Openness to Foreign Investment
Pakistan actively seeks foreign investment and offers 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 from $5.15 billion in FY 2008 to $2.15 billion in FY 2010, nearly a 60% decline. The Government of Pakistan (GOP) is tasked 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 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 risks 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, weak 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 continuity in 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 2006 |
FY 2007 |
FY 2008 |
FY 2009 |
FY 2010 |
|
$3.52 |
$5.13 |
$5.15 |
$3.17 |
$2.15 |
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. Thus, further reforms are needed at both the level of policy formation and legislation, as well as implementation.
Table 2.
Millennium Challenge Corporation, Int’l Organizations’ Pakistan Ratings
|
Measure |
Year |
Score |
Note: The MCC score indicates the percentile achieved by Pakistan amongst the group of Low Income Countries |
|
MCC Government Effectiveness |
FY11 |
47% |
|
|
MCC Rule of Law |
FY11 |
50% |
|
|
MCC Control of Corruption |
FY11 |
34% |
|
|
MCC Fiscal Policy |
FY11 |
10% |
|
|
MCC Trade Policy |
FY11 |
46% |
|
|
MCC Regulatory Quality |
FY11 |
65% |
|
|
MCC Business Start Up |
FY11 |
86% |
|
|
MCC Land Rights Access |
FY11 |
74% |
|
|
MCC Natural Resource Management |
FY11 |
92% |
|
|
TI Corruption Index |
2010 (Calendar Year) |
143/178 2.3/10 |
Note: 143 is Pakistan's ranking out of 178 countries; 2.3 is the score |
|
Heritage Economic Freedom |
FY11 |
123/183 |
|
|
World Bank Doing Business |
FY11 |
83/183 |
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, telecommunication, 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. 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.” In addition, the minimum allowable equity investment in the non-financial services sector is only $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 corporate farming. 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 of the tariff incentives provided for various manufacturing sub-sectors, specifically the value added, priority, and high-tech industries. Now, 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, as well as exemption from sales tax. 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, multiyear tax reform program. This program was set to conclude in 2009, but has been extended until December 2011. 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, and political gamesmanship prevented the GOP from presenting an IMF-mandated tax measure to Parliament at the end of 2010.
A significant hurdle to investment in Pakistan is the bewildering number of approvals, permits, and licenses required from various governmental entities prior to launching a project. 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 also 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 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 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 $120 million (net of losses) by 2013. Currently, banks are required to have $82 million as paid up capital, 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 $120 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 will be allowed to maintain the following minimum capital requirements: By December 31, 2010, foreign banks operating up to 5 branches are required to raise their assigned capital to $36 million and foreign banks operating 6 to 50 branches will be required to raise their assigned capital to $72 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 $120 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 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 2010. 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 77 SOEs to the employees of those firms will cost the government $1.35 billion, money sorely needed to reduce the fiscal deficit and fund increased development spending. These divestments will decrease the GOP’s annual SOE dividend receipts by an estimated $93 million, and obligate 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 $19.4 million.
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 can take 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. A bill to rectify this was passed by the National Assembly on November 5, 2010 and is now awaiting Senate approval. When approved by the Senate and signed by the President, the New York Convention will be applicable retroactively from the previous point of expiry to ensure continuity.
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 longstanding dispute between a major U.S. multinational and its local Pakistani partner has 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.
In 2007, a British petroleum entity (which also has U.S. subsidiaries) sold assets to two foreign subsidiaries, and several disputes regarding taxation on the sale arose between the petroleum companies and Pakistan’s taxation authority, the Federal Board of Revenue (FBR). Each company has a Petroleum Concession Agreement (PCA) signed with the GOP, however in spite of this, the FBR substantially increased taxes on the companies, ignoring certain terms of the PCAs. As a result, the FBR has issued tax demands, notices of asset seizure and notices of forced sale against the foreign petroleum companies. The petroleum companies have raised this matter to the Income Tax Appellate Tribunal, and cases are pending in the High Courts in both Karachi and Islamabad.
One of the disputes occurred when the FBR began to retroactively impose a new method of calculating the tax depreciation allowance for the petroleum companies, which retroactively reduced the depreciation allowance, thus reducing expenses and increasing their tax liability. Another dispute arose when the petroleum company submitted a request for an advance ruling to the FBR in 2007. Although the FBR is required to reply to such requests within 90 days, it finally responded 17 months later in February 2009, and then attempted to immediately assess a tax. The company sought a stay in the Islamabad High Court, which was vacated in July 2010 when the High Court sent the case to FBR’s Commissioner of Appeals. The Commissioner of Appeals then ruled against the company, which has subsequently made payments to the FBR.
