Keport NO. b5u-rAK

Current Economic Situationand Issuesin PakistanVolume 11: AnnexesJuly 11, 1975

South Asia Department

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmnentInternational Development Association

This report was prepared for official use only by the Bank Group. It may notbe published, quoted or cited without Bank Group authorization. The Bank Group doesnot accept responsibility for the accuracy or completeness of the report.

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CURRENCY EQUIVALENTS

Effective February 16, 1973Rs 9.90 US$ 1.00Rs 1.00 US$ 0.10Rs 1.0 million US$101,010

May 12, 1972 to February 15, 1973Rs 11.00 US$ 1.00Rs 1.00 US$ 0.09Rs 1.0 million US$ 90,909

Prior to May 12, 1972Rs 4.7619 US$ 1.00Rs 1.00 US$ 0.21Rs 1.0 million US$210,000

Note: Historical data in the report, including the Statistical Appendix,refer only to the present nation of Pakistan, i.e., the fonmerWest Pakistan, unless otherwise specifically noted.

GLOSSARY OF ABBREVIATIONS

ADP - Annual Development ProgramPWR - Pakistan Western RailwaysWAPDA - Water and Power Development Authority

EQUIVALENTS

Seer 2.057 lbs.Maund = 82.286 lbs.Bale (raw cotton) 392 lb.

This report was prepared by an updating mission comprising Messrs.G. T. Brown (Chief of Mission), K. Caden, R. Cuca, W. H. Edwards,J. R. Hansen, W. S. Kee, and M. E. Tadros. The mission visited Pakistanfrom late October to late November, 1974.

FISCAL YEAR: July 1 to June 30

ANNEXES TO REPORT ON

CURRENT ECONOMIC SITUATION AND ISSUES IN PAKISTAN

Table of Contents

List of Tables

Map

Annex 1 Government Budget and Public Savings

Annex 2 Agriculture: Trends, Issues and Prospects

Annex 3 Some Aspects of Pricing Policy

Annex 4 Public Manufacturing Enterprise in Pakistan

Annex 5 Capacity Utilization in Pakistan Manufacturing Industry

Annex 6 Investment Issues and Priorities in Pakistan Industry

Annex 7 Family Planning

Annex 8 Health Sector

NOTE: The Report was issued March 28, 1975.

LIST OF TABLES

Page No.

ANNEX 1

Table 1 Consolidated Federal and Provincial Government'sRevenues and Expenditures 2

Table 2 Tax and Non-tax Revenues and Their Share in GNP 5

Table 3 Consolidated Federal and Provincial GovernmentExpenditures 8

Table 4 Corporate Tax Rates (percent) 15

Table 5 Corporate Tax Rates 17

Table 6 Taxes and Government Profits in Export Price ofRice 20

ANNEX 2

Table 1 Quantity and Value of Prinripal AgriculturalExports 4

Table 2 Wheat Acreages, Production and Procurement 6

Table 3 Food Balance Sheet (wheat, rice coarse grains andlegumes) 8

Table 4 Production and Export of Rice 9

Table 5 Sugarcane, Sugar and Gur Production 12

Table 6 Edible Oil 13

Table 7 Production and Export of Raw Cotton 14

Table 8 Farm °rices of Seed Cotton 16

Table 9 Benefit Costs per Acre from FertilizerApplication - Wheat 18

Table 10 Benefit Costs per Acre from FertilizerApplication - Rice 19

Table 11 Benefit Costs per Acre fram FertilizerApplication - Cotton 20

Table 12 Benefit Costs per Acre from FertilizerApplication - Sugarcane 21

LIST OF TABLES

Page No.

ANNEX 2 (Cont'd)

Table 13 Saline and High Water Table Cultivated Areas 25

Table 1 Estimates of Livestock 26

Table 15 Farm Credit Disbursements 27

Table 16 Disbursal of ADBP Loans 27

Table 17 Area Available for Redistribution 29

Table 18 Cotton/Wheat Farm-Tenant Operated 30

Table 19 Sugar Cane Farm-Tenant Operated 31

Table 20 Coarse Rice/Wheat Farm-Tenant Operated 32

Table 21 Gross Returns, Government Duty and TradingProfit per Acre 37

AiNNEX 3

Table 1 Price Movements, 1968-1974 1

Table 2 Profitability of BIM Product Groups, FY72-74 6

Attachment 1 Price Indices, 1959/60 - 1973/74 10

Attachnent 2 Items TJnder Eaport Ban, 1974; 11

ANNEX 4

Table 1 Profitability of BIM Product Groups, 1971/72 -

1973/7h 6

Attachment 1 Structure of State Enterprise in Manufacturing 15-18

Attachment 2 Distribution of Public Sector Enterprises byIndustry, Region and Control 19

Attachment 3 Regional Distribution of Large Scale Industry,1969/70 20

Attachment 14 Growth in BIM Enterprise Sales 21

LIST OF TABLES

Pze lNo.

ANNEX 4 (Cont'd)

Attachment 5 BIM: Relative Growth of Sales and Employment 22

Attachment 6 Estimated Performance fron Selected NDFCProjects Proposals 23

ANNEX 5

Table 1 Capacity Utilization in Factory Sector, 1967/68 2

Table 2 Real Growth in Manufacturing Output, 1961-1969 4

Table 3 Shares of Manufacturing and Agriculture in GDPand Goverrnent Capital Expenditures, 1959/60and 1970/71 h

Table 4 Average Rates of Capacity Utilization in BIMSectors, 1969/70 and 1973/74 6

Table 5 Capacity Utilization in Major StandardizedProduct Industries 1969/70 - 1973/74 7

Table 6 Investment in Factory Sector, 1963/64-1973/7J4 11

Table 7 Capital Goods Imports, 1970/71-1973t/4 14

Attachment 1 Capacity Utilization, 1965/66 21

Attachment 2 Capacity Utilization Rates in Manufacturing 22Industries (3 Digit SITC Level)

Attachment 3 Average Rates of Capacity Utilization in PublicSector Manufacturing Enterprises, 1969/70-1973/74 23

Attachment 4 Capacity Utilization in Public Sector MotorVehicle Plants, 1969/70-1973/74 (percent) 24

Attachment 5 Capacity Utilization in Public Sector TextileMills, 1969/70-1973/74 (percent) 25

Attachment 6 Capacity Utilization in Public Sector FertilizerPlants, 1969/70-1973/74 (percent) 26

Attachment 7 Capacity Utilization in Public Sector ChemicalPlants, 1969/70-1973/74 (percent) 27

LIST C'v TABLES

Page No.

ANNEX 5 (Cont'd)

Attachment 8 State Cement Corporation, Ltd. - CapacityUtilization, 1969/70-1974/75 (percent) 28

Attachment 9 Capacity Utilization in the Cotton TextileIndustry 1948 - 1972 29

Attachment 10 Capacity Utilization in Major StandardizedProduct Industries 1969/70 - 1973/74 30

Attachment 11 Impact of Capacity Tax on Utilization Rates1964/65 - 1972/73 31

ANNEX 6

Table 1 Provincial Distribution of Industry 4

Table 2 Major Exports, 1972/73 8

Attachment 1 IDBP and PICIC - Sanctions and Disbursements,1967/68 - 1973/74 18

Attachment 2 Capital Expenditures of Federal Government,1950 - 1975 19

Attachment 3 Relative Shares of Public and Private Sectorsin Industrial Investment - FY 1964 - 1980 20

Attachment 4 BIM Investment Project Proposals 1975 - 1980 21-26

Attachment 5 Fertilizer Production and Consumption 27

ANNEX 7

Table 1 Number of Notional Acceptors Obtained by the Saleof Contraceptives by the Family Planning.Programin Selected Subdivisions of the Country 6

Table 2 Estimated Proportions of Eligible Couples Protectedby the Family Planning Program in Selected Sub-divisions of the Country 8

LIbT OF TABLES

Page No.

ANNEX 7 (Cont'd)

Table 3 Indices of Manpower Availability andProductivity, FY 1973-1974 11

Table l4 Expenditures in the Family Planning Program,FY 1°73 - 1974 12

ANNEX 8

Table 1 Health Institution Based Data on Sickness 2

Table 2 Communicable Diseases Notifiable in Pakistan in1973 3

Table 3 Health Personnel and Health Institutions -June 1974 7

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ANNEX 1Page 1

GOVERNMENT BUDGET AND PUBLIC SAVING

Resource Mobilization in the Public Sector

1. Pakistan's economic development requires a considerably higherrate of domestic savings and effective resource mobilization. If the domes-tic saving rate continues at not much more than 10% of GDP, it is very doubt-ful that, even following a very labor-intensive development strategy,Pakistan will be able to obtain a satisfactory growth rate and keep itsforeign debts at manageable levels. Virtually all saving is now donein the private sector. Public sector investment is financed almost entirelyby borrowing from the private sector, from the banking system and from foreigncreditors. The budget current revenue surplus has declined steadily duringthe present decade, and became negative in FY 1973 (Table 1). Public enter-prise profits have been able to finance only a small portion of their in-vestment. Government capital expenditures have increased rapidly from verydepressed levels in FY 1973 to a planned level of 11.2% of GNP in FY 1975.While there will be some shortfall of that target this year, it will almostcertainly be surpassed in FY 1976, when foreign project aid inflows areexpected to double to more than 6% of GNP. Total foreign borrowing, proj-ect and non-project, may exceed 10% of GNP both this year and next.

2. The decline in public sector saving has reflected numerous factors.Historically, the military effort in East Pakistan and the subsequentseparation of the two wings both increased defense expenditures and resultedin a loss of revenues to support central administrative, military and otherfunctions which continued at almost their pre-separation levels. DevaLua-tion in May 1972 also reduced government savings because tariff rates onaid and other goods previously imported at the official or other favoredrates had to be lowered, thereby reducing the absolute rupee level of dutiesin many cases, while government expenditures for imports, debt service andother foreign exchange payments increased by the full amount of the 131%increase in the exchange rate.

ANNEX 1Page 2

Table 1: CONSOLIDATED FEDERAL AND PROVINCIAL GOVERNMENT'SREVENUES AND EXPENDITURES

(Rs Millions)

1970-71 1971-72 1972-73 1973-74 1974-75Actuals Actuals Actuals Revised Budget

Revenues 7,162 8,102 9,665 13i280 15,260

Federal Government 5,155 5,922 7,316 10,567 11,895Provinces 2,007 2,180 2,348 2,712 3,365

Revenues Expenditure 6.606 7.837 1JQ08J 14,209 15.558

Federal Government 4,653 5,763 7,110 10,511 11,268Provinces 1,953 2,074 2,968 3,698 4,290

Revenue Account Surplus 556 264 -413 -929 -298

Federal Government 502 159 206 56 627Provinces 54 105 -620 -986 -925

Source: Ministry of Finance, Planning and Development (Finance and PlanningDivisions).

3. The government's attempt to cushion the economy from world-wideinflation by preventing or slowing increases in prices of basic food-stuffs and industrial and agricultural inputs also resulted in substantialloss of savings through reduced revenues and increased expenditures. Revenuelosses came from attempts to cushion price increases by cutting down excisesand customs duties, such as in the case of petroleum products, and bypreventing or moderating increases in prices and profits of public enter-prises on such products as cement and bicycles. Expenditures have risenbecause of subsidization of prices of imported wheat and vegetable oil.

4. Inflation has also reduced current revenues because of theinelastic nature of many sources of government revenues. Tax revenues onlygrew about 80% as fast as GDP during the 1960's, and that situation haslargely persisted into the 1970's if revenues from export duties and profitsof monopoly government exports of cotton and rice are excluded. Mostimportantly, it has resulted from the failure to effectively tax the areasof greatest increases in income. Agricultural income has been exempt fromdirect central government taxation. Industrial and other urban income hasbeen taxed, but numerous exemptions nominally intended to encourage savingand investment have tended rather to legally exempt an important part of thegrowth of income from taxation. By making determination of taxable incomedifficult, these exemptions have also aided and abetted illegal tax evasion.Legal restrictions on the growth of land revenue taxes on agricultural land,

ANNEX IPage 3

plus 25 year or longer periods between assessments, have reduced this taxfrom a major to an inconsequential source of revenue. The personal iincometax has been steadily adjusted to prevent any significant increase inincome tax revenues as the result of inflation, as for instance by doublingthe personal exemption level between FY 1973 and FY 1975, and by aboutdoubling the income range of each marginal tax bracket. A significantnumber of excise and other taxes are on a specific or fixed rather than advalorem base and do not rise as prices go up.

5. The importance of public sector saving has become much greatersince the nationalization in 1972 of about one third of private manufacturingassets plus the commercial banks, parts of the distribution system (domesticsales of petroleum and fertilizer and exports of cotton and rice), inter-national shipping and the two largest private utilities. Total nationalsaving will decline unless these enterprises generate as much saving nowthat they are in the public sector as they did when in the private. Whiletax revenues are today much larger than the savings (profits plus deprecia-tion charges) of government enterprises, the efficiency of management andpricing policies of government enterprises could play an equally importantrole in the mobilization of domestic resources. Public enterprise pricingat long run marginal cost can both tend to produce the economic resourceallocation benefits ascribed to competitive markets and generate substantialsavings to finance new investment. Experience in many countries, however,indicates the strength of pressures to instead charge less than economicallyappropriate prices as a supposed "counter-inflationary measure", (which infact is inflationary rather than deflationary because it reduces saving orincreases deficits), and to hire unneeded workers in the name of creationof employment.

6. With public sector saving of perhaps 6% of GNP, Pakistan couldassure itself a fairly steady and rapid rate of growth and reduce in relativeterms its dependence on foreign aid. Whether it chooses to increase-theabsolute amount of its borrowing would be a separate decision that could bemade on the basis of an assessment of the value of the additional revenuesrelative to the repayment burden imposed.

7. The remainder of this Annex deals largely with government revenuesand expenditures as recorded in the budget rather than with governmententerprises. Public enterprise management and pricing is the subject ofmuch of Annexes 3 through 6. Public enterprise pricing is discussedparticularly in Annex 3, page 6 ff, and in Annex 4, paras 27 to 30.

Government Revenues

8. A rapid and lasting increase in tax revenues depends on aninitial rise in the tax effort and a high income elasticity in the taxsystem thereafter. Both tax buoyancy and tax effort performances were lowin the sixties. Incentive legislation, exemptions of various kinds andadministrative inefficiency have been the major causes of low revenueperformance. Since 1970, however, tax buoyancy has tended to increaseslightly under the impact of various new tax measures and the devaluation,

ANNEX 1Page 4

which expanded the base of import duties. The increase in non-tax revenueshas been more pronounced, but has reflected primarily profits of StateTrading Corporations which are subject to large fluctuations or even lossesdepending on swings in internmational prices.

9. The present jurisdiction of the governments in matters of taxationis determined by the Constitution of 1973. The federal government hasjurisdiction over the major direct and indirect taxes (custom duties,excises, sales tax, and income taxes on non-agricultural sector). Thus thedistribution of taxing powers under the Constitution puts the major respon-sibility in a policy of increased tax effort and improved incidence of thetax burden on the Federal Government. All the broad based taxes that canexpand rapidly with accelerated industrialization and growth are in thejurisdiction of the Federal Government.

10. The bulk of tax revenues of the Provincial Governments consistsof their shares in taxes collected by the Federal Government. The taxingpowers of Provincial Governments are limited by the Constitution. Taxationof agricultural incomes and urban real estateare by far the potentially mostimportant taxing powers, but they do not use even their limited tax potentialfully. Provincial taxation of the agricultural sector via the land tax,water and other taxes has become progressively less as inflation has increasedthe value of agricultural production but not of agricultural taxation.Rapidly expanding urbanization renders the urban property tax potentiallyhighly revenue elastic, but the administration of this tax is very unevenand often very poor. The motor vehicle tax is another potentially elasticsource of provincial and local revenue.

11. Table 2 shows federal and provincial tax and non-tax revenueswhile Table 5.4 gives additional information on revenues. Taken asa whole, no noticeable increase in the tax effort has been achieved despitethe work of the Taxation Commission between 1972 and 1974 and the imple-mentation of many of its recommendations. The increase of non-tax revenueshas been faster than that of tax revenues. Provincial governments have notraised their tax effort. With the share of tax revenues in GNP at 12%,Pakistan is still among the low tax effort countries. Most of the revenueincrease achieved in FY 1973 and FY 1974 was obtained from export taxes oncotton and rice. A large increase in revenue was expected from this sourcein the original budget of FY 1975, but since the Budget-Speech of June 1974export duties on cotton products and cotton yarn (but not raw cotton) havebeen abolished.

Table 2: TAX AND NON-TAX REVENUES AND THEIR SHARES IN GNP

1970-71 1971-72 1972-73 1973-7h 197b-75Actuals % Of OF Actuals % Of GNP Actuals% of ONPRevised % of GNP Budget % of GNP

Federal Government

Taxes 5,111 10.2 5,9b 10.3 6,768 10.7 8,820 10.7 10,081 11.1

Provincial Govt's share ( 897) (1.8) ( 861) (1.6) ( 874) (1.4) ( 882) (1.1) (1,125) 1.2

Non-Tax Revenues 941 1.9 1,289 2.4 1,L22 2.3 2,620 3.2 2,939 3.2

Provincial Government

Own Taxes 534 1.1 627 1.2 729 1.2 965 1.2 1,154 1.3

Other Revenues 576 1.2 691 1.3 7h6 1.2 865 1.0 1,086 1.2

Consolidated

Tax Revenues 5,645 11.3 6,121 11.b 7,497 13.9 9,795 11.8 11,235 12.3

Non-Tax Revenues 1,517 3.0 1,980 3.7 2,168 3.14 3,485 4.2 1,025 4.h

Total Revenues 7;16 1h.3 8,101 15.2 9,665 15.3 13,280 16.0 15,260 16.7

GNP -49,902 53,h88 63,012 82,780 91,120

Source: Ministry of Finance, Planning and Developrment (Finance andl Planning Divisions)

ANNEX 1Page 6

Tax Reform

12. A Taxation Commission was set up in October 1970, with the objectiveof increasing tax revenues, iraproving the efficiency of the tax administra-tion, and ensuring a more equitable distribution of the tax burden. TheCommission has made recommendations to extend the coverage and to increasethe yield of direct taxes, to eliminate the factors reducing the elasticityof indirect taxes, and to reduce tax evasion. Several of these proposalshave been implemented, such as the abolition of the tax holiday scheme,reduction in some income tax allowances, and a more extensive use of advalorem rather than fixed basis indirect taxes.

13. After this initial work, the Commission was reconstituted inFebruary 1972 with the specific instruction to make proposals for theforthcoming budget. Many of its recommendations for federal taxes wereimplemented in the FY73 budget. However, the Provincial Governments failedto enact the necessary legislation to improve their tax effort, particularlyby changing the taxes on agricuitural incomes and urban immovable property.The Commission also made several recommendations with regard to the re-organization of the Central Board of Revenue and the Directorates under theBoard. Other matters which had received the Commission's attention werepersonnel policy, tax evasion and arrears of taxes. The Commission's finalreport was completed in March 1974 for implementation after FY75. Thereport has not been released, but there have been newspaper stories allegedlybased on its contents.

14. Price rises in the international market and a growth in importsare the main factors that have contributed to greater government revenuesduring the last three years. Among new tax legislation, only export dutieshave been a major factor in revenue increase. In the last three fiscalyears (1972, 1973 and 1974) government revenues in current prices have grownby 13%, 19% and 37%, respectively. A high percentage increase was alsoexpected in the original budget for FY 1975. Revenues expected from newlegislation represented (Table 5.7) about half of the actual increase inFY72, less than one quarter in FY73, and about one-fifth in FY74. In FY75,new legislation is expected to reduce total revenue by Rs. 872 million, ornearly one-half of the expected increase in the government revenue. Theaverage coefficient of tax elasticity estimated for the period FY70 toFY74 was above unity (1.18). However, if export tax receipts are eliminatedthe elasticity of other taxes falls to 0.85.

15. Revenue increases provided by new tax measures, other than exportduties, came mostly from changes in indirect taxes. In the period FY71through FY73, increases in excise duties were an important source of addition-al tax revenues. Income tax changes which had been introduced during thesame period were a minor factor in the revenue increase. Revenue increasesdue to the changes in the taxes of provincial governments were also modest.Some changes introduced into the revenue system in fact were responsiblefor loss of revenue. In FY75, for example, major revenue loss is expectedfrom changes of personal income tax and export duties on cotton products.

ANNEX IPage 7

16. The government has tried to absorb a part of the international pricerises in some basic imported goods by reducing custom duties, excise taxes,or the trading margins of the Trading Corporation of Pakistan (TCP). Theimpact of such action on government revenues is likely to be substantial.Thus, rapid rises in the international prices of some major imports exerteda negative impact on import duty receipts, while the effect of price in-creases of export commodities increased export duty revenues. Absorptionor smoothing out of international price fluctuations by export taxincreases and import duty reductions (or subsidies) has justification onlyin the short run, to reduce windfall gains (and losses) of sudden (unex-pected) price changes. If prolonged, however, this policy can drain neededrevenues and savings and lead to inefficient production by isolatingPakistan's economy from world market prices.

Government Expenditures

17. The ratio of total government expenditures as a percent of GNPhas increased rapidly in recent years (Table 3). In FY75 the share ofpublic sector expenditure in GNP is estimated at 28.3%, while consolidatedgovernment revenues represent only 16.7% of GNP. The gap between currentrevenues and total expenditures is made up by external and domesticborrowing. In addition to increasing the cost of capital and other goodsimported by the government for its own use, the devaluation of 1972 sub-stantially increased the cost of subsidies on imported agricultural Lnputsand wheat 1/.

18. The figures of consolidated government expenditures do not coverthe expenses of local government units (municipalities and district councils)because of lack of data. Local units presently account for only about 5%of total government expenditures. Community development programs such asintegrated rural development and the People's Work Program are financedthrough the Central Government's budget directly or through grants toprovincial governments. At present there is no scheme to promote theseprograms on a basis of local cost recovery from the beneficiaries, thoughsuch recovery could substantially increase resources available for suchprograms.

19. Current expenditures represent about three-fifth of total govern-ment expenditures. The share of defense in total current expenditures isvery high; after reaching almost half of current expenditures in FY72, itstarted to decline in FY73 and is estimated to absorb a little over one-third

1/ Similarly on the revenue side, after devaluation export taxes replacedthe implicit taxation of agricultural exports imposed by the previousexchange rate. Therefore, both revenue and expenditure increased afterdevaluation due to the removal of hidden taxes and subsidies createdby unrealistic exchange rates.

