2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report

Openness to Foreign Investment

The Government of Pakistan (GOP) policy is to welcome foreign investment and offer some incentives to attract new capital inflows. Despite this openness to foreign direct investment (FDI), FDI stock has declined sharply in Pakistan over the last five years. Analysts attribute this decline to the deteriorating security environment, the chronic energy crisis, a lack of privatization since 2008, and macroeconomic instability. Pakistan remains a profitable market for fast moving consumer goods and multinational corporations have a robust presence in this sector and a number of others. Nonetheless, future foreign investment inflows depend on how the GOP addresses the above challenges. 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.

The Government of Pakistan welcomes foreign investment and offers some incentives to attract new capital inflows, including tax exemptions, reduced tariffs, and infrastructure and investor facilitation services in designated special economic zones. Between 2002 and 2007, Pakistan attracted significant foreign investment through the privatization of state-owned enterprises, specifically in the financial services and telecommunications sectors. However, the current administration has not pursued privatization and the deterioration in the security environment, the chronic energy shortage, and macroeconomic instability have all contributed to the 85% decline in foreign direct investment from its peak of US$5.4 billion in FY 2008 to US$812.6 million in FY 2012.

Table 1

Foreign Direct Investment Inflows (in billions)—Statistics provided by the Pakistani Board of Investment

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
US$5.4 US$3.7 US$2.2 US$1.6 US$0.8

Millennium Challenge Corporation (MCC) /International Organizations’ Pakistan Ratings

The MCC score indicates the percentile achieved by Pakistan for FY 2013 among the group of Low Income Countries:

Measure FY Year Score

  • MCC Government Effectiveness: 58th percentile
  • MCC Rule of Law: 51st
  • MCC Control of Corruption: 40th
  • MCC Fiscal Policy: 15th
  • MCC Trade Policy: 44th
  • MCC Regulatory Quality: 62nd
  • MCC Business Start-Up: 92nd
  • MCC Land Rights Access: 51st
  • MCC Natural Resource Management: 51st

Measure Calendar Year Score

Transparency International Corruption Perception Index 2012: 139/176

Measure FY Score

  • Heritage Economic Freedom 2012: 122/179
  • World Bank Ease of Doing Business 2012: 107/185

Foreign investors in the services sector may retain 100% equity “for the life of the investment.” The minimum allowable equity investment in the non-financial services sector is US$150,000, and 100% repatriation of profits is allowed in the services sector. Investors need to obtain licenses from the Pakistan Telecommunication Authority in order to start a cellular operation network. In the social and infrastructure sectors, 100% foreign ownership is allowed, with a minimum investment requirement of US$300,000. In the agricultural sector, 60% 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 raw material and machinery for agricultural and agro-based industries can be imported at 0% custom duty. 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.” Only Pakistanis can invest in small scale mining valued at less than Rs. 300 million.

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 manufacturing sector pays up to 5% customs duty on imported plant and machinery. In its FY 2007 budget, the government 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% first-year depreciation allowance for all fixed assets. The agriculture sector is entitled to the import of plant and machinery free of duty. The GOP also allows 5% of the cost of plant and machinery as first year depreciation allowance in infrastructure and social sectors.

Foreign investors in Pakistan sometimes complain of a confusing array of federal and provincial taxes and controls. These taxes are often assessed with considerable administrative discretion, resulting in discrimination among taxpayers, inefficiency, and corruption. Attempts to reform the tax system date back to the 1980s and have failed to yield results. Pakistan has one of the lowest tax-to-GDP ratios in the world (less than 10% in 2012). The tax regime is discriminatory and poorly connected multinational corporations shoulder a large portion of the tax burden, while others are largely tax exempt. The number of approvals, permits, and licenses required from various governmental entities prior to launching a business project posed a significant hurdle to investment in Pakistan in the past. Many of these licenses and permits have been removed over the last several years. Mandatory Board of Investment (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. The same year, the GOP also eliminated requirements that foreign investors seek provincial government clearance for project location.

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 SECP regulates the insurance industry, while the SBP oversees the banking sector. The GOP opened the insurance industry as part of its financial sector reforms. In 2007, the government allowed 100% foreign equity in the insurance business subject to the condition that foreign investors are required to bring in minimum paid up capital of US$5.3 million in life insurance and US$3.1 million in non-life/general insurance.