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, customs duties on imported agricultural machinery were abolished, and customs duties for machinery imported by the manufacturing and services sectors were reduced to 5 percent or less. Export oriented industries have also been granted customs duty and sales tax exemptions on the import and purchase of raw materials. The FY 2011 budget retained all these incentives. The GOP Cabinet, however, approved the Reformed General Sales Tax (RGST) Bill and presented it to the National Assembly for passage. The RGST proposed to withdraw all non-essential goods sales tax exemptions including those provided to export oriented industries. Political wrangling at the end of the year resulted in a withdrawal of the bill so that the ruling Pakistan People’s Party can gain broader support for the measure.
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 investment, 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 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. The Water and Power Development Authority (WAPDA) retains control of power transmission and distribution in much of the country outside of Karachi, and this continues to be highly subsidized.
The sale of major state assets prior to 2009 has reduced the government’s role in the power and telecom sectors. 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. 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. Due to a lack of progress in either of these areas, Pakistan was elevated to the Priority Watch List.
The United States commends Pakistan for its continuing enforcement actions against large-scale illegal optical disc production and retail sales of pirated and counterfeit products, but encourages Pakistan 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.
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 linkage, 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 also 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 finally 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 Health Ministry claims 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
The GOP has acted to combat piracy in the Urdu Bazaars, a major market for booksellers and wholesalers in Karachi, but the piracy situation has only improved slightly. According to the International Intellectual Property Association (IIPA), The Urdu Bazaars remain the main sources of pirated books in the country, though book piracy has spread beyond just bazaars and is rampant. 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. All types of books are pirated, and any book that can sell more than a few hundred copies is a target for the pirate market. English language novels and other trade books are popular among pirates, harming U.S. publishers of mainstream commercial fiction and non-fiction. 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.
The situation is equally bleak in the business software sector. Unlicensed use of software by businesses causes significant losses each year to the software industry. There was a slight decline in the business software piracy level from 86 percent in 2008 to 85 percent in 2009, with losses also declining from an estimated $80 million to $73 million. While the GOP took steps in 2009 and 2010 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 from November 2009 to October 2010, 20 new cases were filed against IPR violators and millions of rupees worth of pirated material was confiscated. However, the lack of successful prosecutions underscores the limited deterrent effect these arrests have had. The FIA made 41 arrests during the course of their investigations, however only 2 individuals were charged, and both were acquitted. Nineteen cases are still in pipeline for prosecution. 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.
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.
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, and 4 takeovers took place under this law in 2009.
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.
Market Entry: While the end of licensing regimes, the rationalization of bureaucratic controls, and broad-based market liberalizations have reduced market entry barriers, in numerous industrial sectors market barriers remain.
Environmental Issues
Pakistan’s key environmental issues are the management of scare 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 6 percent of GDP, and that these costs fall disproportionately on the poor. 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.
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).
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. 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 weak.
In 2009, the GOP approved the National Drinking Water Policy but a nationwide water quality monitoring system has yet to be instituted. The GOP has also introduced unleaded gasoline to control air pollution, and Pakistan is now among the world’s largest users of compressed natural gas vehicles.
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 in the last two years. 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 140 locomotives for Pakistan Railways was conducted in a non-transparent manner. Despite the fact that Chinese locomotives did not meet Pakistan Railways’ technical requirements, they were awarded the contract for Railway locomotives. In another example, U.S bidders submitted the lowest bid for the sale of high frequency radio receivers to Pakistan’s Navy, but the Navy called for another round of bidding. 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 $77.5 billion, heavily concentrated among a handful of state-owned and private-sector institutions. System-wide, net non-performing bank loans (NPLs) total approximately $1.7 billion, or 4.6 percent of 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. 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. Just like their domestic counterparts, foreign entities must ensure that their total exposure (fund-based and/or non-fund based) from financial institutions does not exceed ten times their equity. In addition, fund based exposure must not exceed four times equity. 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 has staged a recovery in FY 2010, rising by 35.7 percent to 9,722 points, from 7,162 points at the end of FY 2009. This was a sharp reversal of the 41.7 percent decline witnessed in FY 2009. Market capitalization also increased by 26 percent to $31.77 billion (18.5 percent of GDP) in FY 2010 compared to $24.66 billion in FY 2009. Pakistan was to be upgraded from the Morgan Stanley Capital International (MSCI) Frontier Market Index to the MSCI Emerging Market Index in June 2010; however this decision has been delayed. The KSE currently has 537 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. The National Commodity Exchange has been functioning since May 2007. Currently, the Commodity Exchange deals in gold, silver, rice, 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.