Page

Table 3: rCONSOITDATED FEDE1RAL AND PROVIINCIAL SOYERNTtZJT EXPY<-DITUTRS(million of Rs.)

1970-71 1971-72 1972-73 1973-71 19-?_

Actuals Actuals Actuals Revised Budget

1. Current Expenditures 6 606 7 852 10,078 14 209 15 558Interest on debt 677 1i5lT 1,250 1Ul? Ji7)JODefense 3,000 3,725 8,80 4 ,782 5,579Other non-development 2,551 2,760 3,533 6 89 6,385Development 378 322 955 1,811 1,85h

2. Capital Expenditures 3 065 38489 5 o86 6 113 10203Develomrent 2,121 7 6,Non-development 664 1 ,321 2,222 1L,4 -6 3,761

3. Total Expenditures 9,671 11286 164 20 322 25761Non-development 6,592 tt836 mftr nDevelopment 2,779 2,L50 3,319 6,041 8,296

----- In percent of current expend(itures----

Interest on debt 10 13 12 12 11Def'ense h5 8 81 33 36Other non-development 39 35 35 h5 81Development 6 8 9 10 12

---In percent of total expenditures---

Current expenditure 68 70 66 70 60Capital expenditure 32 30 34 30 40Capital expenditure

(development) 25 19 19 23 25

Non-develoumentexpenditure 71 78 75 70 68

Development expenditure 29 22 25 30 32

-In percent of G?-----------------

Interest on debt 1.8 1.9 2.0 2.0 1.9Defense 6.o 7.0 7.0 5.7 6.1Current expenditure 13.2 18.7 16.0 17.2 17.1Capital expenditure

(development) 8.8 8.0 8.5 5.6 7.1-Total expenditure 19.8 21.1 28.1 281.5 22.3

Source: Ministry of Finance, Planning and Development (Finance and Planning DfviEsions).

ANNEX 1Page 9

of current expenditures and 22% of total expenditures in FY75. Interestpayments absorb more than 10% of current expenditures. About two fifthsof current expenditures are absorbed by so-called non-development publicservices. Some of these expenditures include substantial amounts oneducation, health and agricultural services which have an important impacton development. After deducting these items, what is labelled as currentdevelopment expenditures, although its share has recently increased,remains very small. They include subsidies on agricultural inputs (primarilyfertilizers, seeds, pesticides and tubewells) and outlays on research.,technical education and agricultural extension.

20. Capital expenditures represent about two-fifths of total consol-idated government spending but items labelled development expenditures,current and capital, represent only about one-third of total expenditulres.Capital expenditures on development are only about one-fifth or one qularterof total expenditures. These expenditures rose slightly in recent years,after a decline in FY72. A recent change in the non-development componentof total expenditures is the sudden increase in the financial burden ofsubsidies. This is due mostly to the increased cost of government importsof wheat after devaluation, due both to higher prices and greater quantitiesof imports (Table 5.11).

21. The federal government has traditionally been in charge of theconduct of foreign affairs, defense, communications, currency control, andthe regulations regarding banking, insurance, corporations, copyrights,trademarks, weights and measures, major ports, lighthouses, and sea/airtransport. Under the constitution it has a concurrent responsibility withthe provinces for the maintenance of law and order and for agriculture,industry and public services, including education and health. The con-current topics, however, are mainly the responsibility of provincial govern-ments. A determination of the respective responsibilities of federal andprovincial governments has been made by the constitution of 1973, althoughthe federal government can confer some of its prerogatives to provincialgovernments and vice versa. In general, nationwide public services areleft to the exclusive jurisdiction of the federal government, while provin-cial governments are mostly in charge of economic and social services thatbenefit specific regional areas.

22. The federal government accounts for about two-thirds of totalcurrent expenditures and nearly three-fourths of total capital developmentexpenditures. The bulk of provincial governments current developmentexpenditures are on such items as agricultural extension services and inputsubsidies. Virtually all non-development capital expenditures, which arerelated mostly to financial intermediation, are disbursed by the federalgovernment.

23. Provincial governments' powers in the allocation of publicexpenditures far exceed their powers and performance in revenue collection.In FY75 about 11% of gross tax collections by the federal government areearmarked for the provinces; they account for about one-half of totalprovincial tax receipts and one-third of total provincial revenues.

ANNEX X

Page 10

Notwithstanding the major role of the Federal Government in the supply offunds to Provincial Governments, federal funds are not tied to specificexpenditure items and their allocation among alternative public expendituresis the exclusive privilege of Provincial Governments.

24. Under the present arrangement, based on the recommendations of theNational Finance Committee of 1970, the provinces are entitled to share theproceeds from income and sales taxes, from central excises and export dutieson several commodities, and the full proceeds of two minor taxes (Table 5.12).Revenue shares are very close to population percentages, except the smaller(and poorer) two provinces receive relatively larger shares. The totalamount of shared taxes is distributed among the four provinces on thefollowing percentage basis: Punjab 56.5; Sind 23.5; NWFP 15.5; and Balu-chistan 4.5.

25. In addition to current transfers, the Federal Government alsomakes capital transfers (loans) to provinces. Provinces pay interest onthese loans. The servicing of loans had become a high burden for someprovinces by the seventies, and in FY74 forgiveness of past debt wasgranted first to NWFP and Baluchistan; later it was also given to otherprovinces.

FEDERAL INCOME TAX

26. The income tax has not grown into a major government revenue sourcein Pakistan, although such taxation has existed for more than a century.In FY74 taxes on personal and corporate income contributed only 13% of totalfederal tax revenue and equalled 1.4% of GDP. Moreover, the share of in-come taxes in total tax revenues has declined from 24.5% in FY 1965 to anestimated 10.5% in FY75. Income tax payers (360,000) represent about 10% ofurban households and 3% of all households.

27. The reasons for the lack of growth of income taxes in Pakistanare well known. First, the taxation of agricultural income has been underthe jurisdiction of provincial governments and such income is exempted fromfederal income tax. Second, the basic exemption limit for the personalincome tax has been increased from Rs 6,000 in FY73 to Rs 12,000 in FY75,and is high enough to keep the bulk of salaries and incomes from small tradeout of the scope of the tax. Third, other exemptions and deductions, e.g.,personal allowance, earned income relief, investment allowances, etc., havecontributed to the erosion of the tax base. Fourth, income tax evasionhas always been high, facilitated by the complexities and magnitude ofexemptions and deductions and further stimulated by steep tax rates. Fifthand lastly, the tax administration has not been able to enlarge the tax base.Unless the tax base is enlarged, there cannot be much hope for improving theyield from income taxes.

ANNEX 1Page 11

Personal Income Tax: Exemptions and Deductions

28. The personal income tax in Pakistan is noted for the abundanceand generosity of exemptions and deductions. Most of the incentive typeexemptions are ineffective in achieving their targets and constitute in facta cover for tax relief privileges. It is highly questionable, for example,whether the investment allowance and the exemption on interest and dividendincome (see below) have had more than a marginal effect on personal savingor on activation of the capital market other than by increasing after taxincome. These exemptions and deductions were accepted for various reasonsand on different occasions, gradually building up into a formidable erosionof the tax base. The following review of these exemptions and deductions isclassified in two groups, according roughly to the motivation behind theiradoption; the first group comprises the exemptions and deductions that aimmostly at generating saving and investment, and the second covers those in-troduced for equity purposes. The first group includes the investmentallowance, the tax holiday (abolished in 1972), dividend and interestexemptions, allowance for depreciation, charitable donation, and residentialhomes. The second group (equity type) of exemptions and deductions aregranted to take into account differences in the personal or family conditionsof taxpayers, to render incomes from various sources comparable, or foradministrative convenience. Some included in this group have been abolishedor reduced following the recommendations of the Taxation Commission in 1971an, 1972. The education allowance and the conveyance allowance wereabolished in FY72. To partially compensate for this change, however, thepersonal allowance was increased from Rs 2,000 to Rs 3,000. Earned incomerelief was also increased from Rs 2,500 to 20% of annual income subject tominimum relief of Rs 2,500 and a maximum of Rs 5,000 for salaried persons.In case of non-salaried persons, it has been increased from Rs 1,000 to10% of annual income subject to minimum relief of Rs 1,500 and a maximnum ofRs 2,000.

29. Investment Allowance. The purpose of this allowance is to induceindividuals to save out of their personal income 1/. It does not cover thephysical investments expenditures of enterprises. Companies benefited fromanother incentive measure (called "tax holiday"), which covers their profitsfrom new investments. Investment allowance stipulations were modifiedseveral times in the sixties and early seventies. It provided tax deductionup to 20% of personal income, subject to a maximum of Rs 12,000, untilFY65, when the limits were extended to 30% for life insurance premiumsand to a maximum of Rs 15,000 for investment in National Investment Trust(NIT) shares. In FY67 tax relief was restricted to 50% of the amount. actually

1/ Investment allowance is granted to contributions to approved ProvidentFunds, premiums for life insurance, investment in the shares of approvedcomipanies, investment in Post Office Savings Certificates, in NationalInvestment Trust Certificates, approved debentures, government securitiesand amounts spent on purchase of technical or professional books.

ANNEX IPage 12

invested. In FY68 a Rs 12,000 maximum limit to tax relief was accepted fora total income of RS 30,000 with this maximum rising to Rs 25,000 forincomes up to Rs 100,000 and to Rs 25,000 plus 5% of the amount in excess ofRs 100,000. The special allocation granted for investment in life insuranceor in NIT Unit Certificates was also abolished at that time. In FY70 theadditional 5% of income to the Rs 25,000 maximum limit was also abolished.In FY73 the investment allowance was further reduced to the present levelof 30% of the total income, subject to a maximum of Rs 20,000.

30. Dividend and Interest Earnings Exemption. A limited exemptionon dividend and interest incomes has been provided under the personal incometax to encourage private saving and investment. Interest on bonds of taken-over industries has been exempted up to Rs 5,000. The maximum exemptionlimit on corporate dividends has been raised from Rs 2,000 to Rs 5,000 andon NIT and ICP dividends from Rs 2,000 to Rs 10,000. Interest earned ongovernment securities, approved debentures, government savings certificates,and prize bond winnings are exempt from tax.

31. Housing Allowances: Another important exemption is granted toresidential houses constructed between July 1970 and June 1975, if theirannual rental value does not exceed Rs 6,000. In addition, from FY75houses constructed between July 1974 and June 1980 with annual rental valuenot exceeding Rs 12,000 have been given tax exemption for five years. Suchexemption has no justification on the grounds of incentives or equity.Demand of upper income groups for residential houses can adequatelystimulate the supply. The government can stimulate low cost housing in amore equitable and efficient way by providing sites and services, and long-term credit facilities.

32. Charitable Donations: Exemptions granted for charitable donationshas been another important factor in erosion of the tax base. In the sixties,increasingly liberal rules were set for charitable donations. Donations upto 20% of total income of both persons and companies were deductible fromincomes. This exemption led to a rapid expansion of charitable organizations,which mostly served as a cover for tax evasion. The exemption limit hasbeen reduced recently to 5% of total income subject to a maximum of Rs 200,000in the case of companies and 10% of total income subject to a maximum ofRs 100,000 for households.

33. Personal Exemption. As already noted the government raised thepersonal exemption limit from Rs 6,000 in FY73 to Rs 9,000 in FY74 and toRs 12,000 in FY75. The present limit is very high; virtually all salariesof workers and clerks remain exempt. 1/ One of the major explanations forlow income tax coverage in Pakistan, apart from evasion, is the continuouslyincreasing exemption limit.

1/ The basic exemption plus personal allowance and earned tncome reliefadd up to an exemption level of about Rs 18,000, which is high even bythe standards of industrialized countries.

ANNEX 1Page 13

34. Income Tax Rate: With the present progressive rates the incometax should have exhibited a high income elasticity. On the contrary, how-ever, the elasticity of the income tax has been less than unity. Inadequatesurvey and identification of taxpayers, a severe erosion of the tax basedue to the above mentioned exemptions and deductions, the exemption ofagricultural income and administrative inefficiency are among the majorfactors that have been responsible for low revenue elasticity.

35. The Taxation Commission has argued that high and steeply progressiverates strongly hinder incentives to work, save and invest. Furthermore, highrates enhance the benefits of tax evasion and encourage income splitting byinducing taxpayers to find fictitious partners. These arguments have gainedmore weight as inflation has further aggravated the burden of tax rates onreal incomes. The Commission proposed that tax rates should not exceed anoverall ceiling of a 50% average effective rate. The only change introducedby the government upon those recommendation was to offset much of theefforts of recent inflation by raising the taxable income levels to whichparticular tax rates applied. Thus the maximum rate of 70% is now applicableto taxable income exceeding Rs 100,000 instead of the previous limit of

Rs 50,000. The corollary of the proposal of the Commission, however, is animprovement in tax enforcement. Because no dramatic improvement in tax

enforcement efficiency can be hoped for in the short run, the lowering ofrates, which appears desirable, might be accompanied by removal or reductionof some of the many exemptions now in the law, and reduction in the generalexemption level, in order to maintain and increase revenue and the number of

taxpayers.

37. Capital Gains: A tax on capital gains was reintroduced in 1963wherby capital gains derived from disposal of stocks and shares are, underrather restricted conditions, subject to income tax. The provisions relat-ing to capital gains tax have been rationalized by the Finance Ordinances of1963 and 1971. Capital gains realized by individuals within twelve monthsafter acquisition of assets are now treated as income, and taxed accordingly.Gains realized after such period are reduced by 60% or by Rs 5,000 whicheveris the greater, and the balance, if any, is added to other income for normaltaxation. Capital gains of companies realized after 12 months are taxed atthe reduced rate of 25%. The Finance Act of 1974, however, exempts allcapital gains irrespective of their nature from taxes for fiscal years 1975and 1976. Capital losses during these years will be carried forwward tobe set off against future capital gains.

38. The taxation of capital gains on immovable property is in thejuris'diction of provincial governments. Since 1963, a capital gains taxhas nominally been levied on profits and gains realized from the sa]e, exchangeor transfer of immovable property within urban areas in West Pakistan. After

the reestablishment,of four provincial governments, this tax has been enforcedin the Punjab and Sind but has remained limited in scope. Effective taxation

of gains on real estate would reduce the relative attractiveness of landspeculation and slow down land price increases. It would also bring inneeded revenue for provincial and local governments.

ANNEX 1Page 14

39. Tax Withholding at Source: Withholding of taxes on upper-incomewages and salaries account for most personal income tax collections, butrelatively little income is subject to withholding. The generous basicand other exemption keeps the bulk of payrolls out of the reach of theincome tax. Business entrepreneurs and self-employed professionals contri-bute relatively little to income tax revenues.

40. A pervasive practice of withholding could greatly enhance totalincome tax revenue and its elasticity with respect to GNP. As mentioned,a lower basic exemption could bring a much larger portion of payrolls underthe income tax. Tax rates can be kept at low levels for most wage earners,but withholding would increase in the coverage of employers subject todeclaration. Moreover, all interest payments on bonds, debentures and alldividend or profits shares paid by incorporated enterprises could be subjectto withholding. Similarly, disbursements to contractors on contracts andpayments to self employed professionals by enterprises or employers who aresubject to income tax could also be subject to withholding. Taxes withheldat these sources could be cred' ed to taxpayers against their annual incomedeclarations.

Corporate Income Tax: Coverage and Rate

41. All corporations conducting business in Pakistan are subject to30% income tax on their distributed profits and another 15 to 35% as "supertax" On all income. The variations in super tax complicate the actual ratestructure greatly (Table 4). Upon the recommendations of the TaxationCommission in 1971, the government abolished the then 15% rebate on profitsdistributed as dividends, and reduced the 10% rebate for public (broad-basedownership) companies to 5%. It also extended the corporate tax to all un-distributed profits of listed and unlisted companies at the respective ratesof 15% and 25%. Previously, only the "excess reserves" of companies weresubject to the tax. One year later, however, the Commission changed-itsposition on the issue and in its Interim Report of 1972 recommended theabolition of the corporate tax (but not supertax) on undistributed profitsof companies listed on domestic stock exchanges. The motivation for thismajor concession was to provide companies with an opportunity to "re-establishtheir financial soundness in the wake of the severe losses many of themhave suffered in East Pakistan." The government acted on this recommendationby exempting the retained earnings of not only listed but also unlistedcompanies. Therefore, only the supertax is levied on undistributed profits,25% for most public (listed) companies and 30% for most private (unlisted)companies.

ANNEX IPage 15

Table 4 CORPORATE TAX RATES(percent)

Income Tax Super Tax Total Tax

A. Banking Company

(a) Distributed Income 30 35 65(b) Undistributed Income - 35 35(c) Foreign income brought into

Pakistan 30 15 45

B. Public Company -/

(a) Distributed Income 30 25 55(b) lJndistributed Income - 25 25(c) Foreign income brought into

lakistan 30 15 45

C. Private Company 2/

(a) Distributed Income 30 30 60(b) Undistributed Income - 30 30(c) Foreign income brought into

Pakistan 30 15 45

D. Every Company with paid uocapital plus free reservesnot exceeding Rs 0.5 million

(a) Distributed Income 30 25 55(b) Undistributed Income - 25 25

E. Every Industrial Companywith paid up capitalplusfree reserves not exceedin-Rs one m4l. on

(a) Distributed Tnlccie 30 25 55( Undistributed Income - 25 25

F. Food Processing Companies

(a) Distributed Income 30 20 50(b) Und2.stributed Income - 20 20

l/ Listed on stock exchange.N/ Mot listed on stock exchange.

5'ource: Ministry of Finance, Planning and Development

ANNEX 1Page 16

42. Intercorporate dividends are exempt from the basic corporateincome tax rate but subject to a "super tax" of 15% if the receiving companyis broad-based, and of 20% if it is closely held. Investment companies areexempt from the corporate income tax if they distribute not less than 90%of their profits and have sufficient portfolio diversification.

43. Registered firms are subject to a low income tax rate. Thisstipulation is introduced as an inducement toward registration of partner-ships, and ultimately toward their incorporation as companies. In practice,however, the registration of firms has been used as a device to split personalbusiness incomes into fictituous partnerships. The Taxation Commission hasrecommended that this favorable rate practice be discontinued and thatpartners' profits be included in their personal income tax declaration.

44. The Taxation Commission has also proposed the merger of the ratesof income and super taxes, as has already been done in the case of personalincome tax in 1959, and exemption from tax of undistributed profits offirms listed on stock exchanges. According to this proposal, listed companieswould pay 50% tax on distributed income and no tax on undistributed profits. 1/Unlisted (closely held) companies, however, would pay 60% on all income,whether or not distributed. Taxes would thus be lowered for companies whereshares were traded on stock exchanges, and the retention of profits would beencburaged., For unlisted companies, however, tax rates would be increased(double) on retained earnings and unchanged on distributed profits. Thosetaxes on listed firms would be reduced and those on unlisted firm increased,and strong incentives given to the public sale of shares.

1/ The first Rs 30,000 of each type company would be taxed at only 30%.

ANNEX 1Page 17

Table 5: CORPORATE TAX RATES

Income Tax Super Tax Total Tax

I. Present rates

A. Public (listed) Companya. Distributed profits 30% 25% 55%b. Undistributed profits - 25% 25%

B. Private (unlisted) Companya. Distributed profits 30% 30% 60%b. Undistributed profits - 30% 30%

II. Commission's Proposal

A. Public Companya. Distributed profits 50% /a - 50%b. Undistributed profits - - no tax

B. Private (unlisted Company)a. Distributed profits 60% /a - 60%b. Undistributed profits 60% Ta - 60%

/a Tax rate would be 30% on first Rs 30,000.

OTHER FEDERAL GOVERNMENT TAXES

46. Indirect taxes provided 87% of federal tax revenues in FY74,and equalled 9.3% of GDP. Custom duties on imports and exports accountedfor 44% of total tax revenue, excise taxes (including surcharge) another35% and sales taxes 7%.

Taxation of Foreign Trade

47. The government's policies on taxation of foreign trade haveemphasized revenue collection, and only secondarily prote!ction of newindustries and support of the balance of payments. Particularly prior todevaluation in May'1972, the government relied upon import restrictions tomaintain the balance of payments and to protect domestic industries. Thegovernment tried to moderate the pressure of overvalued exchange rates onthe balance of payments by introducing a system of "bonus vouchers" in 1959.Under this system, an exporter received "bonus vouchers" equivalent to somepercentage of his export earnings, in addition to local currency convertedat the official exchange rate. Bonus vouchers, which could be bought andsold, could be used for importing any item from a list that changed from timeto time. This system provided "a safety valve" for the imports of criticalspare parts and raw materials. In 1967 the government introduced the "cash-cum-bonus system" for the import of a wide range of raw materials. Under

ANNEX 1Page 18

this system, importers had to p2t half of their import at the official ex-change rate, and half with bonus vouchers purclased from exporters.

48. This system was inefficient in yielding revenue to the government,in achieving the economic advantages of trade, and in protecting infantindustries. Fixed exchange rates shrunk the yield of import duties byreducing exports and hence foreign trade volume, and by tying the tax baseto world price movements rather than to domestic prices. The foreign cur-rency shortage at the prevailing exchange rate was so acute that quantityrestrictions and import bans were used, in addition to import duties, toallocate the existing foreign exchange. Effective protection of domesticindustries followed an erratic pattern because of tariff anomalies thatoccassionally emerged from the coexistence of imports of finished goods underlicensing at the official surcharge rate together with imports of rawmaterials for domestic producers under the bonus voucher system, i.e., at ahigher exchange rate.

49. The high cost of r materials under the bonus voucher system plusdomestic taxes paid on this mark up value put domestic production of finishedproducts at a disadvantage relative to those imported finished products thatpaid import duty and sales tax only on c.i.f. value at the official exchangerate.

