of plant, machinery, and equipment is available to encourage plant expansion and modernization.

With a recommendation letter from a foreign chamber of commerce, an invitation letter from a business endorsed by the Chamber of Commerce of Pakistan, or a recommendation letter from one of Pakistan’s foreign commercial attachés, most U.S. businesspeople are granted multiple entry visas valid for five years, with a three-month stay. Technical and managerial personnel are not required to obtain special work permits in sectors that are open to foreign investment, including the manufacturing, infrastructure, agricultural, service, health, and education sectors. Work visas are granted for up to two years with multiple entries.

Right to Private Ownership and Establishment

Foreign and domestic investors are free to establish and own businesses in all sectors except five: arms and munitions manufacturing, high explosives manufacturing, currency/mint operations, non-industrial alcohol manufacturing, and radioactive substance manufacturing.

In regard to competition between public and private sector firms, the GOP has licensed two (Pakistani) private airlines to compete with state-owned Pakistan International Airlines. In retail food sales, the GOP has influenced pricing of essential foodstuffs (such as flour, rice, and lentils) through its several hundred Utility Stores. Market leaders in the cement and sugar industries are alleged to have formed cartels. Energy shortages area acute and many allege that power sector reforms move at a glacial pace. Investment in the energy sector, particularly conventional gas, is stymied by a policy that under-prices resources and fails to safeguard contracts, and by an evolving relationship between and among the federal and provincial governments, whose views on the disposition of natural resources do not always match.

The sale of major state assets prior to 2009 has reduced the government’s role in the telecom sector. In an effort to create market competition, the GOP has issued licenses to long distance and local telephone operators, as well as to cellular and wireless local loop operators, ending the state telecommunications monopoly. The GOP, however, continues to hold important equity stakes in oil and gas, civil aviation, electric power, and steel, and over the past few years, the GOP’s privatization program has stalled.

Protection of Property Rights

Pakistan's legal system offers incomplete protection for the acquisition and disposition of property rights. The 1979 Industrial Property Order safeguards industrial property in Pakistan against compulsory acquisition by the government without sufficient compensation, even in the public interest, in accordance with provisions of the law. The Order protects both local and foreign investment. The 1976 Foreign Private Investment Promotion and Protection Act guarantees remittance of profits earned through sale and appreciation in value of property.

Intellectual Property Rights:

Pakistan was listed on the Priority Watch List in the 2009 Special 301 report and remains on that list in 2011. Key concerns cited in the report relate to weak protection and enforcement of intellectual property rights, especially with respect to copyright and pharmaceutical data protection.

Pakistan was on the Special 301 "Watch List" from 1989 to 2003 due to widespread piracy and was elevated to the "Priority Watch List" in 2004, 2005, 2008, and 2009 for continuing severe IPR violations and lack of progress in enforcement and legislation.

In early 2005, Pakistan was among the world’s leading producers of pirated optical discs and other copyrighted material, but in the past few years has taken significant steps to shut down pirate optical disc production and exports of pirate optical discs. In April 2006, USTR lowered Pakistan’s designation to “Watch List” from the more severe “Priority Watch List,” in recognition of the GOP’s enforcement efforts. Notable improvements include the closure of numerous pirate optical disc factories, enhanced enforcement efforts through the creation of a centralized Intellectual Property Rights Organization of Pakistan (IPO), commitment to establish a system to avoid granting marketing approvals to unauthorized copies of patent-protected drugs, and efforts to put in place a “Data Protection Law” to effectively protect test and other data submitted for marketing approval by pharmaceutical companies. (Note: A “Data Protection Law” has never been passed, and no such protections for pharmaceutical companies currently exist.) The GOP has identified intellectual property protection as a key area for its “second generation” economic reforms.

Pakistan has enacted five major laws relating to patents, copyrights, trademarks, industrial designs and layout designs for integrated circuits, but their impact was limited by weaknesses in the legislation and/or enforcement.

In April 2005, in an effort to improve the protection of intellectual property within Pakistan, the Government of Pakistan transferred inter-agency responsibility for the enforcement of intellectual property laws to the Federal Investigation Agency (FIA). FIA staff received specialized training in intellectual property enforcement and technologies, which enabled the agency to expand enforcement operations to target manufacturers of pirated goods. Expanding manpower and training at the FIA remains a key challenge.

Also in 2005, in response to longstanding domestic and international criticism of Pakistan’s lack of a functioning central IPR regulatory and enforcement authority, as well as the need to implement its WTO TRIPS obligations, the Pakistani President created the Intellectual Property Rights Organization of Pakistan (IPO). IPO, an autonomous body under the administrative control of the GOP’s Cabinet Division, consolidates into one government agency authority over trademarks, patents, and copyrights – areas which were previously handled by offices in the three separate ministries. IPO's mission is to initiate and monitor the enforcement and protection of intellectual property rights through law enforcement agencies, in addition to dealing with other IPR related issues. While IPO’s establishment represented an important milestone, it has not led to consistently measurable results in terms of increased public awareness of intellectual property rights, stepped up enforcement, and prompt action to address specific legislative and policy weaknesses.

In 2007, the United States conducted an Out-of-Cycle Review to monitor Pakistan’s progress on enacting legislation to provide effective protection against unfair commercial use of undisclosed test and other data generated to obtain marketing approval for pharmaceutical products, as well as a system of coordination between its health and patent authorities to prevent the issuance of marketing approvals for unauthorized copies of patented pharmaceutical products.