Political Violence
Al-Qaida, the Taliban, and domestic terrorist organizations pose significant threats to foreign interests in Pakistan, especially along the porous border with Afghanistan. Continuing tensions in the Middle East have increased the possibility of violence, and terrorists have attacked hotels, clubs and restaurants, places of worship, schools, and outdoor recreation events in Pakistan. In 2007, seventy bombings killed over 1000 people. In early 2008, four U.S. Embassy employees were injured in a terrorist attack. The coordination, sophistication, and frequency of suicide and other bombings that have increased sharply since 2007 continued unabated in 2010. Based on unofficial media reports, in 2010 Pakistan experienced more than 400 incidents of bomb blasts, suicide attacks, and sectarian violence, resulting in more than 2,000 dead and in excess of 5,000 injured. Embassies of most western countries, including the U.S. Embassy, have revised their staffing patterns accordingly, and issued travel advisories recommending against non-essential travel to Pakistan.
The GOP has taken steps to curb the terrorist threat, including banning eight 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 increased in 2010. Consequently, western businesses operating in Pakistan will require extra security measures and should budget accordingly.
Corruption
In October 2002, Pakistan’s Cabinet approved a National Anti-Corruption Strategy (NACS) that identified areas of pervasive corruption and recommended measures and reforms to combat corruption. 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. Corruption still remains widespread in Pakistan, especially in the areas of government procurement, international contracts, and taxation. In 2010, Pakistan ranked 143 in the Transparency International Corruption Perceptions Index (with a score of 2.3 out of 10), slipping 4 places from 139 in 2009. 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.
In late 2004, the United States and Pakistan launched negotiations on a BIT, which would provide U.S. investors in Pakistan with significant legal protections, but negotiations have since stalled.
OPIC and Other Investment Insurance Programs
Following Pakistan's decision to support U.S. efforts to combat terrorism, U.S. economic sanctions were waived and Overseas Private Investment Corporation (OPIC) insurance and financing became available for commercial transactions involving Pakistan. Projects must meet OPIC eligibility guidelines.
Labor
The Pakistan work force consists of approximately 55.7 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 (44.6 percent), followed by the services sector (20.7 percent), and manufacturing, mining and construction (19.4 percent). Officially, the unemployment rate hovers around 5.5 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. Under the 18th Amendment, responsibility for labor regulation and enforcement, in addition to industrial relations, has been devolved to the provinces. Punjab province has already enacted the Industrial Relations Act of 2010, but the other provinces have yet to take action. 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. The GOP has also approved and begun implementing a 12 percent divestment of state ownership in 77 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 Ports
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 also 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 in rural areas and small urban centers.
Foreign Direct Investment Statistics
FDI in Pakistan dropped to $2.15 billion in FY 2010 from $3.17 billion in FY 2009. Historically, the United States, the United Kingdom, the United Arab Emirates, Switzerland, and Japan 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 2010, major U.S. investments were concentrated in oil and gas exploration, power, trade, construction, food, food packaging, and chemicals and petroleum refining (Table 4).
Table 3.
FDI Flows into Pakistan by Source Country
Millions of Dollars, Fiscal Year (FY) Ending June 30
COUNTRY FY 2008 FY 2009 FY 2010
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U.S.A 1309.3 869.9 468.3
U.K 460.2 263.4 294.6
UAE 589.2 178.1 242.7
Switzerland 169.3 227.3 170.6
Japan 131.1 74.3 26.8
Hong Kong 339.8 156.1 9.9
Norway 274.9 101.1 0.4
Germany 69.6 76.9 53.0
Other 1809.4 1232.8 884.5
Total: 5152.8 3179.9 2150.8
FDI/GDP (%): 4.5 2.2 1.3
Source: Pakistan Board of Investment (BOI)
Table 4.
FDI Inflows in Pakistan from United States by Economic Group
Millions of Dollars, July 2009 - June 2010
Oil and Gas Exploration 244.65
Power 29.30
Trade 27.03
Chemicals, Petro chemicals and Petro Refining 22.08
Construction 15.76
Food and Food Packaging 12.73
Financial Business 7.58
Electronics 2.77
Others 106.40
Total 468.30
Source: Pakistan Board of Investment (BOI)
Table 5.
FDI Inflows - 10 Major Companies in Pakistan, FY 2010
Millions of Dollars
Company Name FDI
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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
Source: Pakistan Board of Investment (BOI)