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 US$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 that do not meet these conditions are capped at a 49% 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% 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 US$115 million (net of losses) by 2013. Branches of foreign banks operating in Pakistan are also required to increase their assigned capital to US$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 US$300 million and have a capital adequacy ratio of at least 8% are allowed to maintain the following minimum capital requirements: foreign banks operating up to 5 branches are required to maintain their assigned capital at US$35 million and foreign banks operating 6 to 50 branches are required to maintain assigned capital at US$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 US$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%. 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 are subject to the same regulatory requirements as traditional banks.

The GOP’s privatization of state-owned enterprises (SOEs) stalled in 2008, and the GOP did not earn any money through privatization in FY 2012. 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.

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

The SBP maintains tight control on the exchange rate and imposes informal controls on transferring foreign exchange De jure, there are no limits on dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported inputs; however, banks report that they must justify all outward flows of foreign currency with underlying trade documents. Additionally, to move more than US$10,000 abroad, individuals and companies must seek the written approval of the SBP. 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 US$100,000 and capping subsequent royalty payments to 5% of net sales for 5 years. Royalty and technical payments are subject to 15% 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, the SBP eliminated the requirement that commercial banks notify it before issuing foreign exchange in 2002. Banks still have to report loan information to the SBP, which then verifies that remittances match the repayment schedule.

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

Foreign direct 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. Pakistan’s National Assembly 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 its appeal of the decision in June 2009.

Several other high profile foreign investment disputes in the mining and energy sectors remain active cases in Pakistani courts.

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 0-5 %. Export oriented industries have also been granted customs duty exemptions on the import and purchase of raw materials. The FY2013 budget retained all these incentives. In 2011, the GOP imposed sales taxes ranging between 4- 6% on unregistered supply chain goods of export oriented sectors including textiles, surgical, sports, leather, and carpets. Registered supply chain goods of these sectors will remain exempt from sales tax, but retailers in these sectors will be charged a 4% sales tax irrespective of registration. The GOP reduced the maximum general tariff rate from 35% to 30% (except vehicles) and reduced the number of duty slabs from 8 to 7. The GOP further reduced customs duty on 88 pharmaceutical raw materials and other input goods from 10% to 5%.

Petroleum companies receive royalties at the rate of 12.5% of the value of petroleum at the field gate.

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% of their production are eligible for incentives under this program, but new enterprises are required to export 100% 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% 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% 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 remain acute and power sector reforms move at a glacial pace. Investment in the energy sector, particularly conventional gas, is stymied by a policy that underpriced 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 2012 Petroleum Policy, adopted in August 2012, increased the wellhead price for natural gas to US$6 per million British thermal units (mmbtu), part of an effort to increase exploration and attract new investors to this sector.

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 long-promised auction of 3G frequencies has been repeatedly delayed over the last several years. 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 remained on the Priority Watch List in the 20012 Special 301 report. Pakistan continued its efforts on IPR enforcement, including through raids, seizures, and arrests by various enforcement authorities in 2012. However, widespread counterfeiting and piracy, particularly book and optical disc piracy, continue to present serious concerns for U.S. industry. Pakistan should provide ex officio authority to its enforcement officials, and should provide for deterrent-level penalties for criminal IPR infringement. Pakistan should also take the necessary steps to reform its copyright law. 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 the laws’ impact has been 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 Organization (IPO). IPO, a semi-autonomous body under the administrative control of the Pakistani Cabinet, consolidates into one government agency the 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. IPO has conducted training courses for IP professionals in accordance with WIPO standards. The Intellectual Property Organization law was adopted in November 2012, and provides for specialized IPR tribunals to adjudicate cases and a policy board with private sector representation to assess policy decisions. It is too early, however, to assess progress on implementation.