50. After the devaluation in 1972, the government resorted to exporttaxes as a major source of revenue. High world market prices for stapleexports of Pakistan rendered this policy consistent with an expandingvolume of exports until 1974. The inherent danger of this policy, howeveris the isolation of the economy from international trade and its advantages.In the predevaluation period, export taxes had been progressively abolished.But this abolition was more apparent than real because, at the same time,the multiple exchange rate system was imposing on exports an implici-t taxthat grew higher as the discrepancy between domestic and world priceswidened. The present export duties constitute a potential hindrance tothe expansion of Pakistan's exports in the seventies, much as the overvaluedexchange rate hindered exports in the sixties. As far as revenue consider-ations are concerned, the long-run objective should be to reduce dependenceon export duties and substitute income and land taxes as a means of taxingagriculture.

Export Duties after the 1972 Devaluation

51. The devaluation of 1972 did not completely remove the hidden taxthat overvalued exchange rates had imposed upon agricultural export products.In the last several years before devaluation the impact of these rates hadbeen moderated by a gradual introduction of modest (e.g. 10% on raw cotton)export bonuses for agricultural products. At the time of devaluation, exporttaxes were introduced on a variety of agricultural products to moderatetheir domestic prices and to generate much-needed budget revenues Volume 2,Table 3.10. Two commodities have been particularly affected by export taxes:cotton and rice.

ANNEX 1Page 19

a. Cotton. An ad valorem tax or 40% (reduced to 35% twomonths later) was introduced to absorb a part of theprice raising effect of devaluation in the domesticmarket. Thus the effective exchange rate for cottonexports was brought down to Rs 7.15 insteacd of Rs 11.0,which was still higher than the pre-devaluation rate ofRs 5.7 per dollar. The export tax on cotton yarn wasfirst fixed as a specific rate, then converted into a15% ad valorem tax with a maximum of 70 paisa per poundplus 20 paisa regulatory duty. Rate differentiation infavor of processed octton goods (cotton yarn and clothes)aimed at making raw cotton available for domesticindustry at lower than international prices. However,since international cotton prices kept increasing during1972-74, the ad valorem export duty for raw cotton wasincreased from 35 to 45%, plus an additional 30% on theprice element in excess of Rs 1,500 per baLe of cotton.Simultaneously, export duties on yarn and cloth were alsoincreased.

In addition to tax measures, the export of raw cotton wastaken over from the private sector in October 1973 by anew government trade corporation, the Cotton ExportCorporation. As a result, the government no longer neededadjustments in cotton export tax rates to absorb totallyor partly the windfall gains (or losses) stemming frominternational price fluctuations in raw cotton. It shouldbe noted that until 1974 international prices moved in theupward direction, providing the government with a marginto increase export tax (or profit) but the recent trend hasbeen sharply downward. Effective August 1974, the exportduties on cotton products and cotton yarn were completelyabolished because of falling international prices. Therate on raw cotton was also reduced in August to a straight35%, but is now a redundant tax in view of the governmentmonopoly on raw cotton exports.

b. Rice. After devalution a specific rate (Rs 34 per cwt.)was imposed on the fine quality rice (basmati) that istraditionally exported; a lower rate (Rs 7 per cwt.) wasimposed upon coarse rice. In a context of rising worldprices, coarse rice was also exported by a very active privatesector in 1972/73. To absorb the windfall gains stemingfrom international price rises, the government first decidedto increase the duty from Rs 7 per cwt. to 30% ad valorem oncoarse rice. Moreover, starting from FY 1974 it nationalizedthe procurement of coarse rice in addition to basmati rice.Export taxes and government monopoly profits thus introduceda wedge between world market rice prices and prices received

ANNEX 1

Page 20

by Pakistani farmers. As a result, farmers receivedlower prices for coarse rice in 1973/74 than in 1972/73.From 1973/74 to 1974/75, the government increased this

wedge from 55% of the international price to 64% forbasmati rice exports and reduced it slightly from 60% to57% for coarse rice (Table 6). As a result, rice pro-duction received little increase in price incentives.

Table 6: TAXES AND GOVERNMENT PROFITS IN EXPORT PRICE OF RICE(dollars per ton)

Basmati Rice Coarse Rice1973/74 1974/75 1973/74 1974/75

1. Export Price (FOB) 475 800 286 350(Index) (100) (168) (100) (122)

2. Export Duty Plus Gov'tProfit 262 515 173 201

- Government Profit 193 446 87 96- Export Duty 69 69 86 105

3._Price to DomesticProducers /a (1-2) 213 285 113 149

(Index) (100) (134) (100) (132)

4. Ratio of Gov't Revenue (2)to Export Price (1) 0.55 0.64 0.60 0.57

/a Including transport and milling costs.

Source: Ministry of Finance, Planning and Development (Finance and Planning

Divisions).

c. Other Products. Other agricultural products subject to

export taxes are raw hides, raw skins, and raw wool. Thereis no export tax on the goods produced from these primary

products. The aim of this export tax is to encourage localprocessing before export.

Excise Duties

52. Although excises are imposed on a great variety of products in-

cluding certain services, this tax is concentrated on six major products:

petroleum and its products, tobacco products, cotton fabrics and yarn,

vegetable oil, sugar and cement; these six bring in more than 70% of the

total. The coverage of excises has progressively expanded to new productsover the years with the growth of the industrial sector, but this expansion

has often been belated and limited in scope.

ANNEX 1Page 21

53. Despite the large number of domestic products subject to excise,the tax is still collected through the methods that are peculiar to customs,excises and monopoly type taxes, because of high tax rates. A close surveil-lance of production and movement of merchandise is the typical procedurein the administration of these taxes. The central excises are collected onthe premises of production. The basic procedure requires that excisablegoods be cleared on payment of duty under the supervision of the exciseofficer from the community in which they are produced. In view of thelarge number of industrial products subject to excises, this typical exciseenforcement procedure was simplified in 1963. At principal industrialcenters, the practice of clearance of goods after payment of excise on thebasic of self-assessment, instead of clearance in the presence of the exciseofficer, was accepted for certain commodities.

54. Excises exhibit low revenue elasticity; three factors are largelyresponsible for this. First, the items that yield highest revenue, such aspetroleum, oil and lubricants, cigarettes, cement, salt, tea, are taxed ona specific rather than ad valorem basis. Therefore, the revenue is responsiveonly to volume increase, not to price increases. Secondly, producers ofseveral important commodities are taxed on the basis of capacity. Capacitytaxation revenue is only responsible to volume increases when new capacityis added. The capacity tax reflects price increases only in the case ofsome commodities for which the tax base is the capacity multiplied by theprice. The third factor is the delay in their imposition on new productbranches as industrial output is diversified.

55. The capacity tax was introduced in 1966 with the taxation of sugar,cement and soda ash 1/. In 1968, it was extended to cotton fabrics, cottonyarn, and vegetable ghee. Under this system, individual manufacturing unitswere required to pay tax on the basis of their pre-determined productioncapacity instead of actual production. The quantities of these commoditiesproduced in excess of the notified production capacity were thus not subjectedto any tax. However, as recommended by the Taxation Commission, vegetableproducts have been taken out of the system and pay tax on actual production.The nationalization of cement and soda-ash industries in 1972 eliminated themajor reason for adoption of the capcity tax system. Now, only sugar, cottonfabrics and yarn are subject to capacity taxation.

56. The Taxation Commission cited the following drawbacks of the capa-city tax: the rigidity of revenue, the long procedure and litigation involvedin the determination of capacity, frequent refund claims for reasons of in-voluntary idleness of capacity, and distortions created in product mix infavor of high priced products. Furthermore, according to the Commission,two major merits claimed for the capacity tax, i.e., avoidance of contactsbetween taxpayer and excise officer (and therefore the opportunity for

1/ For detailed information on this practice see S. Cnossen, "CapacityTaxation: The Pakistan Experiment," IMF, Staff Papers, March 1971,vol. 21, pp. 127-69.

A%NNEX 1Page 22

corruption), and inducement to full capacity utilization, have not materialized.First, frequent claims for tax refund or suspension on grounds of factoryclosure and work stoppages have maintained these contacts at a high level.Second, a short supply of materials has persistently been a more crucialfactor that influenced, among others, the degree of capacity utilizationin most of these industries (particularly in sugar and vegetable oil in-dustries), leaving ineffective all the possible stimuli generated by thecapacity tax.

57. Another important reform that is needed is the determination ofthe respective coverage of excises and sales tax. At present, the salestax is as restricted as excises, and excises are as pervasive as a generalsales tax. Since a more selective excise system confined to a limitednumber of items can operate more efficiently under high rates withoutoccasioning significant evasion, most of the present excises might best betransferred into the realm of the sales tax (particularly, the excises ontextile, metal and chemical products, and in general, on intermediate goods).Consumer goods that are excisable at high tax rates should remain under thecoverage of excises.

Sales Tax

58. The sales tax, which was originally introduced in 1948 as a multi-stage turnover tax, has become a sort of excise duty through a large numberof exemptions that have narrowed its base considerably. Revenue losses dueto exemptions have been partly compensated for by several increases in itsstandard rate. As a result, the standard rate has risen from 10% in 1960to 20% at present. After dlevaluation, the general sales tax rate on importswas reduced from 20% to 10% in order to absorb a part of the price mark-up,but in 1973 it was again raised to 20%. The new rate structure provided astandard rate of 20% on locally manufactured goods, although some specificitems are subject to higher or lower rates.

59. The tax is levied on manufacturers on the sale of the taxed items.On imports the tax base is the duty paid value. The tax is collected by theincome tax department, except for imported goods, in which case it is col-lected by the Customs and Excise Department. The narrowing of the tax baseand the raising of the standard rate complicated the administration of thetax. First, evasion possibilities and benefits have increased considerably.With the proliferation of exemptions, the number of "licensed producers"entitled to buy free of sales tax has increased considerably. As a result,tax free purchases of "licensed producers" are easily resold in the marketwithout any payment of the sales tax. Also, the tax has lost its elasticityof yield in response to the growth and diversification of domestic manufactur-ing activities.

60. Until 1973, the exemption of intermediate production activitiesfrom the sales tax to prevent multiple taxation was secured through thesystem of "manufacturers' licenses." These licenses enable producers tobuy their inputs without paying any sales tax, but their finished productswere subject to tax. This system was responsible for substantial tax

ANNEX 1Page 23

evasion in Pakistan when licensed manufacturers overbought taxable inputsand resold a part of them in the market. In 1973, however, a tax cretlitsystem (the payment of the tax on input purchases, and a refund or "taxcredit" on the sales tax due on the finished product) was adopted toreplace the system of licensed manufacturers.

61. The products of small manufacturers employing capital up toRs 10,000 and satisfying certain other conditions are exempt from the salestax. These conditions include that the industry must be an owner-operatedbusiness which employs less than ten persons, or an even smaller number ifmechanical power is used. An important disadvantage of small industryexemption is its encouragement to the splitting of production units. Thisexemption should probably be confined to the encouragement of a limitednumber of subsidiary manufacturing activities which are usually produced inresidential premises, or else abolished.

62. Reform in the sales tax should reverse the past trend: the taxbase should be broadened by minimizing exemptions and lowering the standardrate.

63. The broadening of the tax base will allow a substantial reductionin the present rates. The standard rate can be brought down, and a ratelower than the standard rate can be applied to manufactured goods widelyused by low income groups and activities difficult to tax. Food processingindustries can be exempt. A group of luxury items may be separated from thesales tax coverage and integrated into the excise tax subject to higher rates.

ANNEX 2Page 1

AGRICULTURE - TRENDS. ISSUES AND PROSPECTS

Agricultural Growth in FY 1974

Kharif (Summer Crops)

1. Agriculture in early FY 1974 was poised for a record growth ratein the two main export crops, cotton and rice, with a possibility of surplussugar also becoming available for export. This hope was dashed with thedevastating floods which hit the southern areas of the Punjab and Sind inAugust 1973, totally destroying an estimated 1.5 million acres of cotton, rice,sugar cane and other crops. Despite this enormous loss, the rains thatcaused the floods benefitted the remaining standing crops and consequentlythe production of rice, sugar cane, maize, bajra and sorghum millets wasnear record levels, while that of cotton was only 10% down from FY73,altogether a remarkable achievement.

Rabi (Winter Crops)

2. In an effort to minimize the losses of crops from the floods theGovernment launched a campaign to sow wheat in most of the area where thecrops had been destroyed by the floods. Seed and fertilizers were providedin the devastated areas on easily available credit terms, and abundant creditwas provided for the replacement of bullocks lost in the floods and for therepair of damaged tubewells. Teams of tractors were also sent by the variousProvincial Governments to the devastated areas, for hire against credit givenon the spot by mobile banks under the aegis of the ADBP (Agriculture Develop-ment Bank of Pakistan). On the completion of the rabi cultivation, however,the tractors were sold by auction for cash. Although the flood water wasslow to recede in some of the low-lying areas, it was forecast that about1.2 million acres more wheat had been sown than in FY73. Fertilizer salesduring the wheat planting period increased by 30% over the record offtake inthe FY73 planting season. Canal flows were satisfactory and the winterrains were fair. Everything pointed to a record wheat crop in FY74, and theGovernment estimated production could reach 8.5 million tons, an increase ofsome 1.2 million tons over FY73. Procurement targets of 1.8 million wereset for the Punjab and 400,000 tons for the Sind; in Sind, the target wasachieved but procurement in the Punjab fell short by one million tons.

3. The government now estimates FY74 wheat production at only 7.5million tons, or only 2% greater than a year earlier, and has announced thatoriginal acreage estimates were too high and that substantial amounts ofhealthy looking standing crops proved to have shrivelled grain. Some othersources estimate production may have reached 8 million tons. Pricing policiesmay also have played a role in the lower than expected crop and governmentprocurement levels. It was known at sowing time that many farmers in thePunjab were very dissatisfied that the procurement price of Rs 25.5 permaund announced by GOP in August 1973 for the FY74 wheat crop representedonly a 13% increase over the previous year, while the price of fertilizer

ANNEX 2Page 2

had been increased by 57% since the planting of the previous wheat crop.Despite representations from the agricultural community and others, theGovernment refused to raise the procurement price before or at harvest time.As a result much of the Punjab crop was sold in the free market, where wheatprices were some 25% to 40% higher than government procurement prices. Al-though the agriculture growth rate during rabi was higher than in FY73,the government imported nearly 1.2 million tons of wheat during FY74 in orderto provide wheat for the government ration shops.

4. Despite the August floods, the combined growth rate of the majorcrops during the kharif and rabi seasons was 7.7% compared with only 1.7%in FY73. Most of the growth can be attributed to the more attractive pricingof sugarcane, basmati rice and cotton and to the additional acreage of wheatsown in areas where kharif crops were devasted by floods.

5. Analyzing the performance on a crop by crop basis shows that, foryears of normal irrigation supplies and good winter rains, there is a discern-ably upward shift in wheat production. This shift could be speeded by addi-tional financing to encourage the application of fertilizers and the morewidespread sowing of the HYVs. The same upward shift is also apparent inrice. It has not occurred in kharif millets and maize, although the produc-tion of the latter could improve with the present efforts to breed improvedseed for Pakistan conditions. Nutritionally valuable pulse crops also showno signs of growth due to low productivity and unattractive prices.

6. The production of sugarcane is entirely irrigated. Water short-ages, especially in spring and early autumn, affect planting and sucroseproduction respectively. Sugarcane production consequently reached peaksdue to favourable weather conditions in 1969/70 and 1973/74, but was lowerin intervening years due to drier conditions and unattractive pricing afterthe glut of white sugar in 1969/70. Refined (white) sugar production hassince failed to surpass the 1969/70 record level, even though prices from1973 have been more attractive and many new sugar mills have been installed.Gur (raw sugar) production has continued at around 1.3 million tons, or morethan double that of refined sugar, because of the demand for this type ofsugar in rural areas. Given normal weather conditions and continuing at-tractive cane prices, however, further growth in refined sugar productioncould be easily sustained.

7. Seed cotton production has failed to sustain the high levelachieved in 1971/72, but a positive growth rate would have been registeredin FY73 had it not been for the scarcity of fertilizers, and again in FY74had ft not been for the loss of some 1.1 million acres during the floods.The drop in seed cotton production has also had severe repercussions on theedible oil availability for ghee manufacture, the demand for which is growingat an average rate of 10% per annum.

ANNEX 2Page 3

8. The most promising source of additional domestic edible oils isfrom improved extraction processes since only about two-thirds of the oilcontent is extracted by traditional oil seed expellers. Modern hydraulicor solvent expellers would raise the extraction ratio to 95 to 98%, and somehave been and are being installed. Apart from cotton the potential forincreasing edible oil production is limited. Groundnuts have not been asuccess due to poor prices and lack of processing facilities. Attempts topopularize sunflower production have failed. The second most importantoilseed crops after cotton are rape and mustard, but production of theseoils is stagnating due to poor productivity from unattractive prices whichdiscourage farmers from spraying against aphids and applying fertilizers.

9. There is no reason why growth rate of 5% or more in the major cropscannot be sustained for the next decade, given average weather and attractivepricing.

(i) Agricultural research is becoming more economicallyoriented. The availability of good seed should improvewith the development of a scientifically organizedseed industry. The availability of locally producedbalanced fertilizers and thereby cheaper fertilizersshould double in the next four years, and plans arebeing made for reclaiming vast areas of waterloggedand saline areas.

(ii) When Tarbela dam comes on stream in FY76, this willincrease average irrigation canal flows by 15-25%,depending on the time pattern of storage and releaseof water during scarce water periods in the winter,spring and late summer to early autumn. Waterconservation through improving and lining watercoursesand on-farm water management is also being givenincreased prominence.

(iii) The increased productivity of cotton, rice, rape andmustard oilseeds, and sugarcane depend to a largemeasure on increased use of pesticides, however, towhich adequate attention is not being given.

(iv) Further attention must also be given to increasingfarm power through the gradual replacement ofbullocks by tractors, thereby releasing severalmillion acres for producing more milk and meat orfor crops. In the interim cowpower should beencouraged as in Eastern Europe. Draught animalsin Pakistan seldom work more than 130 days annually.Cows when not working could be giving milk and pro-ducing calves.

ANNEX 2Page 4

10. In order to sustain long-term growth, adequate attention must befocussed on the development of rainfed agriculture, rangelands, afforestationand reforestation of the catchment areas and the control of soil erosionthroughout these areas.

11. The systematic development of inshore, offshore, and deep seafishing along the Sind and Makran coasts could add greatly to the wealthof Pakistan. Although Pakistan has recently declared a 50-mile sea fishinglimit, in the past much of the coastal and deep sea catches have been under-taken by foreign countries.

12. The future growth of export earnings depends heavily upon improve-ments in the physical volume of its major exports, all based on domesticagricultural production. As shown in the following table, these volumesgenerally declined between FY73 and FY75.

Table 1: QUANTITY AND VALUE OF PRINCIPAL AGRICILTURAL EXPORTS

1972/73 1973/74 1974/75 EstimatesTons $ Tons % of $ Tons % of $

Thousand Million Thousand FY73 Million Thousand FY73 Million

Rawcotton 212 109 36 (17) 38 210 (99) 160

Yarn 179 186 96 (54) 183 89 (50) 100Cloth 73 120 50 (68) 143 67 (92) 150Basmatirice 109 26 231 (212) 110 200 (183) 160

Coarserice 667 87 357 (53) 102 400 (60) 132

Total 1.240 528 770 (62) 576 966 (78) 703

Total value ofexports 808 - 1,026 1,160

Above exportsas % of totalexports 60% 56% 61%

The sharp drop in export volume of raw cotton in FY74 was due both to thedecline in the cotton crop due to the floods and to government reservationof excessive amounts of cotton for the use of the domestic textile industry.Basmati rice procurement increased because of more attractive pricing. Coarserice exports were in the private sector during FY73 but the procurement inFY74 was passed to government which offered less to farmers for paddy thanthey had received from the private dealers in FY73, even though export pricesfor coarse rice were considerably higher.

ANNEX 2Page 5

FOODGRAINS

Wheat

13. Since the introduction of fertilizer responsive HYVs of wheat overa wide area in 1967/68, the growth of output has been fairly steady butslow (Table 2). From 1967/68 to 1972/73 the average annual growth in pro-duction was 3.2%, or little more than the population growth rate. The growthin the acreage of HYVs during the same period was about 32% , withlittle change in total wheat acreage. Irrigation water availability, rainfalland pricing are the key determinants of wheat production, since Mexican typewheat productivity is a function of fertilizer application, which in turndepends upon water availability and prices. The increase in wheat acreagein 1973/74 was a result of the floods in August, when 1.5 million acres ofother crops were totally destroyed and much of this land was resown to wheat.

14. The indicative price which farmers can expect for wheat is normallyreflected by the Government announcement before planting of the procurementprice at the next harvest. Despite inflation this procurement price forwheat has remained unrealistically and unattractively low since about 1970,and has failed to stimulate productivity sufficiently through increasedapplication of fertilizers to avoid heavy imports of wheat.

ANNEX 2Page 6

Table 2: WHEAT ACREAGES, PRODUCTION AND PROCUREIENT

1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74

Acreage (million) 14.8 15.2 15.4 14.8 14.5 14.7 15.2 /d

HYV acreage (million) 2.4 5.9 6.6 7.7 8.2 9.0 9.6Production (mill.tons) 6.3 6.5 7.2 6.4 6.8 7.4 7.5 /d

Procurement priceRs. 17 17 15 17 17 22.50 25.50

Amount procured(million tons) 0.78 0.89 1.00 0.82 0.20 1.3 1.2

Fertilizer innutrient lbs peracre 66* 39 51* 35 /a 35 /a 37 /b 27 /cPrice per bag(112 lbs) ofurea Rs. 28.50 28.50 28.50 28.50 35 35 55

Fertilizerbenefit/ /ecost ratio 3.9:1 3.8:1 3.3:1 3.8:1 3.0:1 4:1 2.9:1

Average annual production growth rate: FY1968 - FY1973 = 3.2 percent.

* good winter rains

/a very poor winter rains

/b shortage of fertilizer

/c price increase of 30 percent

/d these were revised downward in December from 16.2 million acres and 8.4

million tons respectively.

/a based on FAO/GOP soil fertility trials and Agricultural ResearchStation experimental results, outlined in the report 343-PAK, MultanFertilizer Factory.

15. In view of the response to the grow-more-wheat campaign inl theareas devastated by floods, resulting in what was initially believed to have

been an additional 1.3 million acres being sown compared with FY73, adequate

canal flows, fair rains in the barani areas and a record offtake of fertilizerfor the wheat crop, wheat production in FY74 was anticipated by Governmentto reach a record 8.5 million tons or some 1.2 million tons more than theFY73 record. In consequence, Sind had a procurement target of 400,000 tons

which it achieved, and Punjab 1.8 million tons, of which only 800,000 tonswere procured. This shortfall from production and procurement targets

necessitated an equivalent increase in imports in FY75.