Pakistan has made progress for continuing enforcement actions against large-scale illegal optical disc production and retail sales of pirated and counterfeit products, but needs to increase enforcement actions against book piracy, aggressively prosecute IPR crimes, and ensure that its courts issue deterrent-level sentences for IPR infringers.

Pakistan is a party to the Berne Convention for the Protection of Literary and Artistic Works, and is a member of the World Intellectual Property Organization (WIPO). On July 22, 2004, Pakistan acceded to the Paris Convention for the protection of industrial property. Pakistan has not yet ratified the WIPO Copyright Treaty nor the WIPO Performance and Phonograms Treaty. Since the arrival of the new Secretary General in June, 2011, IPO has worked to increase awareness about IP rights violations and has started a media campaign against counterfeiting and piracy. IPO has also conducted training courses for IP professionals in accordance with WIPO standards. They also have reached out to law enforcement agencies in an effort to upgrade enforcement mechanisms to counter IPR violations, and intend to work with trade organizations to increase IPR awareness. IPO has expressed an interest to formulate new laws and fix gaps in current legislation in hopes that these efforts will eventually lead to Pakistan’s removal from the Priority Watch list.

Patents:

Pakistan enacted a patent law in 2000 that protects both process and product patents in accordance with its WTO obligations. Under this law, both the patent-owner and licensees can file suit against those who infringe. Unfortunately, a Patent Ordinance in 2002 weakened the 2000 Patent Law by eliminating use patents, restricting patent filings to single chemical entities, limiting protection for derivatives, and introducing barriers to patenting biotechnology-based inventions. This change generated great concern among U.S. pharmaceutical firms seeking to sell patented drugs in Pakistan. In addition, the GOP has not implemented patent linkages, effectively authorizing the sale of pharmaceuticals without requiring checks to confirm that another firm does not hold an active patent on the compound.

Pakistan has failed to make progress in providing effective protection against unfair commercial use of undisclosed test and other data generated to obtain marketing approval for pharmaceutical products. The GOP and international and local pharmaceutical companies have been negotiating a draft data protection law for the past three years. Although draft data protection regulations were formulated in 2009, the regulations remain under GOP review and have not been promulgated. Now, with the health portfolio being devolved to the provinces following passage of the 18th Amendment in April 2010, the data protection regulations will require passage from provincial assemblies in addition to the National Assembly, which is likely to further delay promulgation. Pakistan currently does not have an effective system to prevent the issuance of marketing approvals for unauthorized copies of patented pharmaceutical products. In 2009, Pakistan’s President issued an ordinance that removed an 18-month patent application processing deadline, slowing the processing of pending patent applications. This ordinance has frustrated the pharmaceutical industry, as many companies have already been waiting for years for approval of their product patents. The GOP maintains that other countries do not adhere to an 18-month application processing period. While the former Health Ministry claimed that this change was made to avoid litigation in view of capacity constraints, the ordinance has effectively created an environment where the potential for discriminatory treatment exists.

Trademarks:

Pakistan promulgated its Trademarks Ordinance in 2000, which provides for the registration and better protection of trademarks, and restricts the use of fraudulent trademarks. The ordinance has been enforced since April 2004, after the enactment of implementing rules. The GOP has eliminated the requirement that pharmaceutical firms label the generic name with at least equal prominence to that of the brand name on all products. Trademark infringement remains widespread.

Copyrights:

Pakistan remains a predominantly pirate book market, although print piracy is slowly giving way to pirate photocopying. The Urdu Bazaars in Karachi and Lahore remain major sources of pirated books in the country, though book piracy has spread more widely. Pirates now focus attention on illegal photocopies made from one master/source copy legitimately purchased online or overseas, and slapping on a higher-quality color-printed book cover. The printing of title covers has taken on a new dimension, since pirates now often print the pirated book obscuring the author’s names, publisher’s names, logos, ISBN numbers, etc. Print piracy consists of smuggled books from Iran and Afghanistan by land, or overruns by legitimate printers in Pakistan. Unauthorized India-only reprints are also being imported into Pakistan. All types of books are pirated, from English language novels to fiction and non-fiction trade books. Pirate booksellers are highly organized, well-connected, and often succeed in convincing authorities to drop cases immediately after any enforcement action or avoid enforcement action altogether. In some cases, they have even resorted to threats of violence and intimidation to avoid enforcement. Some pirate enterprises are now able to produce fairly high-quality counterfeit copies that are difficult to differentiate from legitimate versions. Additionally, the National Book Foundation continues to claim it may avail itself of compulsory licenses to copy books even though doing so is incompatible with Pakistan’s international obligations under the Berne Convention.

According to the International Property Alliance, the publishers operating in Pakistan report that overall the situation in Pakistan has improved slightly due to increased enforcement activity, and that piracy levels are proportionately similar to Bangladesh, Iran, and Sri Lanka. The authorities, especially the Federal Investigations Agency (FIA) Islamabad, have taken some timely and positive actions against book piracy in the Urdu Bazaars.

Despite significant public awareness and enforcement drives by the Business Software Alliance over the past several years, enterprise end-user software piracy remains a serious problem. While the GOP took steps to improve copyright enforcement, especially with respect to optical disc piracy, it appears that only some of the arrests resulted in prosecutions and the few verdicts that were issued resulted in imposition of insignificant prison sentences.