Pakistan has made some progress 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’s government has made no tangible progress to further protect agricultural IPR. Pakistan does not enforce intellectual property rights for genetically modified organisms (GMO). This has deterred U.S. seed companies from entering the Pakistani market. In 2006, the (now defunct) Ministry of Food & Agriculture introduced legislation to Parliament outlining Breeders Rights for Planting Seeds to set standards for protecting against illegal multiplication of seeds and better controls on seed certification. The Ministry also introduced legislation to place tighter controls on seed companies in registering certified seed and producing quality seed. Parliament has not yet voted on either piece of legislation, and it is unlikely to take up the legislation in the short term.

Seed labeled “certified” has had less than a 35% germination rate in some years, compared to over 90% in the United States. A U.S. seed company has failed to negotiate a deal with government officials to allow for the legal introduction of biotech cotton seed into Pakistan. Currently a vast majority of farmers in Pakistan use biotech cotton varieties, which were illegally obtained from India and carry Monsanto’s biotechnology IPR.

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. 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 four years. Although draft data protection regulations were formulated in 2009, the regulations remain under GOP review and have not been promulgated. After the health portfolio was devolved to the provinces following passage of the 18th Amendment in April 2010, data protection regulations will require adoption by 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 informal markets (“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, claiming that piracy levels are proportionately similar to Bangladesh, Iran, and Sri Lanka. Pakistani authorities, especially the Federal Investigations Agency (FIA) Islamabad, have taken some actions against book piracy in the 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. Optical media piracy remains a major concern in Pakistan. The import and export of pirated media was banned under the 1969 Customs Act. However, the easy import of pirated movies and music CDs and DVDs continues in large quantities from China.

Pakistan’s Federal Investigation Agency (FIA) continues to conduct occasional raids. The accused parties, however, 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. Since 2008, the factory production of pirated optical software has become less prevalent as vendors have started manufacturing and selling their merchandise from residential locations, which they continue to do with impunity. Occasional enforcement action has done little to dent the market for pirated goods, as pirated CDs, books, movies, and software remain readily available in most local markets in Pakistan.

Internet use continues to rise in Pakistan, and online piracy in Pakistan is also a problem. 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. Pakistan has thousands of mostly local and small-scale cable television operators nationwide. The Pakistan Electronic Media Regulation Authority (PEMRA) has prohibited cable operators from displaying pirated content, but the FIA has been unable to enforce this provision. Cable operators frequently broadcast pirated material.

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% of turnover to 10%, and authorized the CCP to collect 3% 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 140 cases are still pending and many of those cases won are not fully enforced due to a poorly functioning court system.

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.

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 SBP and the SECP continue to expand their regulation and oversight of financial and capital markets. The banking sector is moderately concentrated with the top five banks by asset size representing 51% of sector assets, of these banks only one is state-owned. In 2010, banking sector assets totaled US$613 billion. As of September 2012, net non-performing bank loans (NPLs) total approximately US$2 billion, or 5.4% of net total loans.

Credit is allocated on market terms, and domestic interest rates have declined following interest-rate cuts by the central bank; the policy rate has fallen from 14% in July 2011 to 9.5% in December 2012. 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 30% of banks’ equity up until December 2012 and 25% 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 reached record highs in 2012. The KSE currently has 591 listed firms, but only five firms (three of which are state-owned enterprises) account for 38.4% of market capitalization.

The GOP implemented a capital gains tax, effective July 1, 2010. The capital gains tax is applied at 10% on stocks held for less than six months, and 7.5% 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. The Capital Gains Tax Ordinance, promulgated on April 24, 2012, appointed the National Clearing Company of Pakistan Limited to compute, determine, collect and deposit the capital gains tax. 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% 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. 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.

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

Per the Foreign Exchange Regulations, any foreign investor can invest in shares and securities listed on Stock Exchanges in Pakistan, and can repatriate profits, dividends, or disinvestment proceeds. The investor has to open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

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 Pakistani government has pointed to this ruling as a key reason for GOP inaction on privatization. As a result, large and inefficient SOEs have retained monopolistic powers in a few key sectors, requiring the GOP to provide annual subsidies to cover SOEs’ losses. Three of the largest 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 have caused PR’s market share in freight traffic to fall from more than 80% in the 1970s, to less than 4% today. Of PR’s 500 locomotives, only 107 are reported to be in operation. 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 US$390 million losses in FY 2012. The company relies on government handouts of US$2.8 million a month to pay salaries and pensions. In the FY 2013 budget, total GOP grant payments to PR are budgeted at US$323 million. In 2012, Pakistan initiated three public-private partnerships to manage, improve, and develop its passenger service train service.