16. As noted, the Government had been warned of the danger of this

shortfall well before the sowing season started by the Punjabi farmers, who

ANNEX 2Page 7

argued that the procurement price of Rs 25.5 was insufficient to meet their

costs of production,. which had escalated enormously due to inflation. Un-

successful efforts were again made in March to get the Government to of'fer

higher prices in order to procure more wheat.

17. Procurement officials in some cases also employed'pressure in an

effort to increase wheat purchases in the villages. The main sufferers were

the small farmers who were obliged to sell at prices some Rs 7-10 per maundbelow the free market.

18. In mid-September the Government announced the closure of procure-ment and promised to purchase wheat at the next harvest at Rs 37 per maund

($101 per ton). While an increase of 45%, this price is still regarded as

too low by many farmers, and is still significantly less than world marketprices.

19. Prospects for the 1974/75 wheat crop at the end of calendar1974 were very bleak. Canal- were flowing at about 40-50% of normal for the

time of the year, power for tubewell operation was in short supply, much of

the Barani wheat was planted late due to the absence of timely rains anddid not gefminate until wide-spread but light rains after Christmas. Theacreage is reported to be appreciably less in the Sind compared with 1973/74

but only slightly down in the Punjab, but NWFP has not suffered from irri-

gation shortages. During October to December 1974 fertilizer application

dropped by 37%, to to 103,000 nutrient tons (N+P) compared to 164,000 nutrient

tons for the same period in 1973, due to the water shortages and higherprices. Because of the slow offtake of fertilizers during October-Decemberfor the wheat crop, the government decided to reduce the price of fertilizeron the 18th of December by 12.5% for six weeks. In consequence, fertilizer

sales increased to 110,000 nutrient tons during January 1975 compared with

44,000 nutrient tons in January 1974. Although wide spread rains werereceived throughout January to about mid March, it is doubtful that-much of

this tonnage was applied to the wheat crop at such a late stage in its growth.

nie unusual but timely late winter rains have improved the prospects for the

wheat crop especially in the Punjab and throughout the Barani areas. It

is now estimated that production could reach 6.8 to 7 million tons this

season. Production of 6.9 million tons in FY75 would still necessitate

imports of about 1.8 million tons in FY76, to provide for a per capita

consumption of 11 ozs of wheat per day (Table 3) and import expenditures of

about $300 million. If the per capita consumption is to be maintained at the

same level as in 1974/75 of 11.42 oz per day, an additional import of about

260,000 tons and expenditure of about $42 million would be needed. It is

understood that in order to meet the anticipated heavy shortfall in FY76increased imports of wheat are being undertaken in FY75.

ANNEX 2Page 8

Table 3: FOOD BALANCE SHEET

(wheat, rice, coarse grains and legumes)

1972/73 1973/74 1974/75 1975/76------- thousands-----------

Wheat /a /c1. Local production- 6,782 7'3 25/b 7,500 6,900-2. Seed & losses 10% 678 932- 750 6903. Net availability 6,104 6,393 6.750 6,2104. Imports 1,464 1,134 1,250 1,8005. Opening stocks 74 86 200 2006. Closing stocks 86 200 200 2007. Net availability 7,728 7,413 8,000 8,0008. Per capita availability (ozs per day) 11.67 10.88 11.42 11.00

Rice /c9. Production 2,288 2,365 2,000c-

10. Seed & waste 6% 137 142 12011. Exports 776 587 40012. Net availability 1,375 1,636 1,48013. Per capita (ozs per day) 2.09 2.40 2.11

Coarse grains (maize. Bajra and Sorghum millets) Ic14. Production 1,300 1,480 1,300-L15. Seed, loss + feed (60%) 780 888 78016. Net availability 520 592 52017. Per capita (ozs per day) 0.78 0.87 0.74

Legumes - Pulses (Gram & others)18. Production 700 744 79519. Availability (less seed, feed & losses) 498 526 56420. Per capita (ozs per day) 0.75 0.77 0.8021. Total availability (7)+(12)+(16)+(19) 10,121 10,167 10,56422. Population (million) 65 66.9 68.823. Per capita (lbs per annum) 349 340 34424. Per capita (ozs per day) 15.29 14.92 15.07

/a These wheat production figures are for the previous fiscal years, butrepresent the new availability for the year indicated.

lb Includes estimated flood losses of 200,000 tons.

/c IBRD estimate.

ANNEX 2Page 9

Rice

20. The high yielding varieties (HYVs) of coarse rice were introducedon a wide scale in 1968/69, or one year later than the HYVs of wheat. Sincethen total rice production has increased steadily by an average annual growthrate of nearly 3.9%, but Basmati rice production has declined during thisperiod (Table 4). Had it not been for the floods in August 1973 whenseveral hundred thousand acres of rice were destroyed, production mighthave reached 2.8 million tons compared with 2.4 million tons of actualproduction.

Table 4: PRODUCTION AND EXPORT OF RICE(thousand tons)

1968/69 1969/70 1970/71 1971/72 1972/73 1973/74Variety Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp.

Basmati 565 126 585 88 405 187 378 150 394 109 469 231Coarse 1435 236 1778 371 1760 130 1848 195 1899 667 1947 357

Total 2000 362 2363 459 2165 317 2226 345 2293 776 2416 588

21. About 1.5-1.8 million tons of rice are consumed annually withinPakistan and the surplus is exported. In the last two years rice has surpassedraw cotton in earning foreign exchange. Rice could contribute much more toexport earnings if the coarse rice farmers were given the incentive of pricescloser to world market levels. In FY74 the foreign exchange earnings fromboth basmati and coarse rice $212 million.

22. Basmati rice has a limited market of some 200,000 to 250,000 tonsin Middle East countries and the Gulf States, while the market for coarserice is fairly unlimited and Pakistan could probably sell 1.0 to 1.5 milliontons annually to Sri Lanka and East Asia. The procurement price for Basmatiis the equivalent of $248 per ton of rice to the farmer, compared withexport prices of about $800 (February 1975). For coarse rice, the equiva-lent procurement price was about $111 per ton, as compared with world market(export) prices of about $325 per ton. The difference between these pro-curement and export prices (minus handling costs) are absorbed by the govern-ment, partly as custom duties and partly as trading profits. The exportduty on Basmati is fixed at $69 per ton but the export duty on coarse rice is30% ad valorem, or about $100 per ton at present export prices. The dif-ference between the market price and the procurement price plus duty istrading margin and profit of the Rice Export Corporation.

23. Though rice procurement is a government monopoly, it is onlyundertaken from either the mills or nominated agents after the paddy hasbeen milled. The paddy is purchased by the mills from farmers and commissionagents at about two thirds the equivalent rice procurement price less amilling charge. Farmer interests would be better served if the Government

XMNEX 2Page 10

fixed paddy rather than rice procurement prices, reduced the milling, profitfrom producing broken rice grains and rewarded the millers for milling un-broken rice grains. The present (FY75) equivalent paddy price for Basmatiis Rs 60 per maund and for coarse rice Rs 27.60 per maund, and at presentyields only enable farmers to earn gross returns of about Rs 1,620 and Rs 720per acre respectively. The gross returns per acre of coarse rice are in-sufficient to cover the cost of using fertilizer on these fertilizer re-sponsive varieties. Consequently the yield and production of HYV coarserice varieties has remained low and generally static since introduction ona wide scale in 1968/69. In FY74 the gross return per acre for coarse ricecultivation was only about Rs 440 per acre, and was insufficient to coverthe costs of plowing, transplanting, weeding and harvesting, let alone ofapplying pesticides and fertilizers without which high yields cannot beachieved.

24. Of unbroken basmati rice, the Government compulsorily procures 91%(100 tons out of 110 tons), while the miller is allowed to sell the remainderin the open market. In addition, broken basmati rice not exceeding 33% oftotal overall production can be retained by the mill for sale in the openmarket. In the case of unbroken coarse rice, the Government compulsorilypurchases two-thirds, leaving the miller one-third for sale in the openmarket together with broken coarse rice to the extent of not more than 30%of overall total production. This system discourages investment in modernmilling equipment as rice millers make good profits from the open marketsales of broken rice. Although the rice procurement prices are normallyfixed just before the planting season, they have been known to be variedupwards during the milling season, depending on the need to procure morerice for export.

25. The Prime i4inister, while on a tour of Punjab in November 1974,agreed to increase the procurement price of coarse rice from Rs 40 to Rs 48per maund, provided the broken grain content was not more than 15-20%. InSind the percentage of broken grains is normally around 40%, so it is doubt-ful if the Sind rice there can take advantage of this price increase.

26. Paddy storage, rice milling and packing for export are in urgentneed of reorganization. The facilities for paddy drying and storage areprimitive or non-existent. Most of the mills are inefficient, worn out andantiquated, but fit into the present policy of permitting a high percentageof broken grains for free sale by the mills in the open market. All ricefor export has to be re-milled and re-bagged at Karachi at considerableexpense. There is also scope for the extraction of edible rice bran oil fordomestic consumption, as edible vegetable oil is in very short supply.

27. Rice production prospects in FY75 have been dampened by reducedcanal flows in both the Punjab and Sind which delayed the transplanting ofthe present rice crop, while early water shortages in the Kotri area of Sindeven necessitated further transplanting. The near drought conditions formost of the kharif season in the Punjab have affected basmati and coarserice adversely, but production there is still expected to reach the FY74

ANNEX 2Page 11

level of 1.1 million tons. The coarse rice crop in Sind is expected to be

about 17% less than in FY73, however, and therefore total rice production

in FY75 is expected to be above 11% below last year, or not much above2 million tons.

Minor Grains

28. Maize, millet and sorghum are the principal minor cereals and

account for only 1.4 to 1.5 million tons. About 60% of minor grains are

utilized for commercial processing and feeding. Although efforts are now

underway with the help of Ford Foundation to breed improved varieties of

maize, the impact on total production is still only marginal. The breeding

of improved millets is yet to start, but present varieties have very poor

yield potentials.

Pulses

29. The production of buch kharif and rabi pulses has remained vir-

tually stagnant for many years because of poor seed and unattractive prices,

and their per capita availability has declined moderately, to about 0.74ozs. per day. Renewed efforts are underway to procure more resistant

varieties of gram, as gram is the main rabi pulse crop and represents about

70-75% of total pulses production. Before the introduction of Mexican type

wheat in 1967/68 on a wide scale, it was general husbandry to interplant

local wheat with gram, but since then the practice has virtually ceased

in the irrigated areas.

Sugarcane

30. Sugarcane planting increased by nearly 19% in response to more

attractive pricing in FY74, despite the fact that some 143,000 and 6,000 acres

in the Punjab and Sind respectively were devastated by floods. The good

rains which caused the floods benefitted the remaining standing crop and

refined sugar production increased from 432,000 to 597,000 tons, while gur

(raw sugar) production continued at the same level of about 1.3 million tons

(Table 5).

ANNEX 2Page 12

Table 5: SUGARCANE, SUGAR AND GUR PRODUCTION

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75

Acres (million) 1.5 1.58 1.37 1.31 1.56 1.57 /a

Cane production(million tons) 25.90 22.80 19.70 19.60 23.53 n.a.

White sugar production(thousand tons) 616 536 332 432 589 475 /b

Gur production(thousand tons) 1,492 1,300 1,280 1,209 1,300 /c n.a.

Average price ofcane per maund 2.80 2.72 2.47 3.32 4.22 5.22

Per capita availabilitylbs. per annum

White sugar 1 4 . 3 7 /. 19.52 16.28

Gur (raw sugar) 39.03 41.55 n.a.

/a First estimate

/b Government estimate

/c Estimated

/d Including imports . No imports after FY73.

31. Although the first estimate is that the 1974/75 acreage is marginal-ly higher than last:year, the standing crop in Sind and Punjab is stifferingseverely from irrigation shortages and in Sind much of the crop is said to beyellowing. As a result of these water shortages and the fact that about 70%of the acreage is ratoon 1/, the sucrose content is likely to drop and whitesugar production is expected to reach only 475,000 tons, a ,drop of about 25%on 1973/74. In an effort to attract a greater proportion of cane to themills to increase white sugar production, the Government raised the caneprice by 50 paisa per maund in September 1974, making the prices Rs 5.00,Rs 5.25 and Rs 5.40 per maund of cane in the NWFP, Punjab and Sind respect-ively. This was the second 50 paisa price increase for cane in eight months,the first being in February.

1/ See under land tenure for the reason for the increase in the ratoonedacreage.

.ANEX 2Page 13

32. Although about four new sugar mills have begun operating since1967/70 and ten more are projected, white sugar production has still notreached the record level of 616,000 tons achieved in 1969/70. With new millsnow in operation and more coming on stream, there is likely to be excesscrushing capacity in the industry.

33. The encouragement of sugar growing in the southern areas of Sindwhich are climatically most suitable for cane is sound, but expansion ofsugarcane in the cotton and wheat areas of both Punjab and Sind would reduceacreages of those crops, the value of which is much greater to the economyif not to the grower. Irrigation water is already limited in the latterareas and cannot support large increases in sugarcane acreage, which requiremore than double the water needed for cotton and wheat double-cropping. Aswitch over from cane to sugar beets in the NWFP, where cane is affected byfrost, could help to release water supplies further downstream. It ispossible that both kharif and rabi varieties of sugar beet could be grownin the NWFP to enable sugar beet processing to continue for longer periods.The existing growth rate of refined sugar production is too slow to benefitfrom the present high international prices for sugar. In FY75 refinedsugar production could be about 100,000 tons short of the sugar requirementneeded to maintain the per capita availability at the FY74 level of 19.5lbs per annum. To avoid the necessity to import sugar in FY75, the governmentreduced the per capita sugar ration and increased sugar and sugarcane pricesin April 1975.

Edible Oil

34. The main sources of domestic edible oil are cottonseed, rape andmustard, with minor amounts from groundnuts and sesame. Production of edibleoil has displayed only marginal to negative growth since the large boostin 1.971/72, when the cotton crop increased by 32%. Demand on the other hand,especially for ghee, has been growing at about 10% per year since 1971/72,and has had to be met by steadily growing and expensive imports.

Table 6: EDIBLE OIL

Net Per CapitaFiscal Year Production Imports Availability Availability (oil)

---- tons-------------- -------lbs--------

1,971/72 245 69 300 10.01,972/73 248 87 335 11.51.973/74 241 154 395 13.21974/75 /a 210 150 360 11.7

/a Projected on the basis of 3.6 million bales cotton crop.

35. Rape and mustard oil can only be utilized to the extent of 10%for the manufacture of vegetable ghee (margarine) because of its poor keep-ing quality under Pakistan conditions. On the other hand there is no reason

ANNEX 2Page 14

why, when refined, these oils could not be used more extensively for cooking,as is usual in most developed countries. Rape and mustard oilseeds yieldsof about 6 maunds (492 lbs) per acre could be more than trebled to alround22 maunds per acre by timely spraying against aphids and by the use of modestamounts of fertilizer. This would nearly double total domestic vegetable oilproduction.

Cotton

36. From 1967/68 to 1970/71 the annual growth rate of cotton productionwas only 2.3%, but when an export bonus increasing the price of cotton lintby about 20% was given on the 1970/71 crop the price of seed cotton receivedby farmer increased by 30%. As a result of this incentive the crop in1971/72 increased by some 28%, from 3.1 to 3.98 million bales (Table 7).rhis level of production would have been exceeded in later years had it notbeen for a shortage of fertilizers in 1972/73, the loss of 1.1 million acresof standing cotton in the 1973 August floods, and drought and disease in1974/75.

Table 7: PRODUCTION AND EXPORT OF RAW COTTON(million bales of lint)

1964/65 1967/68 1970/71 1971/72 1972/73 1973/74 1974/75

Production 2.13 2.90 3.10 3.98 3.95 3.7 3.6/a

(1964/65 - 1974/75 estimated annual growth rate 6%)

Exports 0.57 1.44 1.21 1.02 0.31 1.02

/a Estimated.

37. All exports of lint were stopped because of uncertainty about thesize of the cotton crop after the floods, and in anticipation of a much largerofftake promised by the textile mills. This off-take never materialized,however, because of the drop in international yarn and cloth prices. Althoughthe export ban was nominally lifted in January 1974, the newly created publicCotton Export Corporation was rather slow in getting underway, and only309,000 bales of lint were exported in FY74 compared with 1,015,000 balesthe previous year.

38. The slow offtake of lint by the mills and the slow export resultedin many unsold bales being left in ginners' hands at the end of the season.This seed cotton had been bought at record high average prices of aboutRs 100 per maund. Many ginners found themselves in the unenviable positionof owing money to the growers and carrying large overdrafts with the banksbecause of the failure by mills to lift bales for which contracts had beennegotiated, and by certain mills failing to pay for lint already lifted.

ANNEX 2Page 15

Although the Cotton Export Corporation recently agreed to purchase all baleslying unsold by ginners, this has not yet solved the problem of the manyginneries which had made firm contracts with mills which could not lift the

lint for lack of credit.

39. The FY75 cotton crop was planted later than usual because ofthe delayed arrival of canal flows. Coupled with the report that the fertil-izer offtake was considerably less at the end of June compared with previousyears, the government announced in July that the crop could only produce3.5 million bales. Since then, however, the estimate has been increased to3.6 million bales.

40. Local textile mills are cutting back on their purchases of rawcotton, with adverse effects on seed cotton prices, because of the recessionin the international yarn and cloth trade. Export demand for raw cottonis also weak and at lower prices of about 32 to 34 IJ.S. cents per pound,compared with over 46 cents in FY74. The 1974/75 cotton season started withfarmers being told by governim_,t that they could expect Rs 100 per maundfor good quality AC 134 seed cotton. This announcement has since beenrevised progressively downwards, however, and most farmers in FY75 averagedonly about Rs 72 per maund compared with Rs 85 to Rs 90 in the previous year.

41. The Cotton Export Corporation announced in August 1974 that it wouldlift all raw cotton from ginners at Rs 237 per maund, but in November re-vised the figure to Rs 200 per maund. The implications of these announce-ments on the price of seed cotton to the growers are shown in Table 8.

ANNEX 2Page 16

Table 8: FARM PRICES OF SEED COTTON

RsAugust November

Free alongside price (lint) per md. 237 200

Export's commission 1-1/2% 3.60 3

Ginning and baling charges per md.of lint 70 70 /b

Equivalent price to farmer of onemd. of lint t63.40 127

Cottonseed 2 mds. at Rs 49 per md. /a 92 98 /c

Total equivalent to farmer for 3 mds.seedcotton 255.40 225

Average price to farmer for bestquality AC 134 seedcotton per md. 85.0 75.0

/a The calculation is based on the formula that 3 maunds ofseedcotton, when ginned, produce one maund of lint and2 maunds of cottonseed.

/b The government is negotiating with ginners to acceptRs 62 - Rs 65 ginning charges per maund of lint, butginners are unwilling to accept charges of less thanRs 70 per maund.

/c Prices were high due to shortage of cottonseed as themain cotton crop had not yet been picked, cottonseedcake prices were Rs 44 per maund when normally they arearound Rs 21-22 per maund. Cottonseed prices arelikely to drop unless the government is prepared toincrease its purchase price for edible cottonseed oilfrom the present low price of Rs 200 per maund, whenimported soya bean oil costs about Rs 366 per maund($1,000 per ton).

The government has stated that it expects the ginners to pay Rs 80 per maundto the farmers for good quality AC 134 seed cotton. Farmers at present aregetting about Rs 73 for outright cash payment and Rs 60 for unfixed purchasepayment (80%). Following the customary practice, the remaining 20% will bepaid on the day to be nominated by the farmer according to the prevailingmarket price on that day.

ANNEX 2Page 17

42. As at August 31, 1974 it is estimated that 487,000 bales of ratherinferior lint were left over from the FY74 crop. The mill demand in FY75is likely to be 2.5 million bales, which could leave a surplus of about 1.1million bales for export. Together with the carryover from FY74 the countryis faced with the disposal of about 1.6 million bales of cotton lint forexport. Out of this total it is reported that by the end of December some442,000 bales, representing about 28% of the surplus, had been exported.For the first time in years a contract for 200,000 bales to India wasrecently negotiated at U.S. cents 34.25 per pound. Japan, which was thebiggest importer of Pakistan's raw cotton and yarn, has been reportedlyselling to Hongkong yarn bought earlier from Pakistan. Textile mills inboth Japan and Hongkong are cutting back on production and dismantling someof their looms for sale to Egypt and Bangladesh. In order to make clothand yarn exports more competitive, the government removed export duties fromthese items in September 1974.

INPUTS

Fertilizers

43. The consumption of nitrogenous and phosphatic fertilizers increasedmore than sixfold in the 8 years ending in 1972/73, from 70,000 nutrient tonsin 1965/66 to 435,000 nutrient tons in 1972/73. Despite this annual growthrate of 18%, Pakistan's annual consumption is only about 23 lbs of nutrientsper acre on the main crops, with a heavy imbalance of 8N to 1P per acre, ormore than double the recommended ratio. In 1973/74 fertilizer consumptiondropped by 4%, but the imbalance between N and P was reduced to 6.2:1.

44. The reasons for the drop in consumption in 1973/74 are mainlytwofold:

(a) the disruption caused by the nationalization of thefertilizer distribution system on July 1st in thePunjab, where over 67% of the total is consumed.Overnight the number of experienced dealers, who oftenhelped the farmers with credit, was reduced from 2500 to 600.The distribution of fertilizers was further disrupted bythe floods in August which destroyed roads and railwaytracks. The subsequent shortage of trucks in the Punjaband rolling stock in Sind also hindered distribution.

(b) The failure to increase the procurement price for wheatin line with world market trends and in step with theincrease in fertilizer prices. The procurement pricefor wheat for 1973/74 was increased by only 13% fromRs 22.5 per maund to Rs 25.5 per maund (the equivalentof only $103 per ton), although the price of fertilizerswas increased at the same time 57% (for fertilizerbenefit-cost ratios see Tables 9 to 12).