Pakistan’s Federal Investigation Agency (FIA) continues to conduct occasional raids, and sixteen new cases were filed in 2011. From 2005-2011, 130 cases were filed against IPR violators and millions of rupees worth of pirated material were confiscated. However, the failure to successfully prosecute those cases has meant that they had little deterrent effect. Out of 130 cases, violators were convicted and charged with IPR infringement in 18 cases acquitted in 8 cases. Seventy-four of these cases are being tried in various courts and another 24 are being investigated by the Federal Investigation Agency. Three cases were closed and another 3 were appealed. The accused parties engage highly paid and high-profile lawyers while the services of FIA’s Prosecutors are confined to limited courts. In most of the cases, higher courts have stayed the investigation / prosecution proceedings and justice was deterred for want of special prosecutors demanding very high fee. Moreover, Pakistan is now reportedly being used as conduit for infringing products transiting from Russia, Malaysia, Singapore, China, Bangladesh, and Sri Lanka for onward distribution to third countries.

Internet use continues to rise in Pakistan. As a result, online piracy in Pakistan increased in 2011. Publishers report that reference books, online journals, and trade books are being digitized and provided by schools. Thus far, no steps have been taken to address increasing online piracy or illegal digitization.

The Industrial Designs Law provides for the registration of designs for a period of ten years, with the possibility of extending the registration for two additional ten-year periods. The Law for Layout Designs of Integrated Circuits provides for protection of layout designs for ten years starting from its first commercial exploitation anywhere in the world. Penalties and legal remedies are also available in case of infringement on industrial designs, layout designs and trademarks. Implementing rules to enforce these ordinances remain incomplete. In 2009, the Cabinet approved a draft Plant Breeder’s Rights Law and an amendment to the Seed Act of 1976, both of which are pending approval in Parliament and passage from the provincial assemblies.

Transparency of Regulatory System

A number of government agencies oversee commercial and financial regulatory regimes, including the Securities and Exchange Commission of Pakistan (SECP), the Federal Board of Revenue (FBR), the Board of Investment (BOI) 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 is responsible for company administration under the 1984 Companies Ordinance and regulates securities markets through its Securities Market Division. The SECP and the national stock exchanges have cooperated to streamline procedures to register and list securities. Equity markets are regulated by the 1969 Securities and Exchange Ordinance and by the 1971 Securities and Exchange Rules.

A Takeover Ordinance was enacted in 2002. Under Section 40 of the 1997 SECP Act, the SECP publishes draft regulations to seek public comment prior to their finalization. The SBP, in its role as bank regulatory authority, consults with commercial banks on proposed regulations. The FBR issues Statutory Regulatory Orders (SROs), which are used either to reduce duties to give special relief to certain sectors or to enhance duties. The FBR does not solicit public input on SROs.

The Competition Commission of Pakistan (CCP) is responsible for regulating the anti-competitive and monopolistic practices of both private sector and public sector organizations. A competition ordinance, drafted with technical assistance from the World Bank, was approved by Pakistani Cabinet in June 2007, and resulted in the creation of the CCP. Previously, competition law in Pakistan was under the jurisdiction of the Monopoly Control Authority, an independent regulatory authority that lacked enforcement capacity.

The Monopoly Control Authority regulatory oversight suffered from resource constraints, and state-owned enterprises (SOEs) were exempt from its provisions. Thus, in Pakistan, where SOEs dominate several sectors, competition regulation remained incomplete. A new Competition Commission Bill was signed by the President and became law on October 6, 2010. This law codified the mandate of the CCP into law, and revised the appeals process to include an Appellate Tribunal in Islamabad consisting of a retired judge and three private sector participants, who are tasked to deliberate and issue decisions within six months. The law also reduced the fine on offenders from 15 percent of turnover to 10 percent, and authorized the CCP to collect 3 percent of the earnings of other major regulatory agencies to supplement their budget. CCP has a record of winning 45 cases against monopolies and restrictive trade practices, but unfortunately140 cases are still pending and many of those cases won are not fully enforced due to a poorly functioning court system.

Market Entry: With the end of licensing regimes, the rationalization of bureaucratic controls, and broad-based market liberalizations, market entry barriers have been reduced but not fully eliminated.

Environmental Issues:

Pakistan’s key environmental issues are the poor management of natural resources, pollution, waste management, and the impacts of climate change. A World Bank assessment released in 2006 revealed that collective environmental degradation costs Pakistan an estimated six percent of GDP, and that these costs fall disproportionately on the poor. The increasing pollution of water, air, and land continues to have an enormous impact on people’s health, especially that of vulnerable groups such as women and children. The quality and quantity of renewable natural resources such as water, forests and other vegetation, and key biological habitats have declined. The Government, private sector, and civil society have not responded adequately to meet these challenges. Pakistan is prone both to natural disasters which, with climate change, will continue to increase in frequency and intensity while capacity to manage and mitigate the impacts of disasters continues to decline. A number of factors accentuate the severity of the post-disaster impact in Pakistan, which include, poverty, poor construction practices, the inadequate management of livestock and agriculture, a fragile natural environment, inadequate early-warning systems, lack of public awareness and education, and poor natural resource management practices. Floods, earthquakes, droughts, and cyclones are the primary natural disasters that occur in Pakistan. Pakistan is one of the flood-prone countries of South Asia.