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 competitive, global environment. In contrast to PR, PIA is technically not operating as a monopoly, with Air Blue and Shaheen Air as popular, private sector alternatives. PIA’s Board of Directors recently approved a fleet replacement plan to replace the aging fleet of B747, B737-300 and A310. PIA’s current known debt is US$1.5 billion. The after tax loss of Pakistan International Airlines increased to US$236 million in the first nine months of calendar year 2012 as compared to a loss of Rs 10.737 billion (US$221 million) during the same period last year.

Pakistan Steel Mills (PSM): Established by the GOP as a cheaper option than importing steel, PSM has deteriorated into a money-losing enterprise that relies on a ban on steel imports to remain afloat. The proposed US$360 million sale of a 75% stake in PSM was halted by the Supreme Court in 2006 because of strong union and public opposition and a perception that the transaction undervalued PSM.

The PSM suffered Rs21.4 billion (US$222 losses million) during FY 2011-12, the second highest in the last four years, which swelled the accumulative losses to Rs71.4 billion (US$743 million).

Privatization: The Privatization Commission initiated 166 privatization transactions from 1991-2007, yielding over US$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.

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) was introduced in 2009 to transfer a 12 percent stake in all SOEs (worth a combined US$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 US$1.35 billion distribution is going to just 10,148 employees of Oil and Gas Company Limited and 2,693 employees of the Pakistan Petroleum limited. The Cabinet has yet to ratify the scheme.

Etisalat/PTCL: In 2006, the UAE’s Etisalat agreed to buy a 26% stake in Pakistan Telecommunication Company Limited (PTCL) in a deal worth US$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 US$800 million. While most of the titles have now been transferred to PTCL, Etisalat has said it will not make payment until all agreed land is transferred to 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.

Political Violence

Over 2700 civilians and 640 law enforcement personnel died in terrorist-related incidents in 2012, and the presence of al-Qaeda, 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, political gatherings, places of worship, schools, and outdoor recreation events in Pakistan. Karachi in particular continued to suffer from political and ethnic violence. Militant groups worked to assert control over political parties and criminal gangs operating in the city and surrounding areas of southern Sindh. The security situation in Karachi remains a serious concern for Pakistan’s Government. In September 2012, violent demonstrations in major cities against an inflammatory film targeted foreign embassies and foreign companies.

Sectarian violence continued between Shia and Sunni factions in Karachi, Balochistan, and in northwest Pakistan. Terrorists committed a number of fatal attacks on buses in Balochistan and the Kohat and Gilgit-Baltistan areas carrying Shia pilgrims to and from Iran. Targeted killings of both Shia and Sunni activists occurred in Karachi. The government and security agencies have sought to convince militant groups to participate peacefully in occasional protests.

Pakistan’s national elections are due to occur in the first quarter of 2013. The period leading up to national elections in the past has sparked political violence. 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 2012. Embassies of most western countries, including the United States, United Kingdom, Canada, Australia, and New Zealand Embassies have issued travel advisories recommending against non-essential travel to Pakistan. 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 2012, Pakistan ranked 139 in the Transparency International Corruption Perceptions Index (with a score of 27 out of 100).

Pakistani law provides for criminal penalties for official corruption; however, implementation of the law is ineffective, 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. The NAB struggles with poor funding and limited staffing. In mid-2009, the Supreme Court directed that legislation replace the executive ordinance establishing the NAB, but as of December 2012, the National Assembly has yet to pass the legislation.

The Competition Commission of Pakistan seeks 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 is 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. The Supreme Court directed the Prime Minister to reopen cases against the President. The former Prime Minister did not carry out the Supreme Court orders and was consequently disqualified. The current Prime Minister has promised to carry out the Supreme Court orders.