ANNEX 2Page 18

Table 9: BENEFIT COSTS PER ACRE FROM FERTILIZER APPLICATION

Wheat (N.120, P.60, K.O.) (rupees and ratio)

20 maunds per acre increase over control of 18.9 maunds -

PostPre- devaluation

devaluation September March August April1971/72 1972 1973 1973 1974

Cost of urea per bag(112 lbs.) 28.50 35 42 55 75

Cost of DAP per bag(112 lbs.) 28.00 37 44 57 75

Cost of 120 lbs. N 66.4 81.5 97.8 128 174.7

Cost of 60 lbs. P 23.4 31.0 36.8 47.7 62.8

Total Cost 89.9 112.5 134.6 175.7 237.5

Procurement price ofwheat - Rs per maund 17 22.50 22.50 25.50 37.00

20 maunds of wheat increase 340 450 450 510 740

Benefit/cost 3.8:1 4:1 3.3:1 2.9:1 3.1:1 2/

Fertilizer cost inRs per maund of wheat 2.3 2.9 4.5 6.1

Average yield of wheatper one lb. of nutrients - 17.8 lbs.

1/ Based on FAO/GOP soil fertility trials and Agricultural Research Stationexperimental results outlined in the report 373-PAK Multan Fertilizer Factory.

2/ Fertilizer price increased to Rs 75 per maund in April 1974. Procurement priceof Rs 37 per maund of wheat announced in September 1974 and this price and3.1:1 benefit-cost ratio applicable to the crop harvested in April-May 1975.

ANNEX 2Page 19

Table 10: BENEFIT COSTS PER ACRE F-'CM FEPT7JLIZER APPLICATION

Rice (2.120_9,K.C_,K (rupees and ratio)

15.3 maunds oaddy Der acre increase ovaer con trol of 39.2 maunds1 /

Postde-iJLuaticn

devaluati c September Xi rch August t pil1.7 1/7_ 1972 1l73 15 ' 1,74

ruea ner bag (112 lbs., 28.5 35 555DJ. per- bag (112 lbs.) 29.- 37 L 57 75Cost of 120 lbs. K 66.4 81.5 97.8 128 174.7Cost, of ;'0 lbs. I 31.2 2413 2/ 9.1 63.1 Q3.7

rotzl Cost 97.6 122.e 2/ li6.9 191.8 258.8

vP,uivalent procurement priceoer md. of paddy 12 24 17 17 25.7

15.3 maunds of rice increase 184 367 260 260 393

Benefit/Icost 1.9:1 3:1 2/ 1. 1 1.4 - :I

Fertilizer cost in Rs nezmaund of paddy 1.8 1.8 2.7 3.5 8.7

^verage yield of paddy perone lb. of nutrients - 25 lbs.

Rice (...150, P.8O, K.C.)

20.7 maunds paddj per acre increase over control of 39.2 maundsl/

Cost of 150 lbs. N 83.0 101.9 3 122.2 160.1 ?1Q.LtCost of 80 lbs. P 31.2 41:3 3/ 49.1 33.7

btEl Cost llL.2 1143.2 171.3 5/ 223-5 -1 3C2.1

Fouiva'ent procurement priceper md. of paddy 12 19 17 17 25.7

20.7 maunds of rice increase 288 393 352 352 532

Benefit/cost 2.2:1 2.7:1 2/ 2:1 5 1.6:1 1.8:1(3.8:1)

Fertilizer cost in Rs permaund of paddy 1.9 1.9 2.8 3.7 5.0

Average yield of paddy perone lb. of nutrients - 21.8t lbs.

1/ Based on FAD/GOP Soil Fertility T'rials and Agricultural :?esearch Stationexnerimental. results oitlined in Bank report 373-PAK Mult.an Fertilizer Factory.

2/ ITncrease in crice too late to affect 1972/73 crop, so fertilizer purchased at1971/72 pre-devaluatiion rates and benefit cost ratio was 3:1.

3/ Tncrease in price too late to affect 1972/73 crop, so fertilizer purchased at1571/72 pre-devaluation rates and benefit cost ratio was 3.8:1.

)i/ Prnbnbly 2/3 of fert.li.zers annlied at March nrice and 1/3 at August price sobenefit cost would be 1.6:1.

5/ Probably 2/3 of fertilizers applied at March price and 1/3 at August price soberBfit. cost ratio would be 2.1:1.

6/ In order to maintain the same benefit cost ratio as in 1972 the equivalentpaddy price in 1973 would have been Rs 28 and in 1974/75 would have beenRs 49.6 per maund.

ANNTEX 2Page' 20

Table 11: BEI.LFI" COSTS FErE ACTE FKi;i FEi"T-InEZ E7 ;LICT.

Cot.toni (-;.80, P.LO) (rupees and ratio)

7.3 m_nuncs per acre iricrease_over control which Zielded 12.5 lrn.un8_ -

ost.

Pre- devcluationdevaluation September Mkarch August April

1971/72 1972 197 3 1973 197L

Gost of urea per bag(112 lbs.) 26.50 35 L2 55 75

Cost of DAP per bag(112 lbs.) 28.00 37 44 57 75

Cost of 80 lbs. N S4 54 65 85 116

Cost of 40 lbs. P 16 21 25 32 2

Total Cost 60 75 90 117 158

Average price of seedcotton per maund 66 85 85 7

7.3 maunds of seedco-iton increase 482 620 620 533

Benefit/cost 8:1 6.9:1 2/ 53: 2/ 37:1

Fertilizer cost in Rsper maund of seedcotton 3.0 14.5 5.9 8.0

.Average yield of seedcotton per one lb. ofnutrients 13.6 lbs.

1/ Based on FAO/GOP Soil Fertility Trials and Agricultural research Stationexperimental results outlined in thle report 373-PAK Multan FertilizerFactory.

2/ Probably 2/3 fertilizers were bought at the March 1973 price and 1,3 at theAugust price; benefit cost would be about 6.3:1.

Table 12: BEEJEFIT COSTS PER. ACPE FROM FERTTIJIZER PPLICATTOjIN

Sugarcane (N.80, P.LO) (rupees and ratio)

236 maunds per acre ilcrease over control of L85 maLinds

PostPre- devaluation

devaluation September March August Apr-iLi1971/72 1972 1973 1973 1574

Cost of urea per bag(112 lbs.) 28.50 35 42 55 75

Cost of DAP per bag(112 lbs.) 28.00 37 4L 57 75

Cost of 80 lbs. Nf 4b 54 65 85 116

Cost of 40 lbs. P 16 21 25 32 142

Total Cost 60 75 90 117 1/ 158

Average price of sugarcaneper maund 2e47 3.32 4.21 4.21 5.22

236 maunds of sugarcaneincrease 538 783 99L 99L 1232

Berefit/cost ratio 9.7:1 10.411 : 1 / 8.0:1-/ 7.8:1

Fertilizer cost inRs per maund of sugarcane 0.08 0.10 0.12 0.16 0.-22

Average yield of sugarcaneDer one lb. of nutrients - 97 lbs. or 6 maunds

1/ Based on FAO/GOP Soil Fertility Trials and Agricultural :esearch Stationexperimental results outlined in the report 373-PAK Multan Fertilizer Factory.

2/ Probably 1/2 the fertilizers applied at March price and 1/2 at the Augustprice; benefit cost would be 9.6:1.

ANNEX 2Page 22

Pesticides

45. The use of pesticides in Pakistan is extremely low compared withcountries with more developed agriculture, probably less than 5% of theproportionate quantities used in the USA and only a fraction of 1% comparedwith Japan. The benefits accruing from the use of pesticides on cotton,rice, oilseeds and sugarcane are sometimes more spectacular than those fromfertilizer. Timely application of pesticides can often prevent the itotaldestruction of crops like rice by stemborer and sugarcane from pyril!Ladamage, while cotton yields could be increased by some 25% or more, and thoseof rape and mustard seeds by about 70%.

46. Scant attention has been given to the local production of pesticidesand simple spray equipment. Until these become readily available to, thefarmer for his own timely application, the full use of fertilizers on cropslike rice, sugarcane, oilseeds and cotton is seldom justified as the' fullbenefits cannot be realized until pests and diseases are kept under control.Pesticides used in conjunction with fertilizers would result in compoundedbenefits both to the farmer and to the country.

47. In the absence of adequate pesticides and equipment for theindividual farmer, the government undertakes aerial spraying to supple-ment the ground spraying of crops like rice, cotton and sugarcane. Thisis a free service to the farmers but owing to the wide scatter of plots,numerous high trees and pylons, aircraft are unable to fly low - an absolutemust if aerial spraying is to be effective.

Seeds

48. The development of an efficient and progressively expanding seedindustry is critical for the rapid spreading of properly tested HYVs ofwheat and rice and for increasing the productivity of crops like cotton,fodder, millets, maize, oilseeds and others. The failure to provide pureimproved seed for wheat sowing last year was a factor in the fall of wheatproduction in the Punjab, as much of the seed distributed in the flooddevastated areas was mixed wheat collected from the provincial food bins.The same source has been used for sowing much of the present crop. Thepresent average yield of irrigated HYV wheat is about 17 maunds per acreonly, against a potential yield of at least 40 to 50 maunds per acre withheavy dosage of fertilizers. The response to fertilizer application inthe case of ordinary wheat varieties is limited.

49. Cottonseed degenerates in both yield, lint length and qua:Lityover a relatively short period compared with seed of other crops. Cotton-seed multiplication schemes in the past few years have been most haphazard,with the result that the lint length has deteriorated to an average of lessthan one inch, yields have dropped, and generally the lint is both veryun-uniform in length and of mixed quality. The loss to the cointry is

ANNEX 2Page 23

enormous in terms of lower prices for raw cotton and cotton product exports,lower production of both lint and cottonseed, and lower quality yarn andcloth.

50. The World Bank is at present appraising a seed industry project.Although originally planned as a private sector project, it has now beenredesigned for puiblic sector operation, with separate projects for eachprovince. Because of provincialization it has not been possible, so far,to agree on a uniform National Seeds Law to cover all the provinces. Thiscould affect the inter-provincial movements of seeds, which will be necessaryin the case of potatoes, maize, vegetables and fodder. It is hoped, however,that there will soon be effective seed multiplication, certification anddistribution systems in all four provinces.

Mlechanization

51. The number of tractors imported into Pakistan as of August 1974is variously estimated at around 37,000, out of which several thousandsare eight and more years old and are no longer operational for lack ofspares for major repairs. Despite the devaluation of the rupee in May1972, when tractor prices more than doubled, the demand for tractors isgrowing. The government-owned Pakistan Tractor Corporation is attemptingto expand local production and increasing importation of completely andpartially knocked down tractors from 6,600 in FY74 to about 16,000 to 17,000annually for each of the following two years. Even though higher petroleumprices have increased significantly the costs of operating tractors, culti-vation by tractors is still much cheaper than by bullocks. Tractor cultiva-tion costs have risen to about Rs 100 per acre, but bullocks costs havealso been rising and are now estimated to be about Rs 550 per acre includingthe cost of raising fodder. It is estimated that some 5 million acres, orone eight of the total cropped area, is now devoted to feeding bullocks.It is essential to increase farm power for more timely cultivation ahd toenable cotton to be followed by wheat in double crop rotation to meet theincreased demand for cereals.

52. A growing demand for both tractors and earth moving equipment isalso foreseen for land development and for increasing the intensity of culti-vation. Over 14 million acres are scheduled for reclamation over the nextten years under the projected accelerated program for waterlogging andsalinity. Additional irrigation schemes totaling about 1.9 million acresare under consideration such as the Chasma Right Bank project, Pehur HighLevel Canal and underground water development schemes in Baluchistan. Afurther one million acres of previously flood zone areas will become avail-able for settled cultivation as a result of the flood control benefits ofTarbela and of Mangla. The combined release of 15.3 million acre feet (MAF)from Chasma, Tarbela and NMangla will permit greater cropping intensity inall these areas.

ASNNEX 2Page 24

Availability of Irrigation Water

53. The rim station inflows during kharif 1974 were often the lowestever recorded. These water shortages persisted into the rabi seasonFwhencanal flows are reported to have been running at about 40-50% of nornal,necessitating frequent canal closures and rotations.

54. The combined stored flows from Mangla (5.3 MAF), Tarbela (9.3 MAF)and the Chasma storage (0.7 MAF) of 15.3 MAF will be about two-thirds ofthe last seven years' average total rabi inflows of 23.3 MAF. When Tarbelacomes on stream, it can also be used to supplement electrical power fromMangla in kharif to allow that dam to fill up to capacity, which has notbeen possible to date because of the need for power from Mangla in kharif.The combined stored flow from these dams should give an enormous boost torabi production from the winter of 1976 onwards not only in the form ofadditional flows in the canals, but also through more sustained power fortubewell operation.

55. The number of private tubewells installed by mid-1974 is estimatedto be about 127,000 1/ out of which about 63%o are diesel operated. The numberinstalled with IDA/credit loans from FY1966 to FY1974 is 18,902 or nearly15% of the total. It is not clear from any of the available statistics,however, how many out of the estimated total of 127,000 private tubewellsare still operational. The number of public tubewells in operation by mid-1974, is reported to be around 9,792 of which 7939 are under WAPDA and 1853under the Irrigation Department. According to the Planning Division privateand public tubewells are likely to contribute about 30% of the total availablewater at farms during FY75.

Waterlogging and Salinity

56. Planning Division estimates indicate that out a total culturalcommanded area of 33.6 million acres, about 23% is severely saline and nearly52% has the watertable within 10 feet of the surface! (Table 13).

1/ Based on the second Pakistan census of April 1971 and the installedprivate tubewell growth rate from FY1966 to FY1972 of some 14.5%annually.

ANNEX 2Page 25

Table 13: SALINE AND HIGH WATER TABLE CULTIVATED AREAS(million acres and %)

Area 10 ftwith Water-

CCA Water- tableGross Cultural as % Severely table Area

Commanded Commanded of Severely Saline within as %Province Area (GCA) Area (CCA) GCA Saline as % CCA 10 ft of CCA

Punjab 23.6 19.7 83.4 2.9 /a 14.7 9.4 47.7Sind /b 14.9 13.2 88.6 4.8 /a 36.4 8.0 60.6NWFP 1.0 0.7 70.0 0.1 14.3 0.01/c 1.4Totals 39.5 33.6 85.0 7.8 23.2 17.41 51.8

/a 6.7 million acres in the Punjab and 8.3 million acres in the Sind arereported to be moderately affected with salinity.

/b Incorporates the Pat feeder area of Baluchistan.

/c Appears to be on the low side when most of Mardan is reported tobe waterlogged.

57. The accelerated program for the control of waterlogging and salinityproposes that, over the next decade, the following acreages in the respectiveProvinces will benefit from the program:

Punjab 8.80 million acresSind 4.90 " iNWFP 0.46 "

Baluchistan 0.04 "

Total 14.20 "

Livestock

58. The World Bank/FAO Cooperative Program has recently completeda livestock survey of Pakistan in an effort to identify projects in thissector. Estimates of livestock are still uncertain as the 1972 agriculturecensus figures are not comparable with the 1960 census. A full livestockcensus is to be mounted in 1975 in an attempt to resolve the issue. Thefollowing Table 14 shows the various estimates of the number of livestockin Pakistan:

ANNEX 2Page 26

Table 14: ESTIMATES OF LIVESTOCK(millions)

Planning Commission Lyallpur Agric. Census1970/71 1970/71 1972

Cattle-/a 10.01 20.0 12.5

Buffaloes 8.26 10.0 9.6

Sheep 12.84 20.00 11.7

Coats 9.03 20.00 10.00

Camels 0.76 1.50 n.a.

Horses, Mules andDonkeys 1.60 1.50 n.a.

IcTotal 42.51 73.00 43.8-

/a Of which 50% are bullocks.

/b Of which 750,000 are draught buffaloes.

/c Excluding camels, horses, mules and donkeys.

59. Meat prices have been held down by the government in an attemptto keep meat prices within reach of lower income groups, and there arestill two "meatless days" per week. One consequence has been to reducemeat production by making uneconomic the fattening of male buffalo calvesand female zebu calves. In recent months, however, mutton and goat meatprices have increased quite appreciably to the equivalent of about WS$0.60cents per pound. Beef, which is not relished to the same extent as muttonand goat meat, has risen to the equivalent of some US$0.35 to 0.40 perpound.

60. Pakistan has an opportunity to develop a large-scale meat exportactivity, but the government is genuinely worried about domestic meat pricesescalating out of reach of the common man. Major policy decisions will haveto be taken about appropriate price levels and levels of production fordomestic and export markets.

Rural Credit

61. The 1973 August floods greatly stimulated the distribution ofcredit in FY74. Crash programs were organized through use of mobile teamsin the flood devastated areas. Credit in kind was given for seeds, fertilizers.hire of bullocks and tractors (which were specially allocated to the floodaffected areas), and for other productive purposes. Cash credit was pro-vided for the purchase of replacement bullocks lost in the floods and

ANNEX 2Page 27

for the repair of tubewells damaged in the floods. In consequence in-stitutionalized credit to farmers rose by 170% in FY74, and will rise con-siderably further in FY75 (Table 15).

Table 15: FARM CREDIT DISBURSEMENTS(million rupees)

1972/73 1973/74 1974/75

Agricultural Development Bank (ADBP) 169 416 600 /aTaccavi (Revenue authorities) 11 16 13 /aCooperatives 65 162 165 /a

Sub-total 245 594 778 /aCommercial Banks 85 300 n.a.Total 330 894 n.a.

/a Targets

62. In the case of ADBP the loans were disbursed for the followingmain purposes:

Table 16: DISBURSAL OF ADBP LOANS(million rupees and %)

1972/73 % 1973/74 _

(1) Fertilizers 41 24 113 27(2) Seeds 6 4 11 3(3) Bullocks 8 5 33 8(4) Tractors 44 26 80 19(5) Tubewells 26 15 51 12(6) tarine fisheries 1 - 5 1(7) Dairy farming - - 25 6(8) Others 43 25 108 26

Total 169 416

63. ADBP realized too late that the loans for bullocks were givenwithout due care and that recovery could later be a problem. The amountgiven for fertilizer nearly trebled, but according to district recordsthe amount of fertilizer applied on wheat was less than in 1972/73. Itmay be that much of the fertilizer wias sold for ready cash by thesmaller farmers, and the recovery rate on this credit could be very low in

FY75.

ANNEX 2Page 28

Land Reforms

64. Land reforms were introduced in May 1972. Their main provisionswere:

a. Reduction in the ceiling of land holdings from 300 to 10001acres in the irrigated and non-irrigated areas respectivelyto 150 and 300 acres, or the equivalent of 12,000 produceindex units, whichever is greater. In the case of farmersowning a tractor or tubewell on December 20, 1971, an addi*-tional 2000 produce index units is allowed, representingan increase of 16.6% in the ceiling. All the land wasresumed without compensation and will be dlistributed freeto the sitting tenants or landless laborers. Concessionsallowed earlier for orchards, stud farms and hunting areas(shikargarhs) were also withdrawn, but these lands have notyet been distributed. All land owned by Government insteadof being auctioned will be distributed amongst landlesslabor free of cost.

b. The costs of paying land tax, land revenue, water chargesand seed have been passed to the owners from the tenants,while all the other inputs, harvesting and picking expenseswill be shared equally between the owners and tenants. Theproduce, however, will continue to be shared between tenantand owner on a 50:50 basis.

c. The security of the tenants has been enhanced through thebanning of arbitrary ejection and giving the tenants theright of pre-emption in the case of sale of the land.

65. It is estimated that these land reforms have benefitted to June1974 some 113,000 farmers throughout the four Provinces and released thefollowing acreages for redistribution:

ANNEX 2Page 29

Table 17: AREA AVAILABLE FOR REDISTRIBUTION(land data in acres)

Punjab Sind NWFP BaluchistanAcres Acres Acres Acres Total

Land resumed 196,000 213,000 144,000 171,000 724,000(excludingunsurveyedlands)

Owners affected 1,921 4,714 247 168 7,350Size of farm forallotment 12.5 16 12.5 32

Land Declared underStud Farms /a 68,719 in all Provinces

Land underShikargargh /a 154,000 "(hunting lands)

Government Land /a 2,550,000 " "

/a The mode of disposal of these lands has yet to be decided, but theGovernment owned land is likely to be distributed amongst tenants andlandless laborers.

66. The 1972 Agriculture Statistics on farm sizes and distribution havenot been released, so the last available data are those of the 1960 census.Since the 1972 census information was collected primarily by questionnaires,it has also been argued that its results will not be comparable with the1960 agriculture census figures, which were compiled primarily from revenuepatwari records. Thus there will be uncertainty about how much the differ-ences between the two sets of data will reflect actual changes in farm sizeand distribution and how much they will merely reflect differences in thesurvey methods. The lack of current data makes it difficult to estimate theeffect of the 1972 land reform on the distribution of land ownership.

67. Even assuming that these reforms are successful in shifting theburden of land revenue taxes, water charges and the cost of seed onto theowner, the 50:50 produce shareout still favors the owner at the expense ofthe tenant and his family. The tenant is entirely responsible for buyinghis bullocks and implements, their feeding and maintenance, and all thecosts of cultivation without any assistance from the owner.

68. Tables 18 through 20 are an attempt to analyze the benefits whichhave accrued to the tenants from the landlord-tenant cost sharing provisionsof the 1972 land reform.