In June 2005, the Cabinet approved Pakistan’s first National Environment Policy. The policy was designed to achieve sustainable development through the conservation, protection, and restoration of Pakistan’s environment, and is in line with national targets for achieving U.N. Millennium Development Goals. The broad policy covers air and water pollution, soil erosion, waste management, deforestation, loss of biodiversity, desertification, natural disasters, and climate change. The Environment Ministry prepared a National Environmental Policy Action Plan in collaboration with major stakeholders for the implementation of this plan, which provides for mandatory environmental impact assessments for all future development projects. After devolution of the Ministry of Environment in June 2011, implementation of the policy has become splintered, complex, and clumsy resulting in the policy having limited current impact.

The GOP approved the National Energy Conservation Policy and National Sanitation Policy in 2006. The World Bank has developed a National Sanitation Action Plan highlighting the roles and responsibilities of various public and private sector organizations working in the area of water and sanitation. A core group of these NGOs includes the Rural Support Program Network (RSPN), Water Aid, Plan International, and the Pakistan Institute for Environment-Development Action Research (PIEDAR). While the Government, NGOs, and international environmental and development institutions commonly agree on the key challenges and technical solutions, the critical roadblock remains implementation.

The 1997 Pakistan Environmental Protection Act provides a comprehensive legal framework for prevention and control of pollution; import of chemicals and other toxic substances; management, handling, and transportation of hazardous substances; management of industrial, municipal, and agricultural wastes; and promotion of sustainable development. The Pakistan Environmental Protection Agency (PEPA) enforces environmental protection laws and controls national environmental policy, environmental standards, and monitoring compliance. To date, PEPA has developed standards for municipal and liquid industrial effluent and waste, industrial gaseous emissions, motor vehicle exhaust, and noise and air pollutant tolerance levels. Standards for air quality and solid waste management have yet to be developed. Projects likely to have an adverse environmental impact are required to file a detailed Environmental Impact Statement with PEPA while still in the planning stage. Potential investors are encouraged to contact PEPA early in the planning process to ensure compliance with environmental standards. The GOP has also introduced unleaded gasoline to control air pollution.

After devolution of the Ministry of the Environment, the Pakistan Environmental Protection Agency became a department of the Ministry of National Disaster Management. 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 GOP’s technical capacity to review, assess and monitor industry compliance with environmental standards remains limited. In 2009, the GOP approved the National Drinking Water Policy but a nationwide water quality monitoring system has yet to be instituted and municipal water is not to WHO standards across the country.

Despite the 1997 PEPA and the 2009 National Drinking Water Policy, the state of Pakistan’s water sector is notably poor. Coverage is low, service quality is poor, and vast amounts of toxic waste are poured into neighborhoods and natural areas. As the urban population grows, many cities are facing growing challenges of obtaining adequate, good quality sources of water. Limited accessibility to reliable, high quality water negatively impacts the investment climate in Pakistan.

Procurement:

The GOP subscribes to principles of international competitive bidding. The relatively weak procurement regulatory framework began to improve with the implementation of procurement rules recommended by the Public Procurement Regulation Authority (PPRA) in 2002. Several systemic flaws were identified, including inadequate bidding documents, inadequate response time for bidders, prequalification as a means of restricting competition, flaws in price negotiations, lack of an independent complaints’ handling process, and irregularities in inspections and measurements. External partners, including the Asian Development Bank (ADB), the U.K. Department for International Development (DFID), and the World Bank are supporting the GOP in modernizing and strengthening the public procurement system at the federal and provincial levels. In 2004, the PPRA enacted a regulatory framework for public procurement which is aimed at establishing transparent public procurement practices. International tender notices are now publicly advertised and sole source contracting using company-specific qualifications has been eliminated. There are no official "buy national" policies. The PPRA also has a grievance mechanism where bidders can lodge complaints. If bidders remain unsatisfied with decisions rendered, they can file suit in the relevant court of jurisdiction.

Political influence on procurement decisions, charges of official corruption, non-transparency, and long delays in bureaucratic decision-making have become common. Suppliers have reported instances where the GOP used the lowest bid as a basis for further negotiations, rather than accepting the lowest bid under its tender rules. The procurement of more than 75 locomotives for Pakistan Railways in 2008 was conducted in a non-transparent manner. The World Bank has encouraged the GOP to adopt a monitoring and evaluation system for public procurement, which the GOP has yet to establish.

There are some positive examples of procurement practices. Pakistan State Oil Company, Pakistan’s largest gasoline retailer and one of the major suppliers of gasoline to the aviation and energy sectors, has a fairly transparent and competitive bidding process for the transportation of crude oil. Other public sector companies, like the Water and Power Development Company, also invite tenders from private companies for fuel deliveries. Though a member of the WTO, Pakistan has yet to accede to the WTO Government Procurement Agreement. The sanctity of contracts has also been a major concern for some companies in their dealings with the GOP.

Efficient Capital Markets and Portfolio Investment

Pakistan’s financial sector policies support the free flow of resources in product and factor markets for domestic and foreign investors. The State Bank of Pakistan (SBP) and the Security and Exchange Commission of Pakistan (SECP) continue to expand their regulation and oversight of financial and capital markets, with the assistance of the World Bank and the Asian Development Bank (ADB).

Banking sector assets total $77.2 billion, heavily concentrated among a handful of state-owned and private-sector institutions. System-wide, net non-performing bank loans (NPLs) total approximately $2.2 billion, or 5.5 percent of net total loans.