Corruption within the lower levels of the police is common. A 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. According to the survey, some police charge fees to register genuine complaints and accept money for registering false complaints. Bribes to avoid charges are commonplace. Critics charge that the appointment of station house officers (SHOs) is 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 (US$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. The Supreme Court of Pakistan gave a decision against RPPs on March 30, 2012 declaring their contracts null and void and their intentions as mala fide. Currently the National Accountability Bureau is investigating the RPP case, and in January 2012, the Supreme Court ordered the arrest of Prime Minister Ashraf and other officials for questioning in the case.

Anecdotal reports persist about corruption in the district and sessions courts, including reports of small-scale facilitation payments requested by court staff. Lower-court judges lack the requisite independence and sometimes are pressured by superior court judges as to how to decide a case. Lower courts remain corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures. Government involvement in judicial appointments increases 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

Pakistan and the United States are currently negotiating a Bilateral Investment Treaty. Pakistan has bilateral investment agreements with Australia, Azerbaijan, Mauritius, Bangladesh, Morocco, Belarus, Netherlands, Belgo-Luxemburg Economic Union, Oman, Philippines, Bosnia, Portugal, Bulgeria, 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.

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 60 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 (45%), followed by the services sector (34.2%), and manufacturing (13.8%). Officially, the unemployment rate hovers around 6%, 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.

Because of Pakistan’s 18th Amendment which “devolved” power to the provinces, federal law no longer applies to labor law. Punjab’s minimum wage is Rs. 9,000 per month, and the other three provinces along with the Islamabad Capital Territory have a minimum wage of Rs. 8,000 per month. Enforcement of labor laws was patchy at best under federal law, and the provinces are in an even weaker position to regulate the labor market. Inspections are almost non-existent, and the low-level labor courts are generally considered corrupt and strongly biased in favor of employers. Furthermore, labor protections do not extend to a majority of the labor force, most notably agricultural workers. Pakistan’s compliance with ILO conventions is challenging in the wake of devolution, and some provinces have since enacted laws that violate international treaty norms. 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 5% of the industrial labor force and 2% of the total workforce. The GOP has ratified 34 ILO conventions relating to human rights, workers' rights, and working conditions. The GOP announced labor welfare measures three years back including extending Social Security eligibility to workers earning up to SUS$ 10,000 (US$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% divestment of state ownership in 80 SOEs, distributing the shares at a cost of US$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% of total profits when goods are exported, in addition to a 0.5% 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 adopted Special Economic Zones (SEZ) legislation in 2012. The SEZ Law aims at creating industrial clusters with liberal incentives, infrastructure and investor facilitation services to reduce cost of doing business. The law allows private parties to establish these zones in addition to public/private partnerships used for the establishment of SEZs. It is too early to assess how successful the SEZs will be in attracting 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% 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 US$812.6 million in FY2012 from US$1.63 billion in FY2011. Historically, the United States, the United Kingdom, the United Arab Emirates, and Switzerland, have been Pakistan’s major sources of FDI (Table 3). Businesses that are members of the American Business Council of Pakistan have cumulative revenues of USUS$ 3 billion and an investment of USUS$ 600 million. In FY 2012, major U.S. investments were concentrated in construction, beverages, communication, chemicals, trade, financial business and oil and gas exploration. (Table 4)

Table 3

FDI Flows into Pakistan by Source Country

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

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

FY 2010

FY2011

FY 2012

U.S.A.

468.3

238.1

233.0

U.K

294.6

207.1

142.8

UAE

242.7

284.2

36.6

Switzerland

170.6

110.5

127.1

Japan

26.8

3.2

22.8

Hong Kong

9.9

125.6

80.3

Germany

53.0

21.2

28.2

Other

884.9

644.9

142.6

Total:

2150.8

1634.8

812.6

FDI/GDP (%):

1.39

0.87

0.37

Source: Pakistan Board of Investment (BOI)

Table 4

FDI Inflows in Pakistan from United States by Economic Group

Millions of Dollars, July 2011 - May 2012

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Construction

28.5

Beverages

28.4

Communications

21.0

Chemicals

20.3

Trade

19.7

Financial Business

13.6

Oil and Gas Exploration

12.7

Personal Services

9.9

Food

8.6

Electronics

5.9

Textiles

5.7

Others

34.9

Total

209.2

Source: Pakistan Board of Investment (BOI)

[This is a mobile copy of Pakistan]