ANEX, 2Page 30

Table 18: COT_T9OKi/1VJTEA T ATd4EJAN OPEPATED________ - (12.5 Acres)

Bullock Cultivated

Owner __ _ ___ Te.artPre-Reform 'ost-Reform Pre-Reform Post-Reforn

Wgheat (5 acres)Seed - 1 md. p.a. Cc Rs 40 p. md. 100 200 100 -Fertilizer - 3 bags @ Rs 225 p.a. 562.5 562.5 562.5 562-5Land Revenue e Rs 15 p.a. 37.5 75.0 37.5Wdater Rate @ Rs 10.40 p.a. 26.0 52.0 26.0

A. Sub-Total 726.0 889.5 726.0 562.5

Cotton (4.5 acres)Seed - 10 seer p.a. @ Rs 40 p. md. 22.5 45.0 22,.5Fertilizer - 3 bags @ Rs 225 p.a. 506.2 506.2 506,.2 506.2Land Revenue 6 Rs 15 p.a. 33.8 67-5 33.8Water Rate @ Rs 16.80 p.a. 37.8 75.6 37.8Pesticides 100.0 100.0 100.0 100.0

B. Sub-Total 700.3 794.3 700.3 606.2

Fodder (2.75 acres)Seed 48.0 96.0 08.0 -Land Revenue @ Rs 15 p.a. 20.6 41.2 20S.6 -Water Rate @ Rs 6.40 p.a. 8.8 17.6 8.8 -

C. Sub-Total 77.4 154.8 77.4 -Total A, B and C 1503.7 1839.6 1503.7 1168.7

Share of ProduceWheat - 30 mds. p.a. @ Rs 37 p. md. 2775 2775 2775 2775Seedcotton - 15 mds. p.a. G Rs 75'p. md. 2531 2531 2531 2531Bhoosa - 30 mds. p.a. @ Rs 51 p. md. 375 375 375 375Cottonsticks - 17 mds. p.a. a Rs 2.2 p. md. 85 85 85 85Fodder 1.25 x 1200 p.a. 750 750 750 750

1.50 xl1000 p.a. 750 750 750 750

I

Total Produce 7266 7266 72661 7266Harvesting & Picking Costs 20% 1.53 1453 1453 1453Net, Shareout 5813 5813i 5813

Cultivation Costs - - 420d L22C0Input 1504 1840 1504 1169Sub-Total 1504 1840 5704 5369,,,et Return per Farm 4309 3973 109 1441

per Acre 345 318 8 .7 35.5

Tenant's return as percentage of owner'sreturn per acre 2.g 11

1/ Cost of maintanining one pair of bullocks and cultivation iamlements for 12 months.

p.a. = per acre. p. md. = per maund.

ANNEX 2Page 31

Table 19: SUGAR CANE FARM-TENAN)T OPERATED(12.5 Acres)~

Cultivation with Bullocks

Owner TenantPre-Reform Post-Reform Pre-Reform Post-Reform

Sugar Cane (5 acres)Seed - 70 mds. o.a. C Rs 5.30 p. md. 927.5 1855 2/ 927.5Fertilizers - 3 bags p.a. (L Rs 225 p.a. 562.5 562.5 562.5 562.5Pesticides @ Ps 40 p.a. 100 100 100 100Land Revenue & Rs 15 p.a. 37.5 75 37.5 -'ater Rate C Rs 32.8 p.a. 82 164 82

A. Sub-Total 1709.5 2756.5 1709-5 662.5

Wtheat (5 acres)Seed - 1 md. p.a. C Rs Lo p. md. 100 200.0 100.0 -Fertilizers - 3 bags C Rs 225 p.a. 562.5 .562.5 562.5 562.5Land Ptevenue G Rs 15 p.a. 37.5 75.0 37.5 -W,;ater Rate C. PIs 10.40 p.a. 26.0 52.0 26.0 -

B. Sub-Total 726.0 8G9.5 726 562.5

Fodder (2.75 acres)Seed 'C Rs 24 p.a. 48.o 96.0 48 -Land Revenue C@ 15 p.a. 20.6 41.2 20.6 -

',,Water Rate C- Rs 6.40 p.a. 8.8 17.6 8.8 -

C. Sub-Total 77-4 154-8 77.4 _D. Grand Total A, B and C 2512.9 3800.8 2512.9 1225.0

Share of froduceSugar Cane-LOO rids. C@ Rs 5.30 p. md. 5300 5300 5300 5300Cane Tops C Ps 40 p.a. 100 100 130 100Wheat-30 mids. Cc Rs 37 p. md. 2775 2775 2775 2775Bhoosa-30 mids. ?.a. @ Rs 5 p.a. 375 375 375 375Fodder 1.25 acre C Rs 1200 p.a. 750 750 750 750

1.50 C Rs 1000 p.a. 750 750 750 750

Total "roduce 10050 10050 10050 10050Harvesting Costs 20% 2O0O 2010 20t 2010''et Peturns from Produce 80L0 80L0 801O 80L0

Cultivation Costs 1/ - - 4200 4200Input Costs (D) 2513 380i 2513 1225Total Costs 2513 3801 6713 5425

Nlet Return per 'Farm 5527 b239 1327 2615per Acre 1g42 339 106 209

Tenuant's return as percentage of owner's return per acre 23 62Suflarcane crop once ratooned - return per acre 2

I Cost of maintaining one pair of bullocks and cultivation implements for one year.2/ 0!rners are now insisting on tenants ratooning the crop in order to reduce their annual

i.nvest_ment in seed, although yields tend to decrease with each ratoon.

p.a. =-per acre p.nd. Der maund

NM\JEX 2Page 32

Table 20: COARSE RICE/MHEAT FAJ!R; - TENAW T OERATED(12.5 Acres)

3ullock Cultivated

OQqner TenantPre-P.eform Post- bform Pre-Reform Pcst-,ieform

Wheat (5 acres)Seed - 1 md. p.a. © Rs 40 p. md. 100 200 100 -Fertilizers - 3 bags @ P.s 225 p.a. 562.5 562.5 562.5 562.5Land Revenue @ Rs 15 p.a. 37.5 75-. 37.5Water Rate @ Rs 10.40 p.a. 26.0 52.0 26.0

A. Sub-Total 726.0 889.5 726.0 562 5

Coarse Padd (5 acres)Seed - 25 seer @ Rs 30 p. mnd. 19 38 19Fertilizers - 3 bags © Ps 225 p.a. 562.5 562.5 562.5 562.5Pesticides Cc Rs 30 p.a. 75-0 75.0 75.( 75.0Land .'evenue @ Rs 15 p.a. 37.5 75.0 37.5W,fater Rate © Rs 17 p.a. 42.5 85 42.5

B. Sub-Total 736.5 835-5 736.2 637.5

Fodder (2.75 acres)Seed 48.0 96.0 48.0 -Land Revenue ©P Rs 15 p.a. 20.6 41.2 20.63 -W4ater Rate @ Rs 6.40 p.a. 8.8 17.6 8.8 -

C. Sub-Total 77.4 154.8 77.4 -Total Inputs 1539.9 1879.8 1539.9 1k00.0

Produce ShareoutWheat - 30 mds. p.a. © Rs 37 p.a. 2775 2775 2775 2775Bhoosa - 30 mxds. p.a. @ Rs 5 p.a. 375 375 375 375Paddy - L0 mds. p.a. (: Rs 26.7 p. md. 2670 2670 2670 2670Paddy Straw - 40 ads. p.a. 0. Rs 1.5 p. md. 150 150 150 15CFodder 1.25 L 1200 p.a. 750 750 750 750

1.50 @ 1000 p.a. 750 750 750 750

Total Produce .;eceipts 7470 7470 7470 7470

Harvesting Costs 20% 14914 1L9 1L94 1L9)4Neet Shareout 5976 5976 5976 5976

Cultivation Costs - - 4200 h200Input Costs 1540 1880 15)40 1200Sub-Total Costs 15),C 1880 57)0 5400Met Return per Farm 4436 3096 236 576,.,et Return per Acre 355 2)48 159 116

Tenant's return as percentage of owner'sreturn per acre 5-3% 1fid

ITCost of maintaining one pair of bullocks and cultivation implements for one year.

p.a. = per acre. p. md = per maund.

ANNEX 2Page 33

These tables have been computed from available primary and secondary sourcesof information on costs of production and market prices. While studies toconfirm or modify these data would be desirable, these estimates are offeredas indicators of general magnitude.

69. In the case of a sugar cane farmer, however, the benefit totenants is estimated to have increased from 37 to 69% of the owner's returnper acre. This is on the assumption that new sugar cane sets (seed) areplanted annually. Owners, in order to improve on their per acre return,however, are now insisting that the tenants go on ratooning the crop toavoid replanting, and so enable the owners to save about Rs 370 per acreon seed. It will be interesting to see how many ratoon crops owners areprepared to push for in order to decrease their investment in seed, sinceratoon yields tend to be less than from planted cane. This increases thenet return to the landlord for at least one or two ratoonings, but reduces thereturn to tenants (Table 19). A fairer rent system to replace the present50:50 produce share out could go a long way toward a more equitable redistri-bution of income within the farming community.

Integrated Rural Development

70. In order to improve the earnings of small tenants and owners, theGovernment ordered that rural development institutions should be developedin the Provinces to provide credit, inputs, extension advise and services,marketing, roads and other facilities to the rural community. Although thedirective to develop these rural development programs has come from thePrime Minister, the responsibility for organizing, implementing and main-taining these programs is that of the Provinces, with the Federal Governmentoffering advice and providing most of the development funds.

71. Although the integrated rural development concept and objectivesare generally the same throughout the four provinces, the implementationof the program varies from province to province. The main focus of activityin each province, however, will be the markaz, which could be a new centeror an existing small market town or "mandi". The main line departments willbe concentrated and coordinated at each markaz under a markaz projectmanager. In some provinces the project manager will be a fully technicallytrained person of the status of an agricultural graduate, while in others hewill be appointed from the ranks of ex-Agricultural Development Corporationor ex-Village Aid employees. The markaz will cover an area of some 80,000-90,000 acres or approximately 200 square miles and will embrace some 40 to 60villages, or an area formerly represented by 5 to 10 union councils.

72. The markaz will house various government departments and othersproviding services to farmers. While the structure will vary depending uponlocal requirements, each markaz is expected to have one or more represent-atives of each of the government departments dealing with rural development,such as Agriculture (crops, animals, fisheries and forestry), Cooperatives,Irrigation, Roads, Health and Power. Each markaz is also expected to have

ANNEX 2Page 34

one or more banks and marketing and agro-based enterprises will also beencouraged to locate there. The markaz will normally also have most ofthe following activities:

a. Staff office buildings and housing for the linedepartments.

b. Buildings for housing the various credit facilitiesboth commercial and institutional.

c. Stores and shops for the sale of fertilizers, seed,pesticides and the other requirements of the farmingcommunity.

d. Tractor and implements, bulldozers and other landlevelling equipment.

e. Cold storage facilities for fruit, potatoes and otherperishable produce.

f. Go downs (warehouses) for storing farmer produceagainst advance payment to the farmer and resalelater for account of the farmer, hopefully for higherprices;

g. Farmer training facilities and equipment for trainingat the village level.

h. Small industries complex such as carpet weaving,rice milling etc. for both training and demonstra-tion.

73. The line departments have been instructed to give the highestpriority to the establishment of cooperatives at each village and markazlevel, and in time these will hopefully spearhead the functions of extension,supply of credit and inputs, marketing and road building in the marlcaz areas.Funds for the development of roads, culverts etc. will come from the People'sWork Program, whose activities will also be coordinated at the markaz level.Watercourse lining and precision land levelling will also come under thedirection of the Markaz Project Director.

74. By June 1974 it is reported that some 117 markazes had been estab-lished, with 38 in the- Punjab, 30 in Sind, 14 in Baluchistan, 30 in NWFPand 5-in Azad-Kashmir. Staff had already been posted in most markazes andthe formation of cooperatives was actively in progress.

75. Local Government elections had been scheduled to be held in April1975. Because of difficulties in preparing voter lists and in organizingfor the elections, however, they have now been postponed to September. The

ANNEX 2Page 35

local government units will be the former Union Council (and MunicipalCouncil) administrative units which were formerly nuclei centers wherefarmers could go for inputs and agricultural advice. It is probable thatafter the elections farmers in the five to ten Union Councils in a typicalmarkaz project area will be able to obtain inputs, credit and advice withouthaving to go to the markaz. Some training or other activities, however,may remain centralized at the markaz.

Cooperatives

76. On December 20, 1974 the Federal Minister of Agriculture announcedthe Federal and Provincial Governments' approval for the setting up ofdemonstration cooperative farming schemes throughout the country aimed atincreasing food production and farm income. It has been announced thatinitially a total of 11 demonstration farms would be established, 5 in thePunjab and two in each of the other three Provinces. The minimum size ofthe demonstration farm would be 500 acres except in the NWFP, where thefarms are small.

77. The farms would be formed by owners pooling their land voluntarily.The tenants of owners wishing to pool their land would be ejected, but wouldbe given priority for jobs on the cooperative farms or in the agro-basedindustries to be established by the cooperatives. If a farmer withdrew orwas expelled from the cooperative, or if the venture collapsed, previoustenancy rights would be restored. The Federal Government would provideRs 500,000 to each farm, and additional working capital would be provided byADBP on easy terms and conditions. Farmers would be permitted to withdrawfrom the cooperative farms after three years, but only at the end of theagricultural year.

78. The Minister announced that cooperative farms would be givenpreference in all government-sponsored social welfare schemes such as thesetting up of hospitals, schools and water supply. lie also stated that:

a. Villages and cooperative farms would have preference forelectrification.

b. Cooperative farms will have the first option on tractorsand inputs.

c. Cooperative farms will receive credit on easier terms bothfor purchase of inputs and capital investment.

d. Agro-based industries will set up cooperative farms withexpert advice.

e. Additional training and refresher courses will be providedfor members and officials of the co-ops.

ANNEX 2Page 36

79. The Minister stressed that participation in cooperative farmingestates would be strictly voluntary. They are to be democratic andindependent institutions, although the Government would fix the croppingpatterns and crop production targets after consultation with the varibusmembers.

80. Farmers joining the cooperative farms would retain ownership oftheir pooled land, but their other resources like bullocks and implementswould be pooled and credit given to their farmer owners. The income,after deducting an amount required to cover the reserve and developmentfunds (for meeting natural calamities, land development and agro-basedindustries), would be distributed 60% to the workers and staff on thefarm and 40% to the land owners. In accordance with the 1972 land reforms,owners would be liable for the payment of land revenue, water chargesand seed from their 40% shareout.

Agricultural Charges and/or Taxes

81. Change in agricultural charges and taxes have been under discussionfor decades, but little action has been taken. Respective governments havetended to shelve the issue because of the strong landlord lobby. In pre-ference to introducing direct agricultural taxes to increase the federalrevenues, the government has resorted to indirect taxation of cotton, rice,leather and other commodities through charging heavy export duties and profitsfrom monopoly trading in rice and cotton. A coordinated adjustment is neededto let farmers earn closer to world market prices, to eliminate subsidies, andto replace indirect taxes with direct taxes that do not discriminate betweencrops.

82. This system of discriminatory indirect taxation is hitting cottonand rice farmers particularly hard. Neither they nor wheat farmers atpresent procurement prices can afford to applying fertilizers to the extentdesireable in order to increase per acre yields. The country is consequentlyfailing to earn large sums of potential foreign exchange earnings and has hada large wheat import bill. Livestock farmers suffer because of the exportduty on leather and the restriction on the export of eggs and meat. Sugarcanegrowers on the other hand, get their full gross return without the deductionof any duty or trading profit, as shown in Table 21.

ANNEX 2Page 37

Table 21, GROSS RETURNS, GOVERNMENT DUTY AND TRADINGPROFIT PER ACRE

GovernmentDuty plus Farmer

Gross Trading Net GrossReturn Profit Return

Sugarcane 2,350 - 2,350Basmati paddy 4,950 fa 3,330 1 ,620Coarse paddy 2,027 /a 1,306 721Seed cotton 1 304 lb 404 900Wheat 740 /c - 740

la Farmgate equivalent df government procurement price.Monopoly procured-farmgate prices.

lb Farmgate equivalent of government procurement pricefor export.

Xc Government procurement price for wheat.

83. The above per acre rates of duty and government trading profitare applicable to owner cultivated farms. In the case of tenant farmerscultivating a 12.5 acre holding, the equivalent rates per acre would be

as shown in Table 22:

Table 22: RETURNS ON 12.5 ACRE TENANT HOLDINGS

Government IndirectDuty and Profit per

Owner Net Return Tenant Net Return Acre on the 12.5 AcrePer Acre Per Acre HoldinR Shared 50:50

Sugarcane Rs 422 290 nilCotton/wheat Rs 328 36 145Rice/wheat Rs 336 51 522

ANNEX 3Page 1

SOME ASPECTS OF PRICING POLICY

1. Because domestic prices have been increasing by up to 30% per yearover the last three years and the cost of some imported products has doubledand even tripled in the course of 12 months, the Government of Pakistan istaking measures to control and stabilize internal prices. This annex examinesbriefly past price trends, price controls and other measures taken by theGovernment to stabilize prices, and some of the effects which these policieshave had on prices, income distribution, production and marketing andresource mobilization.

2. Aside from the years 1964/65 through 1966/67, prices in Pakistanwere relatively stable during the 1960s, seldom rising by much over 1-2% peryear; they began rising more sharply, however, as the country entered the1970s. During the 1959/60-1963/64 period, the overall price rise was lessthan 7%, an average of only 1.4% per year (Attachment: 1). The Indo-PakistanWar in 1965, however, set the stage for larger price increases, althoughstill modest compared with recent experience. The cost of the war, theconcurrent expansion of money supply to pay for it, and domestic shortagescombined to drive wholesale prices upwards by nearly 17% between 1964 and1967. The rate of price rise then slowed to 3% per year between 1968and 1971 (Table 1). But from the latter part of 1972 prices have beengoing up by 20 to 30% annually.

Table 1: Price Movements, 1968-1974

Annual Increase in Index (%) /aIndex 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74

Wholesale Price 1.0 3.0 2.1 3.9 9.5 19.6 27.5

Consumer Price /b 2.2 1.5 4.5 5.2 5.8 13.5 29.7Mfd. Goods 4.0 6.6 3.5 6.0 6.5 12.7 22.4

Food 5.0 0.6 - 2.4 9.5 26.0 30.2

/a Based on increase in average index for year.

/b General Consumer Price Index for Industrial Workers in Karachi.

Source; Monthly Statistical Bulletin.

3. The major causes of recent inflation, in chronological order, werethe disruption of the economy by events in 1970/71, large increases in moneysupply between 1970/71 and 1972/73 due to budget deficits, devaluation in May1972 and rising world market prices. Inflation increased at an acceleratingpace through 1973/74. The consumer price index, which had grown by only4.5-5.5% annually from 1969/70 to 1971/72, rose by 13.5% in 1972/73 and by30% in 1973/74. Import price increases between 1972/73 and 1974/75 were

ANNEX 3Page 2

substantial for wheat (149%), edible oils (187%) and fertilizer (280%'); theseincreases will add about $360 million to Pakistan's 1974/75 import bill. Therise in the price of crude oil by about 350% in the same period will addabout $285 million to the cost of POL imports in 1974/75. The Governmentpassed part of these price increases onto consumers, but also absorbed someof the increase through greater subsidies (wheat, edible oil and fertilizer)and reduced taxes (POL).

Mechanisms for Price Control and Stabilization

4. Pakistan takes three basic approaches to stabilizing domesticprices--monetary and fiscal policy, price controls, and special measuresaimed at price stabilization. The term "price control" is used here torefer to fixing by law the prices of specific goods, while "price stabili-zation" covers the broader range of policies affecting material suppliesand thus, through market mechanisms, the cost to users. Because problems ofadministration, distortion, and black marketing arise from direct pricecontrol, the Government generally prefers price stabilization, though bothare currently in use. Monetary and fiscal policy are aimed at influencingthe overall price level through restricting private disposable income,money supply and credit, and are discussed in Annex 1. Price controls andprice stabilization attempt to control or modify the prices of individualgoods.

5. Price Control: The Government's authority to control prices de-rives fro the Essential Commodities Control Order of 1971. This Order alsoauthorizes price stabilization through controls on "production, treatment,storage, transport, distribution, disposal, acquisition, and use or consump-tion" of specified essential commodities.

6. Although the Order lists 40 different products, only a limitednumber of these are presently subject to direct price control:

Edible Oils & Vegetable Ghee Trucks, Buses, Cars,Tea Bicycles, etc.Milk Food for Infants Tires & Tubes for Mlechan-Caustic Soda & Soda Ash ically Propelled VehiclesDrugs & Medicines (excluding Dry Cell Batteries

folk rnedicine) Cotton YarnElectric Lamps Cotton Textiles 1/

Chemical Fertilizers

The Government estimates that only about 10% of the value of products soldin Pakistan come under direct price control.

1/ Covered are the following gradep: (a) cellular, (b) drill, (c) poplin,and (d) others at the Government's discretion.

ANNEX 3Page 3

7. Price controls generally are imposed by the Federal Governmentand apply to the entire nation. Price controls are too difficult to implementat the provincial level because, among other things, most goods can easilybe shifted to provinces where prices are more favorable. 1/ The Governmenttries to take a "package" approach to price control and stabilization becauseof the intricate inter-relationships among prices. 2/ This is reflected inthe wage-price packages adopted in August 1973 and June 1974. 3/ The latterincluded, for example, adjustments in a number of taxes, adjustments inwage rates for various classes of workers, and price increases on a widevariety of products including kerosene, diesel oil, petrol, vegetable ghee,gas, electricity, and sugar. The Price Control Organization in the Indus-tries Division of the Ministry of Production, Industries and Town Planningis directly responsible for controlling and stabilizing prices and maytake decisions on its own regarding certain prices. However, decisions onprices of basic consumer goods such as cloth and vegetable ghee go to thePrime Minister and the Cabinet.

8. Pressures to change prices come from many sources. Producers andtheir trade organizations petition the Government--usually either theMinistry of Agriculture or the Ministry of Industry-for price increases.Likewise, consumers may urge price reductions (e.g. on vegetable ghee). TheMinistry concerned may prepare a paper indicating the industry's coststructure and its present profits or losses. Arguments which may be per-suasive for a price increase are: (a) costs have gone up; (b) the comparableimport price has risen; and (c) present price does not allow sufficient netearnings to finance modernization, balancing, and expansion.

9. Prices may be fixed at the ex-factory level, the retail level, orboth. Fertilizer seems to be the only product upon which both ex-factoryand retail prices are set by Government. Those of automobiles, fol example,are controlled only at the retail level, leaving pricing between manufacturers,distributors and dealers to private negotiation. On certain grades of cloth,a maximum ex-factory price is set, and on all grades this price must bestamped on the end of the bolt and be made available to the consumers. Thisis to build up consumer resistance to profit-taking by intermediaries andretailers by making the consumers aware of the ex-factory price. Aside from

1/ However, in April 1975 the Punjab government announced price controlson 40 commodities.

2/ For example, there is a feeling that cotton ginning mills are notbeing allowed a sufficient price on ginned cotton for viable operation,a price whose adequacy is a function directly or indirectly of theprices - some controlled, and some not - on raw cotton, linters,cloth, oil seed and cake, cotton seed oil, and vegetable ghee.

3/ Wheat, vegetable ghee and sugar prices and wages were all adjustedupward on April 7, 1975.