Credit is allocated on market terms, and domestic interest rates, after hitting historical lows in 2004, have risen again as the SBP tightened monetary policy. But the SBP has again started to ease the monetary policy and brought the down the policy rate from 14 percent to 12 percent. Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits. The banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 35 percent of banks’ equity up until December 2011 and 25 percent by end of 2013. While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending. Pakistan’s domestic corporate bond, commercial paper, and derivative markets remain in the early stages of development.

The Karachi Stock Exchange (KSE) is a member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE). It is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions. The KSE-100 index recorded a decline in FY2011. The Index dropped to 11640.46 points in FY2011 from 12022.46 points in FY2010 -- down 3.1 percent. Market capitalization also decreased by 6.5 percent to $35.2 billion in FY2011 from $37.7 billion in FY2010. The KSE currently has 638 listed firms, but only 5 firms (three of which are state owned) account for 38.4 percent of market capitalization.

The GOP implemented a capital gains tax effective July 1, 2010. The capital gains tax is applied at 10 percent on stocks held for less than six months, and 7.5 percent on stocks which are held for more than six months, but less than a year. A capital gains tax is not applied on holdings that exceed 12 months. Portfolio investments, capital gains, and dividends can be fully repatriated.

Recent capital market reforms include the introduction of minimum capital requirements for brokers, linking of exposure limits to net capital, strengthening of brokers’ margin requirements, introduction of system audit regulations (mandating audit of 60 percent of brokers), introduction of over the-counter (OTC) markets to facilitate registration of new companies with less paid-up capital, and introduction of a National Clearing and Settlement system. The SECP implemented a number of other regulations, including rules for clearing house regulations, margin trading regulations, proprietary trading regulations, and abolition of the group account facility. A SECP Corporate Governance Code was adopted in 2002 for all firms listed on the nation's equity exchanges. Capital markets’ legal, regulatory and accounting systems are increasingly consistent with international norms.

Pakistan has adopted international accounting standards, with comprehensive disclosure requirements for companies and financial sector entities, and Pakistan adheres to the majority international accounting standards and international financial reporting standards. Pakistan Mercantile Exchange Limited, formerly known as the National Commodity Exchange, has been functioning since May 2007. Currently, the Mercantile Exchange deals in gold, silver, rice, sugar, cotton palm oil, and crude oil futures. The SBP, in its role as bank regulatory authority, has established a formal process of consultations with banks on draft regulations. Under Section 40 of the 1997 SECP Act, the SECP also publishes draft regulations to seek public comment prior to finalization.

Legislation providing a legal framework for friendly and hostile takeovers was enacted in 2002. Four such takeovers occurred in 2009. The law provides that companies have to disclose any concentration of share ownership over 25 percent. There are no laws or regulations that authorize private firms to adopt articles of incorporation that discriminate against foreign investment.

Competition from State Owned Enterprises

The GOP’s extensive 15-year privatization campaign came to an abrupt halt after 2006, when the Supreme Court reversed a proposed deal for the privatization of Pakistan Steel Mills, setting a precedent for future offerings. Since 2008, the civilian administration has argued this ruling as for a key reason for GOP inaction on privatization. As a result, large and costly State-Owned Enterprises (SOEs) have retained monopolistic powers in a few key sectors, requiring the GOP to provide annual subsidies to cover SOEs’ inefficiency-driven losses. Three of the larger SOE’s are Pakistan Railways, Pakistan International Airlines, and Pakistan Steel Mills.

Pakistan Railways (PR): PR is the only provider of rail services in Pakistan, and is also the largest public sector employer with close to 90,000 employees. Decades of corruption and mismanagement (of PR’s 500 locomotives, only 107 are reported operable and only one locomotive is available for the more profitable freight cargo usage), have caused PR’s market share in freight traffic to fall from more than 80 percent in the 1970s, to less than 4 percent today. The 2010 floods also caused extensive damage to Pakistan’s rail network. Facing declining demand in freight traffic (PR’s most profitable business unit), PR posted a loss of $384 million in FY 2011, paid for by GOP subsidies. In the FY 2012 budget, total GOP subsidy payments to PR are budgeted at $1 billion (down from $1.07 billion in FY 2011): $294 million in budgeted losses, $176 million in grants for development expenditures, and $529 million for current expenditures.

Pakistan International Airlines (PIA): PIA continues to struggle and is criticized for poor management, excessive staffing, inefficient operations, and a non-completive market strategy. PIA’s aging and fuel-inefficient fleet are suffering in the current global environment of higher oil prices, and PIA’s payroll has a current total of about 22,000 employees. There are a few key differences between PIA and PR though. First, PIA is technically not operating as a monopoly, with Air Blue and Shaheen Air as popular alternatives. PIA is both helped and hindered by its status as an SOE, enjoying preferential access to the best air routes, but having to endure a more bureaucratic structure, exemplified by recent GOP decision to resolve a PIA strike by nullifying a proposed code-sharing agreement with Turkish Airlines.

Pakistan Steel Mills (PSM): Established by the GOP as a cheaper option than importing steel, PSM has deteriorated into a money-losing enterprise that argues for a ban on steel imports to remain afloat. The proposed $360 million sale of a 75 percent stake PSM was halted by the Supreme Court in 2006 because of strong union and public opposition, and a perception that the transaction undervalued PSM. PSM had net loss of $306 million in FY 2009, $129 million in FY 2010, and $67 million in the first six months of FY 2011.