ANNEX 3Page 4

stamping ex-factory prices on bolt ends, price controls on cloth seem tobe dying out; they focussed on a few relatively crude qualities of clothto assure their adequate supply, but the common man now seems to preferthe better grades upon which price controls have not been imposed. 1/

10. Another price control device used in Pakistan is Governmentpurchase and sale of selected agricultural products at Government establishedprices through ration shops run under license from the Mtinistry of Food andAgriculture. For example, the Government purchases virtually the entireoutput of refined sugar and sells it through ration shops at fixed prices.

11. Price Stabilization Measures: As indicated, the Government has showna preference for price stabilization rather than direct price controls formost goods. The primary instruments of "price stabilization" are controls onimports, exports and production.

12. The Government imports certain products through the TradingCorporation of Pakistan in order to expand domestic supplies and thusto hold down prices. Edible oil is the most important of these products,and in this case the domestic price is subsidized to hold it below importcost. Last year, for example, the Government imported edible oil at $800to $1,000 per ton, but sold it to the hydrogenation plants for only $540per ton. Even at this heavily subsidized price, the vegetable ghee plantswere only breaking even because of the artificially low price of finishedvegetable ghee. 2/

13. The Government has banned the export of certain items and hasimposed substantial export taxes on others to increase their availabilityon the domestic market and to hold their domestic price below the worldmarket level. This is done, for example, with sugar, meat and poultry,eggs, edible oils, vegetables, cotton, cement, chemical fertilizers, andbran and fodder (Attachment 2).

1/ While a few special grades are still subject to price controls, theonly price restruction on most textiles is that the ex-mill pricemust be printed on the bolt. The Government appears to be droppingits efforts to require the manufacture of certain amounts of lowcost "utility cloth" at fixed prices.

21 The vegetable ghee industry is now basically in the hands of theGovernment; the problems which led to the nationalization of thisindustry, and the implications of the prices set by the Governmentfor this industry are examined in Annex 4. In April 1975, the Govern-ment raised the vegetable ghee price by 20% to Rs 9 per seer. Inview of the recent decline in world market prices for edible oil,the c.i.f. price of imported oil may fall to only about $450 perton, thereby eliminating the subsidy.

ANNEX 3Page 5

14. The foreign exchange cost of price stabilization via importationfor sale at subsidized domestic prices and from export bans is substantial.Furthermore, these policies create pricing anomalies; for example, becauseit was driving up the domestic price of raw cotton, the export of cloth wasrestricted during 1973174. The result, however, was to induce the exportof cotton yarn instead, often at unfavorable prices, and at a substantialloss in exported domestic value added.

15. The Government has also sought to stabilize prices throughadjustments in product quality. In the flour industry, at least in thePunjab, the Government withdrew its permission for mills to hold back 6%of the flour as "fines" (the germ and its covering) which had previouslybeen sold on the open market, primarily to middle and upper income customers.This action was taken both to increase the availability of flour through theration shops and to improve its nutritional and other qualities.

Impact of Price Stabilization Policies

16. Price stabilization policies have been adopted to reduceinflation and to improve the welfare of consumers, particularly lowerincome groups. In the short-run such measures have limited price increasesin specific commodities, many of which are important in the budgets oflower income groups. This has moderated the domestic effects of sharprises in world market prices of major tradable consumption goods. Ifextended over a longer period, however, these measures may have effectsopposite to those intended. Price stabilization policies which haverequired budget expenditures or reduced government revenues have addledto the budget deficit and the growth of money supply. Thus stabilization(and price control) measures have tended to raise all prices not effectivelycontrolled or stabilized, thereby possibly contributing to rather thandecreasing overall inflation, with progressively greater inflationaryconsequences over time. These budgetary costs have also reduced fundsavailable for social and other programs of special benefit to lower incomegroups. Furthermore, investment to increase the production of items inshort supply may have been reduced by price control and stabilizationmeasures, therefore reducing future supplies and further increasingfuture prices.

17. Because price controls have been aimed at keeping down the pricesof products important in the budgets of lower income groups, they may havehad some favorable' income distribution impact. The generic drugs programis an example. After the PPP took power, the Government decreed that majordrugs and pharmaceuticals could be manufactured only under generic names;the use of brand names for these drugs was prohibited. As a result, thecost of these drugs today appears to be quite low by international standardsand represents a significant drop from previous prices in Pakistan. This,interestingly enough, was followed by a substantial increase in the valueof drug sales in Pakistan. It appears that the drugs are now priced so thata larger portion of the lower income population can now afford to buy them.

ANNEX 3Page 6

18. Subsidies cost the Government an estimated Rs. 3 billion in1973/74. 1/ This, by way of comparison, was equal to nearly half of Federaland Provincial development expenditures combined. Consequently, the Govern-ment has tried to reduce subsidies; for example, price increases for kerosene,diesel oil, petrol, vegetable ghee, gas, electricity and sugar were announcedin the 1974/75 budget. As stated in the Annual Plan 1974/75, "Certain priceincreases became unavoidable as the Government could no longer sustain theheavy subsidies which were required to maintain the prevalent prices. More-over, if the price distortions were not corrected, they would have givenrise to serious economic difficulties in the future". 2/

19. Just as subsidized prices reduce Government savings, pricesadministered at unrealistically low levels create shortages of funds forreinvestment. Without adequate cash generation, it will be difficult forindustry to undertake the investment required to eliminate present capacityconstraints and to avoid future shortages. According to the Annual Planfor 1974/75 ".... the BIM (Board of Industrial Management) group has not

so far been able to generate any resources for the self-financing of freshinvestment." 3/

20. BIM profit data indicate that BIM may already be succumbingto pressures for "social pricing". 4/ For example, one of the BIM unitsreports that, while it normally tries to price for a 20% profit on salesof most of its products, bicycles are sold at cost because of governmentpolicy.

Table 2

PAKISTAN: Profitability of BIM Product Groups, FY72-74(net profit as percent of assets)

/aProduct Group 1972 1973 1974-

Auto and Farm Equipment -21.7 2.0 8.8Cement 0.0 2.9 2.3Chemicals - 2.5 0.7 6.8

Gas 16.6 17.1 21.6Oil 1.9 -1.4 -4.5Steel and Engineering - 1.3 3.4 7.0

Total - 1.2 2.0 6.0

/a In the absence of new asset data for 1974, 1973 data were used on thegrounds that investment appears to have been little more than enoughto cover replacement. Assets are net of depreciation and are athistorical costs, which exaggerate real profits.

Source: Derived from BIMt Annual Reports.

1/ Annual Plan 1974-75, p. 52.

2/ p. 38.

3/ p. 114.

4/ See Annex 4.

ANNEX 3Page 7

21. Not only BIM, but industry as a whole must: obtain a cash flowsufficient to finance the investment in balancing, modernizing, andexpansion which will prevent inflation-causing shortages in the future.To assure an adequate cash flow, the Government should allow firms a pricewhich will cover the full cost of production with a reasonable rate ofreturn on assets. Furthermore, because of inflation, this rate of returnshould be based on the replacement cost of inventories and fixed assets,not on their historical cost. Revaluation of fixed and working capitalassets to keep pace with inflationary pressures is not a radical idea.In fact, it is already being practiced within Pakistan-by the KarachiElectric Supply Corporation (KESC).

22. The importance of revaluing assets according to realistic replace-ment cost is clearly seen today in three industries - sugar, cement, andvegetable ghee. The Government has announced plans for a substantialinvestment in new sugar factories over the next five years. The price ofsugar from these factories will have to be set at about Rs 150 per maundto recover the cost of invemcnent and a reasonable rate of return; existingmills are receiving only Rs 96 per maund. 1/ The vegetable ghee industryis also slated for expansion, and new plants in this industry, at 1974investment costs, would require a minimum sale price of Rs 8.25 per seer(assuming that oil price subsidies continue at present levels), an increaseof 10%. 2/ The cement industry, despite its reasonably full utilizationof capacity and excellent export performance, is one of the least profitableindustries in the BIM group. In 1973/74, it earned only 2.3% on assets,and those are assets valued at depreciated historic cost - historic costsgoing back 50 years in certain cases. The Government, on the grounds thatcement is an "essential commodity" whose price must be stabilized to holddown the cost of housing, has restricted its price to Rs 220 per ton includingan excise duty of Rs 43 per ton, giving an ex-factory price of only Rs 177per ton. 3/ Today's production cost of Rs 171 per ton--based on old, depre-ciated equipment--leaves a tlhin profit mnargin. New plants, which will berequired to meet the demands of the domestic construction industry and totake advantage of the export market, will need a price of Rs 300 per ton.The exceptionally low levels to which cement prices have been held isunderlined by world' prices which, in the middle of 1974, were as high asRs 700-790 per ton. They had receded to Rs 400-445 per ton by the end of1974, but were still twice the domestic price level.

1/ In April 1975 the retail price of sugar was raised by 20% from Rs 3.5to Rs 4.0 per seer. Since the tax was unchanged at one rupee per seer,this raised the ex-mill price to about Rs 116 per seer.

2/ In April 1975 the price of ghee was increased by 20%, to Rs 9 perseer.

3/ 'In March 1975 the price of cement was raised by 18%, from Rs 220 toRs 260 per ton, after government plants began to experience operatinglosses.

ANNEX 3Page 8

23. Price controls have a pernicious effect on quality, for whenmanufacturers are pressed by price restraints, they can often maintaintheir profits by cutting quality, something price administrators usuallyfind difficult to measure. The price control on rice, for example, hashad the effect of encouraging an increase in the percentage of brokensin the milling process because brokens can be sold on the open marketwhile higher quality rice is subject to price controls.

24. It is no surprise that black marketing and smuggling are asso-ciated with price controls in Pakistan. Internally, because of the pricecontrols on cottonseed oil, small gins and extracting units sell oil tosoap manufacturers rather than to Government-controlled vegetable gheeplants. If the latter could offer a realistic price for oil, it would besold there and cheaper substitutes would be used in soap manufacturing.Bicycles are another illustration of the difficulties of administeringprice controls; only the price of the basic bicycle is controlled sodealers force customers to buy options which are priced at whateverlevel the market will bear. Externally, because of higher prices forwheat in India, substantial amounts are reportedly smuggled out ofPakistan.

25. Railway pricing in Pakistan is "telescopic" in that chargesdecline over distance, despite the existence of separate loading andunloading charges. I/ This telescopic feature of the rates may inducesome distortion in the location of industry and in sources of supply.

26. Distorted prices are also likely to affect the choice of techno-logy. The underpricing of natural gas appears to have led to its relative-ly wasteful use. Likewise, negative real interest rates for capital,caused by interest rates lagging behind inflation, tend to induce relativelycapital-intensive technology choices.

27. Public Utilities: The pricing of public utilities has generallylagged behind cost of production and value of services. The price of powerin the WAPDA system, for example, would have to be increased by about 50%oto earn even a 6% rate of return according to Planning Commission estimates,and this is again based only on historical cost of assets minus depreciation.KESC, on the other hand, revalues its assets and has a fuel clause in itstariff schedule to assure that the price of electricity at least keeps pacewith the rising price of fuel.

1/ If the loading and unloading charges were incorporated in the ratestructure, there would of course be an argument for decreasing thecharge per mile because the loading and unloading charges, which arevirtually fixed costs regardless of distance, would be spread outover more miles on the longer run.

ANNEX 3Page 9

28. Water is greatly underpriced. A farmer may pay a third of hiscrop to obtain water from a private tubewell, but strongly resists payingmore than the present heavily subsidized rate for Government water, eventhough water charges constitute only 1.5% of the gross revenue from thetypical farm.

29. Natural gas is also substantially underpriced despite the June 1974and February 1975 increases that together doubled its price. Prior to theFebruary 1975 increases of 33% in kerosene and in natural gas prices, thePlanning Commission estimated the following costs of alternative fuelsources:

Rupees perFuel Million BTUs

High Speed Diesel 32.92LPG 32.42Charcoal 20.17Kerosene 17.30Wood 13.74Furnace Oil 11.68Natural Gas (maximum price 6.40

for domestic consumer)

This table clearly illustrates that gas was sharply underpriced in termsof its opportunity cost vis-a-vis alternative energy sources. It alsoindicates substantial discrimination against the poorest consumers, whoare likely to use charcoal and wood for fuel, and in favor of the richconsumers, who receive gas service and can afford the equipment to burngas for heating and cooking.

Page 10

Attachment 1

Price Indices, 1959/60 - 1973/74

Cee rau u I 7F.c:sumerWar-/ ',hoLesGe Food Manufctures nv s-i Price c,'Price!s Index

(1956/60=1CC) (1960/61=100)

1960 100.0 100.0 100.0 1.0...1961 1o4. ... 99.2 . O100 .OL9, lOLL. . .. 1OL.0 .. .C01.1.953 102.0 *-- 05.6 ... 99.9196 lOb.) *-- 107.0 lC08.5 103.11965 113.6 ... 107.2 107.1 109.31966 112.0 *-- 112.7 11).1 -L-.9

1067 -122b. ..-. 17.0 1L3. 12:1952. 129<.7 ... 121.7 12 9.6 127.81969 129.8 134.0 129.7 137.6 1.2°.719,7 0 1i32.2 134.1 134, - 146.0 13S c1971 137.3 137.3 142.3 1Cf7.0 1)2. 1972 150.3 150.3 151.5 161.1 1>.81973 1.79.7 189.0 I77o.7 17 2,.7

-*-71 't 229.1 246.0 209.0 >-i.'-

a/ Years end June 30.

b/ Based on weighted average of West Pakistan wholesale price indices

of timber (6%), metals (17%), metal manufactures (5%), machines (30%),cement (12%) and wages (30%). Weights are indicated in parentheses.

c/ General consumer price index for industrial workers in Karachi.1960/61 = 100.

d/ Estimated average for year.

Source: Monthlv Statistical Bulletin, Statistical Division, andInvestment Index, Planning Division, Ministry of Finance,Planning and Development.

ANNEX 3Page 11

Attachment 2

Items Under Export Ban, 1974

Foodstuffs

Animal living all sorts except certain wild animals.Fresh prawns and shrimps.Beef and mutton, in all forms, including cooked and canned such as

Kofta, Pasanda, curry, etc.Animal fat.Milk and milk products.Eggs.Grain and flour all sorts including barley except rice.Pulses and beans all sorts including "Baryan".Onions.Pepper.Sugar, Gur, Khandsari and Jaggery powder.Coconuts and copra.Edible oils, all sorts (including butter oil and vegetable ghee) and

oil seeds except castor seeds, poppy seeds and kapok seeds.Vegetables all sorts including dehydrated vegetables.Potatoes including potato seeds.Poultry in all forms.

Other Items

Iiides and skins, all sorts except lamb skins grade I, II & III.Skins of certain specified wild animals.Wet blue leather made from -cow hides and cow-calf hides.Human skeleton.Blood Meal, Meat Meal, Corn Gluten Meals, Feeds and Seasame Oi: Cakes.Bamboo and timber.Charcoal and firewood.Jute seeds, sann hemp and artemisia seeds.Fissionable Materials.Chemical Fertilizers.Ferrous and non-ferrous metals including M.S. Bars and iron and steel

structurals.U'nfinished and semi-finished hockey sticks and blades.Arms, ammunitions and ingredients thereof.All imported goods in their original or unprocessed form.Maps and charts.Tungsten carbide bits, Milling cutters, Saws straight and circular,

Drills, Taps and Dies.Bran and fodder, all sorts except oil cakes.Empty wooden crates assembled or unassembled.raper all sorts including drawing books, exercise books and paper waste.

ANNEX 4Page 1

PUBLIC MANUFACTURING ENTERPRISE IN PAKISTAN

1. On January 1, 1972, the Government ordered takeover of themanagement of 31 major Pakistani manufacturing enterprises covering 10sectors and, on August 31, 1973, announced purchase of their shares aswell. 1/ This annex examines the environment within which nationalizationtook place and the impact it has had on the performance of enterprisestaken over and, indirectly, on the remaining private enterprises. 2/ Itdoes not, however, attempt to discuss the full range of public enterprisein Pakistan, which includes construction, shipping, power, water, railways,finance and other activities, nor does it even deal in any detail with thenationalized vegetable ghee plants, which are now under provincial govern-ment ownership, or with the new manufacturing enterprises which the provin-cial governments are establishing.

Manufacturing Before Nationalization

Public Manufacturing Enterprise

2. Prior to nationalization, the Pakistan Industrial DevelopmentCorporation (PIDC) 3/ was virtually the only public sector entity involvedin manufacturing. PIDC was expected to promote regional growth even whenthis entailed low returns on projects in backward geographic areas, andin sectors such as textiles, mining, forest products, and cement whereprivate initiative was not considered sufficient. PIDC initially financedand managed projects until they could be sold to the private sector. Sinceonly the more profitable could be sold, PIDC gradually accumulated a port-folio with many weak projects.

3. Until a recent reorganization within the Board of IndustrialManagement, PIDC had 40 projects under its management; in addition, it heldequity ownership in eight of the 20 of its former projects which had beensold to the private sector. Since reorganization, PIDC has been limited

1/ Excluding PIDC firms, already in the public sector, these 31 unitsconstituted about 33% of fixed assets in medium and large-scaleindustry in 1971/72 (Annex 5).

2/ The impact on investment and production in the industrial sector as&awhole is analyzed in Annex 5, "Capacity Utilization in Pakistan."

3/ Prior to the loss of East Pakistan, it was known as the West PakistanIndustrial Development Corporation (WPIDC).

ANNEX 4Page 2

primarily to agro-industries which do not fall under the other sectorcorporations. The returns on PIDC projects are still low, and its financialstructure remains weak.

4. Aside from its developmental impact, which should not be under-estimated, an outstanding feature of PIDC in the late 1960s was that, unlikemany private sector firms, its financial records were reasonably accurateand the results were reported to the public.

Private Manufacturing Enterprise

5. In contrast to the limited activity and low profitability ofpublic enterprise before nationalization, private enterprise was thriving.But unfortunately, not all of the country was thriving with it. In fact,political reaction against the concentration of economic power with arelatively small number of wealthy individuals, perhaps more than anythingelse, led to nationalization of units now under BIM.

6. Evidence on the economic power of this group in manufacturing,commerce, transportation, and external trade is very fragmentary, butPapanek reported, for example:

"While there were over 3,000 individualfirms in Pakistan in 1959, only seven individuals,families or corporations controlled one-quarter ofall private industrial assets and one-fifth of allindustrial assets. Twenty-four units controllednearly half of all private industrial assets....It is also reported that approximately 15 familiesowned about three-fourths of all the shares in banksand insurance companies." 1/

In 1968, Mahbub ul Haq estimated that the 22 largest families controlled 66%of industrial assets, 70% of insurance funds, and 80% of bank assets. 2/White recently reported that, of all non-financial assets listed on theKarachi Stock Exchange in 1968, the largest four families and financialgroups controlled 20%; the largest 10 controlled 35%; and the largest 20controlled 46%. Combined,. the 43 families and groups which White identifiescontrolled 53% of these assets. 3/

1/ Gustav F. Papanek, Pakistan's Development: Social Goals and PiivateIncentives. (Cambridge, Mass., 1967), pp. 67-68.

2/ Business Recorder (Karachi), April 25, 1968. p. 1.

3/ Lawrence White, Industrial Concentration and Economic Power in Pakistan,Princeton: Princeton University Press, 1974.

.ALNNEX 2-Page '

7. This concentration of economic power was a matter of seriouspolitical concern in Pakistan by the end of the 3960s. To assure a moreequitable distribution of income, accountability to the public, and anappropriate generation of tax revenues from industrial activities, senti-ment grew for the nationalization of private enterprises. The ElectionManifesto of the Pakistan People's Party (PPP) stated in 1970: "... it iswithin the public sector that all the inajor sources of the production ofwealth will be placed", and 'All major industries will be nationalized". 1/

Public Manufacturing Enterprise After Nationalization

Structure

8. Upon takeover of 31 industrial concerns in 10 basic industries 2/in January 1972, a Board of Industrial Management (BIJ4) was establishedunder the chairmanship of the Federal Minister of Production to replacethe previous boards of directors of the individual units. In December 1973,the Government, after studying the Italian organization of its industrialsector under the Industrial Reconstruction Institute (IRI), set up 12 sectorcorporations under BIM. BIM is now composed of the chairman of the sectorcorporations, a Member of Finance, a Vice-Chairman, who is now a SpecialAssistant to the Prime Minister, and the Chairman. Board members aresupported by two or three technical/financial specialists for each industry,and the Member for Finance has a small staff including economists andfinancial analysts. 3/

9. The sector corporations comprise the taken over industries, thenew public manufacturing units (some of which are not yet operational),and units transferred from PIDC, which is now left primarily with forestry,sugar, and textile projects (Attachment 1). The 12 sector corporationsare:

1. Federal Chemical and Ceramics Corporation2. Federal Light Engineering Corporation3. Pakistan Automobile Corporation4. National Fertilizer Corporation of Pakistan5. Pakistan Industrial Development Corporation6. State Cement Corporation7. State Heavy Engineering and Machine Tool Corporation8. State Petroleum and Petro-Chemical Refining Corporation9. Pakistan Tractor Corporation

10. National Design and Industrial Services Corporation11. Pakistan Steel 'Mills Corporation12. State Electrical Corporation

,; [lection "lanifesto of the Pakistan People's Party, 1970, pp. 18, 19.2' 1 rar :,nd steel, b)asic met•Us, h,avy en-gineering, heav t1ectrical,

automotive assembly and mianufacture, tractor assemrbly and manufacture,sblipS, pCtro-chenMica's, cemlent, ;nG public utilities (natural gas).

3/ r,IM is not a legal entity (i.e. corporation) in its cwn right; it isonly an administrative device for managing the takeover units.

ANNEX 4Page 4

10. Of these, the first nine are holding corporations with actual orplanned operating units under them, the tenth is an operating corporationin its own right, and the last two are responsible for projects which werenot in operation by late 1974. The units presently under each of thesecorporations are listed in Attachment 1 along with their former names,locations, and major products.

11. BIM (including PIDC projects transferred to BIM and new projects)now accounts for 80 of Pakistan's 118 public enterprises (Attachment !2). 1/Of these, 77 are in the manufacturing sector. Within this sector, the fivelargest subsectors in terms of established units and new projects are ,steel and engineering (17), chemicals and pharmaceuticals (15), cement (11),automobile and farm equipment (10), and fertilizer (9).