Privatization: The Privatization Commission initiated 166 privatization transactions from 1991-2007, yielding over $5.5 billion. However, privatization efforts have stalled since 2008. Additionally, SOEs that are prime candidates for privatization continue to inflict heavy losses on the GOP balance sheet, and have contributed to the current high fiscal deficit. In the absence of privatization, the GOP announced that several major SOEs would be restructured, in an attempt to make them financially and administratively viable.

Restructuring: The Cabinet Committee on Restructuring (CCoR) has the lead on restructuring the various SOEs. Headed by the Finance Minister and with representation from the Privatization Commission, the body has identified eight SOEs for complete restructuring. While privatization of these entities may be the ultimate objective, the GOP believes that current market conditions and the SOEs’ weak financial health necessitate restructuring to increase their value before any direct sale takes place. The CCoR has limited itself to reshuffling the firms’ Boards of Directors, and remains unwilling to make the hard decisions to truly reform these SOEs, which would include significant reductions in staffing.

BESOS: The Benazir Employees Stock Options Scheme (BESOS) enabled the GOP to transfer a 12 percent stake in all SOEs (worth a combined $1.35 billion) to the employees of those firms. The GOP hopes this divestment plan will increase employee loyalty and enhance efficiency at the SOEs. The GOP states that over 200,000 workers will benefit from the transfers, critics complain that 78 percent of the entire $1.35 billion distribution is going to just 10,148 eligible employees of the Oil and Gas Development Company Limited (OGDCL) and 2,693 eligible employees of Pakistan Petroleum Limited (PPL).

Etisalat/PTCL: I n 2006, the UAE’s Etisalat agreed to buy a 26 percent stake in Pakistan Telecommunication Company Limited (PTCL) in a deal worth $2.6 billion. However, because of delays in the transfer of land titles from the GOP to PTCL, Etisalat has withheld the final tranche of $800 million. While most of the titles have now been transferred to PTCL, Etisalat has said it will payment until all agreed land is transferred Etilsalat.

Corporate Social Responsibility (CSR)

Awareness of corporate social responsibility among both producers and consumers in Pakistan is growing and foreign and some local enterprises generally follow accepted CSR principles. Proctor and Gamble-Pakistan was the 2011 recipient of the Secretary’s Award for Corporate Excellence (ACE) for demonstrating CSR in flood relief, support of education and orphans, implementation of science and technology standards, reduction of carbon dioxide emission at its facilities, and collaboration with universities to develop young business leaders. The U.S. based Aspen Institute sponsors a Partners For a New Beginning (PNB)-Pakistan chapter whose membership consists of a mixture of public private partnerships focusing on cultural/educational exchanges, health issues, and promoting entrepreneurship.

Political Violence

Over 2500 civilians and 670 law enforcement personnel died in terrorist-related incidents in 2011, and the presence of al-Qa’ida, Taliban, and indigenous militant sectarian groups continues to pose potential danger to foreigners throughout Pakistan. Terrorists targeted civilians in attacks on markets, clubs and restaurants, places of worship, schools, and outdoor recreation events in Pakistan. In addition, the summer and early fall of 2011 saw outbreaks of serious political violence in Karachi, with estimates of death tolls there in the hundreds. Embassies of most western countries, including the United States, United Kingdom, Canada, Australia, and New Zealand Embassies issued travel advisories recommending against non-essential travel to Pakistan.

The GOP has taken steps to curb the terrorist threat, including banning extremist organizations and placing extra police in the diplomatic enclave and around hotels that cater to international travelers. Despite these measures, the threat to western diplomats, executives, and tourists in Pakistan will likely remain high over the medium term. Political violence outside of the capital remained high in 2011. Consequently, western businesses operating in Pakistan will require extra security measures and should budget accordingly.

Corruption

Corruption remains widespread in Pakistan, especially in the areas of government procurement, international contracts, and taxation. Giving and accepting bribes are criminal acts punishable by confiscation of property, imprisonment, recovery of ill-gotten gains, dismissal from governmental service, and reduction in governmental rank. In 2011, Pakistan ranked 134 in the Transparency International Corruption Perceptions Index (with a score of 2.5 out of 10), gaining 9 places from 143 in 2010.

The law provides for criminal penalties for official corruption; however, the government did not implement the law effectively, and officials frequently engaged in corrupt practices with impunity. The National Accountability Bureau (NAB) organized under the 1999 National Accountability Ordinance, serves as the highest-level anti-corruption organization, with a mandate to eliminate corruption through awareness, prevention, and enforcement. Initially focusing its efforts on well-known politicians and government officials guilty of gross abuses of power and stealing public funds, the NAB refocused its strategy in 2002 after citizens and human rights groups accused the agency of being a political tool for the detention of former officials and party leaders, as well as serving as a means to deviate from the normal justice system. During most of the year, the NAB was ineffective, largely because it did not have a chairman or prosecutor general, and was poorly funded. The former NAB chairman resigned in June 2010; the GoP appointed a new NAB Chairman in October 2011. Pakistan’s new anti-corruption leader spent the remaining part of 2011 working to fill long vacant positions and seeking appropriate funding levels needed to adequately perform NAB’s mandate.

The Competition Commission of Pakistan, formed in 2007, is an independent, quasi-regulatory, quasi-judicial body that worked to ensure competition between companies to enhance economic efficiency and protect consumers from anticompetitive behavior. The organization sought to prohibit corrupt activities, such as collusive practices, abuse of market dominance, deceptive marketing, and illegitimate mergers and acquisitions. Despite dynamic leadership, active community engagement, and lower-level court decisions against businesses engaged in anticompetitive activities, the Competition Commission is hindered by insufficient government funding and slow progress of its cases in the judicial court of appeals. Corruption was pervasive in politics and government, and various politicians and public office holders faced allegations of corruption, including bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement.

A 2007 National Reconciliation Ordinance (NRO), promulgated under former president Pervez Musharraf, provided an amnesty mechanism for public officials who were accused of corruption, embezzlement, money laundering, murder, and terrorism between January 1, 1986, and October 12, 1999. In December 2009, the Supreme Court declared the NRO null and void, and reopened all 8,000 cases against those who had received amnesty, including the president, ministers, and parliamentarians. However, in January 2010, the Zardari government filed a petition challenging the Supreme Court's 2009 decision, and requesting its review. The issue remained unresolved at the end of 2011. Corruption within the lower levels of the police is common. The July 2010 survey by Transparency International noted that the major cause of corruption was lack of accountability, followed by lack of merit and low salaries. Some police charged fees to register genuine complaints and accepted money for registering false complaints. Bribes to avoid charges were commonplace. Critics charged that appointments of station house officers (SHOs) were politicized.

Widespread allegations of corruption plagued the government’s rental power plant projects (RPP), which were a priority in 2008-2009 to address the country’s acute energy shortage. Citizens and parliamentarians accused government officials of providing financial kickbacks and awarding extravagantly priced rental power plants to their close acquaintances. In December 2010 and January 2011, the Supreme Court found two power companies guilty of receiving more than 970 million rupees ($11.2 million) in advance payments to provide electricity but failing to commence commercial operations by the agreed date. The court ordered both companies to return the funds advanced, and the government abandoned the RPP power project as a policy priority.

Anecdotal reports persisted about corruption in the district and sessions courts, including reports of small-scale facilitation payments requested by court staff. Lower-court judges lacked the requisite independence and sometimes were pressured by superior court judges as to how to decide a case. Lower courts remained corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures. Government involvement in judicial appointments increased the government's control over the court system.

The 2002 Freedom of Information Ordinance allows any citizen access to public records held by a public body of the federal government, including ministries, departments, boards, councils, courts, and tribunals. It does not apply to government-owned corporations or provincial governments. The bodies must respond to requests for access within 21 days. Certain records are restricted from public access, including classified documents, those that would be harmful to a law enforcement case or an individual, or those that would cause grave and significant damage to the economy or the interests of the nation. NGOs criticized the ordinance for having too many exempt categories and for not encouraging proactive disclosure.

Pakistan is not a signatory to the OECD Convention on Combating Bribery, but it is a signatory to the Asian Development Bank/OECD Anti Corruption Initiative. Pakistan has also ratified the UN Convention against corruption.

Bilateral Investment Agreements

The United States and Pakistan have had a bilateral tax treaty in force since 1959. Pakistan also has double taxation agreements with Austria, Canada, Germany, Indonesia, Italy, Lebanon, Mauritius, Poland, Switzerland, Turkmenistan, Kazakhstan, the United Arab Emirates, Belgium, China, France, Greece, Iran, Japan, Libya, Saudi Arabia, Romania, Sweden, Belarus, Hungary, Jordan, Kenya, Kuwait, Malaysia, Netherlands, Nigeria, Norway, Oman, Philippines, Qatar, South Africa, Syria, Tunisia, Uzbekistan, the United Kingdom, Bangladesh, Denmark, Finland, India, Ireland, South Korea, Malta, Singapore, Sri Lanka, Thailand, Azerbaijan, and Turkey. Pakistan has Bilateral Investment Treaties (BIT) with Australia, Malaysia, Azerbaijan, Mauritius, Bangladesh, Morocco, Belarus, Netherlands, Belgium, Oman, Luxemburg, Philippines, Bosnia, Portugal, Bulgaria, Qatar, Cambodia, Romania, China, Singapore, Czech Republic, South Korea, Denmark, Spain, Egypt, Sri Lanka, France, Sweden, Germany, Switzerland, Indonesia, Syria, Iran ,Tajikistan, Italy, Tunisia, Japan, Turkey, Kazakhstan, Turkmenistan, Kuwait, U.A.E., Kyrgyz Republic, United Kingdom, Lebanon, Uzbekistan, Laos, and Yemen.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) insurance and financing are available for commercial transactions involving Pakistan. Projects must meet OPIC eligibility guidelines.

Labor

The Pakistan work force consists of approximately 58.4 million workers, but this estimate does not include the informal sector or child labor. The majority of the labor force works in the agricultural sector (44.7 percent), followed by the services sector (34.0 percent), and manufacturing (13.2 percent). Officially, the unemployment rate hovers around 5.6 percent, but this is widely believed to be significantly understated, and a large number of the employed are underemployed. Pakistan is also an extensive exporter of labor, particularly to the Middle East.

Federal law mandates a minimum wage for unskilled workers (currently $81 per month) and a maximum 48-hour work-week (54 hours for seasonal factory workers), with paid annual holidays. These regulations only apply to workers in factories employing 10 or more workers. Multinational employers usually meet their labor obligations, while local businesses often do not. The only significant area of U.S. investment in which workers’ rights are legally restricted is the petroleum sector, which is subject to the Essential Services Maintenance Act. The Act bans strikes, limits workers’ rights to change employment, and affords little recourse to a fired employee, but does allow collective bargaining. However, this Act seldom has been applied.

Criticism of Pakistan’s confusing labor laws led to the 2000 creation of a government commission to revise and consolidate Pakistan’s labor legislation. The Industrial Relations Ordinance of 2002 was revised in 2008 and expired on April 30, 2010. The Industrial Relations Ordinance was again enacted by the President on July 18th, 2011. Under the 18th Amendment, responsibility for labor regulation and enforcement, in addition to industrial relations, has been devolved to the provinces. All the provinces have enacted the Industrial Relations Acts. According to GOP estimates, union membership consists of approximately five percent of the industrial labor force and two percent of the total workforce. The GOP has ratified 34 ILO conventions relating to human rights, workers' rights, and working conditions. The GOP has announced labor welfare measures in the past two years including extending Social Security eligibility to workers earning up to Rs. 10,000 ($116) a month, the establishment of a Complaint Cell to address workers complaints, allowing full wages to workers while on suspension, expanding the coverage of a GOP retirement benefits plan to establishments employing 5 or more workers, increasing marriage and death grants, and increasing workers’ eligibility for and the size of company profit-sharing awards. This package is being implemented by the provinces. The GOP has also approved and begun implementing a 12 percent divestment of state ownership in 80 SOEs, distributing the shares at a cost of $1.35 billion to the employees of those firms, based on length of service.

Foreign-Trade Zones/Free Trade Zones

The GOP established the first Export Processing Zone (EPZ) in Karachi in 1989, making special fiscal and institutional incentives available to encourage the establishment of exclusively export-oriented industries. The GOP subsequently established seven other EPZs in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Dek and Duddar. Of these, only Karachi, Risalpur, Sialkot and Saindak are operational. Principal GOP incentives for EPZ investors include an exemption from all taxes and duties on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to Export Processing Zone Authority One Window services, including facilitated issuance of import permits and export authorizations. The Export Processing Zone Authority (EPZA) is authorized to collect taxes totaling between 0.5-1.25 percent of total profits when goods are exported, in addition to a 0.5 percent development surcharge. There otherwise is an exemption from all federal, provincial, and municipal taxes for production dedicated to exports, and full repatriation of capital and profits for foreign investors is allowed. Investors eligible to establish businesses in EPZs have no minimum or maximum limits on investment. However, despite the substantial incentives offered, most of these zones have failed to attract significant investment.

The GOP offers incentives for other categories of export manufacturing. An Export-Oriented Unit (EOU) is a stand-alone industrial concern that exports 100 percent of its production; it is allowed to operate anywhere in the country. EOU incentives include duty and tax exemptions for imported machinery and raw materials and duty-free import of two vehicles per project. Pakistan also has 82 Industrial Zones (IZs): 26 in Punjab, 27 in Sindh, 15 in the North West Frontier Province, 11 in Balochistan, and 3 in Islamabad. The IZs provide infrastructure facilities but do not enjoy fiscal incentives, unlike EPZs. Occupancy in some IZs remains low, particularly those located in rural areas and small urban centers.

Foreign Direct Investment Statistics

FDI in Pakistan dropped to $1.57 billion in FY 2011 from $ 2.15 billion in FY2010. Historically, the United States, the United Kingdom, the United Arab Emirates, and Switzerland, have been Pakistan’s major sources of FDI (Table 3). The American Business Council of Pakistan estimates total U.S. investment in Pakistan at roughly $1 billion. In FY 2011, major U.S. investments were concentrated in oil and gas exploration, cement, chemicals, trade construction and textiles. (Table 4)


Table 3

FDI Flows into Pakistan by Source Country

Millions of Dollars, Fiscal Year (FY) Ending June 30


 

FY 2009

FY 2010

FY 2011

       

U.S.A.

869.9

468.3

238.9

U.K

263.4

294.6

208.1

UAE

178.1

242.7

284.2

Switzerland

227.3

170.6

47.2

Japan

74.3

26.8

3.2

Hong Kong

156.1

9.9

125.6

Germany

76.9

53.0

21.2

Other

1232.8

884.5

645.2

       

Total:

3179.9

2150.8

1573.6

       

FDI/GDP (%):

2.2

1.3

0.75

Source: Pakistan Board of Investment (BOI)


Table 4

FDI Inflows in Pakistan from United States by Economic Group

Millions of Dollars, July 2010 - June 2011


Oil and Gas Exploration

83.5

Cement

33.4

Chemicals

21.0

Trade

15.7

Construction

11.5

Textiles

11.3

Transport

06.4

Software Development

05.6

Food and Beverages

04.6

Financial Business

03.0

Others

42.9

   

Total

238.9

Source: Pakistan Board of Investment (BOI)


Table 5

FDI Inflows - 10 Major Companies in Pakistan, FY 2010

(in Millions of Dollars)


Company Name

FDI

   

British Petroleum

41.7

Orient Petroleum Inc.

37.42

Kirther Pakistan B.V.

34.57

Occidental Petroleum Inc.

34.32

Premier Kufpec Pakistan

32.04

KESC

20.00

Uch Power Project

17.67

Chevron Pakistan Ltd.

14.92

China Road and Bridge

12.30

Tethyan Copper Company

11.25

NOTE: Information not available for FY 2011. END NOTE.

Source: Pakistan Board of Investment (BOI)



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