12. On a regional basis, the distribution of public enterprise unitsis as follows: Sind (44%), Punjab (37%), NWFP (10%), Baluchistan (9%).The share of BIN and other public enterprises located in NWFP, and especiallyin Baluchistan, is significantly higher than the share of these two provincesin overall industrial activity (Attachment 3).

13. In the 10 "basic industries" in which the larger firms have, beennationalized, private firms continue to operate and new firms are beingestablished or are eligible for establishment with the exception of thecement industry. 2/ Of the 31 units taken over by BIM, 17 still have someprivate shareholders. The Federal Light Engineering Corporation (FLEC),which has private participation accounting for about 40% of the shares ofits individual units, is in the sector with the highest overall level ofproduction capacity in private firms estimated at 75%. About 50% of rollingcapacity is still in the private sector, for example, as is some 70-80% ofthe pipe mill capacity. Although the motor vehicle sector is 100% publicat the assembly level, the majority of ancilliary parts suppliers areprivate sector, and many are relatively small scale. BIM covers virtuallyall basic areas of manufacturing, but "new" industries like electronicsstill lie outside its domain. Because of restrictive social policies:onluxury consumer goods, however, this is not a major concession to privIateenterprise.

1/ These figures do not include projects or units under the ProvincialIndustrial Development Boards, the Fauji Foundation, or the ProvincialRoad Transport Corporations. Most of the units under the ProvinLcialIndustrial Development Boards are either vegetable ghee rlants orvarious development projects such as textile and sugar mills whiich,for the most part, are in the planning stage.

2/ It is not entirely clear why cement has been singled out as a sectorstrictly reserved for public enterprise. Some of the explanationsgiven are thne high export profit, the need for a more rapid imple-^,entation of projects than would be possible in the private sector,`he do%.nstream linlkages (especially with the domestic housing andconstruction industry), and national security.

ANNEX 4Page 5

Production and Profitability

14. Although some have alleged that nationalization of industry causeda major decline in production, available data does not offer proof one wayor the other (Volume I, Appendix Table 8.1). Although the annual productionindex for 1971/72 fell by nearly 7%, the quarterly index rose in that yearfrom 148 in the quarter before takeover to 175 in the following quarter.However, a similar pattern shows up both in earlier and later years.Furthermore, it is difficult to separate the impacts of war, devaluation,and nationalization.

15. As production performance and capacity utilization of BIM unitsare examined in Annex 5, it is unnecessary to repeat the analysis here.Its conclusions should be noted, however: the unweighted average rate ofcapacity utilization in BIM units has increased significantly since 1971 -from 57% to nearly 70%. 1/ But, these unweighted averages disguise themuch more notable increases in both minimum and maximum rates in eachsector which reveal marked improvement in certain units (Annex 5, Attach-ment 3). As shown in Attachment 4 of this Annex, sales of the BIM sectorcorporations grew by 40-60% in the first year in current prices. Averageannual growth of sales in constant prices from 1971/72 to 1973/74 has beenas follows:

Auto and Farm Equipment 63.0% /aSteel and Engineering 14.3%Gas and Oil 27.0%Chemicals 31.0%Cement 3.4%

Total 32.0%

/a The growth in sales for auto and farm equipmentmay exceed the growth in production because ofsales of vehicles imported in assembled condition.

Source: Attachment 5.

16. The financial profitability of public enterprise manufacturinghas generally been poor, but is now improving. In the year of takeover,three of the six sector corporations for which information is availableincurred losses, and another only broke even (Table 1).

1/ These averages are based only on plants in the cement, chemicals,motor vehicles, and textile sectors for which data are available.

ANNEX 4Page 6

Table 1: Profitability of BIM Product Groups, 1971/72 - 1973/74(net profit as percent of assets)

Product Group 1972 1973 1974/a

Auto and Farm Equipment -21.7 2.0 8.8Cement 0.0 2.9 2.3Chemicals - 2.5 0.7 6.8Gas 16.6 17.1 21.6Oil 1.9 - 1.4 - 4.5Steel and Engineering - 1.3 3.4 7.0

Total - 1.2 2.0 6.0

/a In the absense of asset data for 1974, 1973 data were used on the.assumption that investment has been marginal and appears to havedone little more than cover replacement. Asssets are net ofdepreciation and are at historical, not replacement costs.

Source: Derived from BIM Annual Reports.

Overall, there was a slight loss on BIM operations in 1971/72. In thefollowing year, performance was better--only the oil groups lost money,and the six groups in total had a small profit of 2% on book value ofassets. Indequate data on profits and assets for 1973/74 make estimatesuncertain, but overall profitability of BIM may now be 5% to 6%. 1/ Wnilethis is far below the opportunity cost of capital, especially consideringthe depreciated asset base upon which BIM rates of return are calculated,the trend for these groups is at least encouraging. 2/ Also, the one ipro-duct group which showed a loss in 1973/74 was oil, and this primarilyreflected a regulatory lag in the pricing of oil products.

1/ The management of BIM ascribes the relatively poor financial perform-ance of BIM units to factors including non-availability of raw mate-rials, devaluation, unprofitable defense contracts made by previousmanagement, loss of substantial assets of BIM companies in EastPakistan, delays from congestion at Karachi ports, inadequate tariffprotection, procedural delays in financial institutions resultingin bottlenecks for sale and distribution of tractors, cost escalationarising from increased costs of local and imported raw materials,,additional benefits to workers, increased power charges, importduties, and non-availability of certain categories of technical andmanagerial personnel (Annual Report, 1972/73, p. 23).

2/ These data do not cover PIDC and 11eavy Engineerinlg, both of whichappear to have maade losses.

ANNEX 4Page 7

17. Data for July-August 1974, which are available for the eightoperational manufacturing holding corporations within BIM, indicate anoverall return on sales of under 4%, and the performance among the sectorsis quite variable. The most profitable appears to be cement (16.8%); 1/the least profitable is the State Heavy Engineering and Machine ToolCorporation with losses on sales in excess of 1,000% because of low capacityutilization, high fixed costs, and limited sales.

18. In the other sectors the profit rates on sales were: fertilizer(14.8%), light engineering (9.0%), chemicals (6.4%), motor vehicles (6.0%),PIDC (-1.3%), and petroleum petro-chemicals (-35.9%). Comparable data arenot available for private enterprises in Pakistan, but it appears that theirprofit rates are often much higher. It would not be fair, however, tocompare the reportedly high profits of the BIM units before takeover withtheir present profitability, for the economic environment in Pakistan todayhas changed markedly and some of the past profits in the private sectorseem to have derived in part from practices which would not be acceptablein public sector units.

19. There has been no systematic evaluation of the economic profita-bility of BIM units in terms of import competitiveness. Calculations doneon new investments proposed recently for NDFC financing (Attachment 6)indicate financial rates of return of 10 to 20%, and higher economic ratesof return, although the basis of the economic rate of return calculationsis not clear and reliability of these figures is uncertain. 2/ There isa wide variation in profitability of BIM units. Cement, fertilizer, andsome chemical sector units appear to be quite import competitive. Certainproducts in the engineering industries also are import competitive. Forexample, local looms are often one-half as expensive as their importedcounterparts. Some BIM products are even competitive in export markets.Exports constituted 8% and 10% of BIM's output in 1972/73 and 1973/74respectively. 3/

1/ In terms of profits in relation to assets instead of sales, andfor periods prior to the first quarter of FY75, cement was amongthe least profitable of the sector groups. Recent profits haveprimarily come from export sales.

2/ First, they are ex ante - and probably optimistic. Second, a quickreview of NDFC appraisals revealed some problems in estimating appro-priate future market prices and quantities. Third, the econemic ratesof return consistently exceed the financial rates of return - anunusual though not unimaginable situation.

3/ A study of the performance of public enterprises (including financialinstitutions) is being conducted by United Consultants of Lahore forthe Planning Commission. The questionnaires sent to manufacturingenterprises in late October 1974 included questions on internationalprices and price competitiveness. Once these results are available,it will be easier to make meaningful comments about the economicperformance of BIM units.

ANNEX 4Page 3

20. The economic performance of certain chemical plants and of theauto and farm equipment group has been poor. The Synthetic Chemicalsplant (formerly Valika), for example, produces polyethylene granules at acost well above the import price and, in the motor vehicle industry, BIMreports that 30% to 50% protection is required. Given the moderate presentlevels of domestic value added, this implies a substantial rate of effectiveprotection. In February 1975, the tariff rate on automobiles was raised byan additional 25% ad valorem.

Issues and Problems in BIM

21. The basic issues facing BIM are the quality, accountability C'andautonomy of its management and its employment pricing and investment policies.

22. BIM Management: One of the purposes of nationalization was toinfuse the management of taken over units with professional managers whowould be accountable to the public. This appears to have been largelyaccomplished. At the BIM level as well as in the sector corporation andoperating units, men with professional training in management and productionengineering have been hired, many from private firms. Since BIM is not tiedto civil service wage scales, it has been able to compete with the privatesector and offer managers salaries two to three times those of the Govern-ment officials. To increase public accountability, BIM now publishes anaudited annual report. Internal management control has been strengtheiiedand improved substantially by the introduction of annual budgeting andmonthly management information reports. NDFC could play a useful supportingrole by collecting, analyzing and distributing data on public sectorenterprises.

23. The limited autonomy given to BIM managers of sector corporationsand units does not let them operate with the flexibility and initiative ofprivate sector managers. In principle, since the best available managerswere brought in to manage BIM and its units, they should be given broadpolicy guidelines at the outset of each year through the BIM annual budget,then be left alone to make operating decisions within this framework, freefrom day-to-day interference and subject only to threat of dismissal i|f topmanagement does not agree with the procedures being followed. In realityit appears that there is regular interference from each level to that below.The managers and directors involved in Pakistan's public enterprises aregenerally dedicated, hardworking individuals who want to do the best possi-ble job and may feel uncomfortable simply establishing a broad policy, thenretiring from the scene. Any criticism, therefore, is not of the qualityof "interference", for it is generally enlightened. Rather, it is of theinflexibility which results. When virtually every major decision has togo to the Vice-Chairman of BIM, as reportedly is the case, it becomes 'verydifficult for the individual unit to operate in the intended way--as anentrepreneurial, profit-making center which simply happens to have publicownership of its assets and a publicly appointed manager. At present, the

ANNEX 4Page 9

individual manager usually can make investment decisions only for amountsup to Rs 50 thousand. This is less than one-tenth of one percent of, assetsof a BIM unit, which, at depreciated historical costs is Rs 80 million (aboutUS$8 million). As the free limit on investment decisions refers to presentday costs, the relevant figure with which to compare this limit would bepresent replacement costs of assets of BIM units, and this would probablybe three to five times the depreciated book values.

24. One source of conflict over BIM autonomy is its overall authoritystructiure. BIM is nominally responsiblie for making decisions on basic pol-icies regar'ding production, direction of investment, etc. However, BIM isunder the jurisdiction of the Ministry of Production. which also has a pro-duction planning role, as does the Planning Division. The Ministry ofFinance and the National Development Finance Corporation are also involved,though more from the financial policy point of view. There is no easyanswer to such overlapping perspectives, and to a certain extent they arevital to maintain a balance. However, if too many officials must approveeach decision, public enterprises will become strangled with red tape.Among the most important causes of poor performance in public sector corpo-rations in countries other than Pakistan are overlapping decision-making,plus difficulties of providing to managers the incentives which will assurehigh performance standards. At present, Pakistan does not seem to suffersignificantly from these problems, but may be moving in that direction.

25. Sufficient autonomy for operating units and adequate socialcontrol might both be accomplished by reestablishing at plant level theboard of directors which were abolished upon takeover. This would createa group of experts to make operating decisions closer to the point wherethey would be implemented. Because the directors would be charged withdecision-making for only one unit, they could have a much more intimateknowledge of the needs of that unit and could respond more quickly torequests for guidance. Furthermore, establishment of such boards wouldtend to alleviate the present reluctance to delegate authority to onlyone manager. If boards are reestablished, they should be given the powerover investment decisions, product choice, and personnel policies required tokeep the public enterprise units as flexible and competitive as privateunits.

26. Employment: Because of present social priorities regarding em-ployment and income distribution, BIM units feel a substantial pressure tomaintain and even expand present employment. This pressure is not uniqueto the public sector,' but is more likely to create problems there than inthe prtvate sector because of the more direct control which Government canexert. The employment pressures take two major forms. First, and perhapsmost fundamental, is the pressure to keep uneconomic units in operation.For example, the old Valika chemical plant is kept in operation, despite itsextremely poor economic and technical position, largely to avoid laying offworkers. A decision to shut down such a plant would probably have to go tohighest Government levels, which calls into question the degree of autonomyBIM managers really have in operating their units. The second form of

ANNEX 4Page 10

pressure is directly on employment--pressure to not dismiss extra workers.For example, the Lahore Engineering and Foundry unit is reportedly carryingsome 1,500 extra workers which it cannot release for political reasons.. I/It is encouraging, however, that the annual growth of employment in Bil -

units since takeover has only been 7.3% as compared to real annual growthin sales of 32%; output has risen over four times as fast as employment(Attachment 5).

27. Pricing and Resource-Mobilization: Pricing is one of the mostcritical determinants of the financial viability of units and their capa-city to mobilize the investment funds for replacement and expansion. 'Yetpresent pricing policies within the BIM units force them to seek externalinvestment funds, many of which have to come from the Government. Thefirst priority of the Government for -BIM appears to be! "reasonable" domesticprices, while financial profitability comes second. The compromise betweenthese two objectives seem to be to allow the firms to do little more thanbreak even. At least two dangers lurk in this. First, there is littleincentive for improvement if a firm knows its prices will always be heldto a level which only allows recovery of operating costs. Second, if,pricesare set to equal capital and operating costs, and if costs of inventorliesand fixed capital are calculated on the basis of depreciated historicalcosts, depreciation allowances and net earnings will be insufficient toreplace, much less expand, fixed capital and inventories. Prices shouldbe set on the basis of current market replacement costs, which wouldrequire periodic revaluation of assets and calculation of material costson a "last-in, first-out" (LIFO) rather than a "first-in, first-out" (FIFO)basis. If the Government feels that certain prices should be held belowthe level necessary to meet these criteria, it should directly and explicitlysubsidize prices so that the costs of this approach are apparent.

28. Because BIM units have accumulated losses or have made minimalprofits in the past three years, there is virtually no capacity for self-financing the major investments planned for next year and for the Five YearPlan (1975 to 1980). As details of the BIM investment program are discussedin Annex 6, "Investment in Pakistan", and as the impact of Governmentlpricingpolicies on resource mobilization is discussed in Annex 3, "Pricing Policyin Pakistan", they are not discussed here. However, a few specific problemsregarding BIM's financing of working and fixed capital should be mentioned.

29. The arrears on PICIC and IDBP loans to units now under BIM controlindicate the difficulties which the units have in generating the requiredfunds for investment. In 1973, 85% of the loans from PICIC to now publicsector units were in arrears. Although this percentage had fallen by,

1/ The decision to hire these workers on a permanent basis was madejust after takeover, before professlonal managers were appointed.The latter have since resisted such pressures.

ANNEX 4Page 11

September 1974 and was only marginally higher than the percentage forloans in arrears to the private sector, arrears still affected nearly 50%of the number and over 60% of the value of loans to now-public units.Because of the weak financial situation of many BIM companies, BIM has setpriorities in the following order: (1) keeping the companies afloat, (2)getting loans on good terms from the banks, and (3) paying off debts whichare in arrears.

30. The problem of repaying foreign exchange loans was complicatedsubstantially by the 1972 devaluation. Since individual units carried theexchange risk, devaluation effectively increased the loan amount outstandingby over 100%-- a serious financial blow to any corporation. Thoughimmediate remedies of this problem are not possible, it could be alleviatedby appropriate agreements between units and lending institutions. TheGovernment has taken one very good though partial corrective step by allow-ing units to revalue assets attributable to that portion of foreign exchangeloans outstanding at the time of devaluation according to the new exchangerate. This helps when calculat.ng asset values, rates of depreciation and,where prices are controlled, necessary price levels. This policy shouldbe carried further so that all real assets, both fixed and working, arerevalued to reflect today's prices and exchange rates. If any barriersexist in the tax laws of Pakistan to asset revaluation, such as a substan-tial tax on revaluation, their removal should be considered.

31. Another major issue in BIM financing is pooling of funds. Inshort, this means transferring funds from prosperous to less profitablecompanies. At best, it could tide firms with good long term prospectsover temporary difficulties; at worst, it could divert resources from goodfirms to plants that should be shut down. The latter would destroy incen-tives to good firms and drain the country's resources.

32. Two forms of "pooling" already exist among BI' units. First,units lend to sister units at commercial rates. As the loan decision is

made by BIM, it is responsible for assuring that the lending unit is repaid.A second and slightly less direct means of pooling funds is for an entire

sector corporation to apply for a commercial bank loan. This allows a

financially weak unit to use the assets of its stronger sister corporations

as security. If the borrowed funds strengthen the weak unit, enabling itto repay the loan, there is no problem. However, if the funds were to go

to a permanently weak unit and the loan were repaid by stronger sister firms,

resources would have been applied to an inefficient use. Also harmful would

be loans on concessional terms, especially if made without any expectation

of repayment. Another means of pooling funds would be transfer pricing,by which funds are moved from one unit to another unit through artificialprices. This would probably be the most insidious means of pooling, for itis disguised unless the prices are blatantly unrealistic. Loans on the otherhand are usually recorded explicitly.

A.NNEX 4Page 12

33. Means do exist, however, of obtaining financing flexibility amongBIM groups without distorting incentives. Possible devices would be:

(a) Payment of dividends on shares of units owned bysector holding corporations which are in turnwholly owned by BIM. This should of course besubject to maximum dividend payout ratios toprevent a depletion of retained earnings.

(b) Investment of excess reserves in NDFC either asequity participation in the stock of NDFC or asdebentures to NDFC. These funds could be earmarkedfor use by NDFC exclusively for projects within BIMwhich met criteria imposed by NDFC in agreement withBIM. NDFC already holds interest-bearing depositsfor some BIM units, and equity holdings in NDFCcould become attractive once NDFC pays dividends.

(c) Loans at commercial rates and on commercial termsbetween units in a given sector corporation uponapproval of the sector corporation in accordancewith agreed criteria and adequate appraisal. Similarloans could be made between sector corporations uponappraisal and authorization of BIM itself.

34. It appears that BIM will have to depend heavily on Governmentallocations to finance its proposed investment program, which is unfor-tunate for at least three reasons: First, the Government already hastrouble mobilizing the rupee resources required for current and capitalexpenditures. Second, if BIM units are to be run as profit-making cen-ters, they should be able to generate their own investment funds. If aunit's immediate asset position is not sufficient to finance investmelnt outof reserves, it should be able to borrow the required funds on the basisof its assets and projected cash flows. In Italy, for example, IndusltrialReconstruction Institute (IRI) units, after which BIN was at least partiallymodeled, raise 13 times as much capital on the market as they get from theGovernment. 1/ Third, to the extent that units were able to finance theirown investment without government help before nationalization, it indicatesa decrease in savings effort.

1/ One of the arguments for pooling funds among the BIM units appears tobe to avoid the allocation procedures of Annual Development Plans.It is difficult to say whether this is good or bad. On the one hand,if it is simply used to prop up terminally ill units which would havebeen closed by open legislative review, pooling to avoid the HIOPprocess would clearly be wrong. However, if pooling is used as a meansof delegating investment decision-making to a lower level withina policy framework established by the National Assembly and topGovernment officials, it could increase BIMt efficiency.

ANNEX 4Page 13

Impact of Nationalized Industry on the Private Sector

35. The impact of nationalization on the private sector may be brokendown into two parts, that caused by nationalization per se, and that whichnow results from the coexistence of public and private sector units. Asthe former is discussed in Annex 5, it will not be discussed here; thissection deals only with the impact of public sector units on those in theprivate sector.

36. It is unclear whether public or private sector firms have theadvantage today. The public sector has a number of handicaps includinglack of management depth; bureaucratic entanglement; risk aversion; socialcontrols on decisions regarding investment, employment, and pricing whichmay reduce efficiency; and more strict compliance with tax and labor lawsthan is sometimes observed in the private sector. On the other hand, theprivate sector believes that public sectpr units receive Government prefer-ence in TCP allocations of materials, Government contract awards, and allo-cation of working capital and investment credits.

37. There seems to be some special TCP treatment for public sectorenterprises in material procurement, though much is indirect and perhapsunintended. When import shipments are insufficient to meet requirementsof all users, full allocations are given to all "industrial" users (whoare primarily the largest firms--often in the public sector) and reducedallocations go to the "commercial" purchasers (who act as intermediariesfor the smaller and usually private firms). When shipments are expectedat various prices, TCP sometimes makes available early shipments to publicsector units without establishing a price; the price is established laterwhen the remaining shipments have arrived and prices are known. 1/ TheTCP also makes available ungraded billets (seconds) to the public sectorand only graded billets to the private sector. This concerns the privatesector, for graded billets are substantially more expensive, but TCP main-tains that this policy is necessary because private sector units generallydo not have the equipment needed to test the quality of billets. By thesame token, TCP does not import ungraded scap iron and steel for the pri-vate sector. On the other side of the coin, the public sector is sometimesasked by TCP to take "over-priced" stocks which were purchased when priceswere higher and cannot be sold readily once the world market prices havedropped and other sources of supply become more attractive.

1 The publc 'l" hifts supplies imported through TCP from unit tounit depending on needs and availabilities. In the private sector,this would be considered black marketing. Public sector managersinsist that these materials are not sold but simply loaned; thatthe money which changes hands is not a payment but simply asecurity against the promised return of the materials. They alsoclaim that the same mechanism is available to the private sector.

ANNFX 4Page 14

38. There has been some discussion of granting Government procurementpreference to public sector units, but this does not appear to have beendone so far, at least on an official, price-only basis. 1/ It would beunfortunate, however, for the Government to prop up inefficient publicenterprise units by its procurement practices. Conversely, a major problemof certain BIM units today is Government contracts with excessively lowprices. For example, the Trailer Development Corporation has lost Rs 3million on defense contracts for axles, water trailers, etc. and has stoppeddelivery pending agreement of the Ministry of Defense to a price escalationclause. Without a revaluation of the contracts - one of which was made bythe private sector owner in 1969 - the total loss would be nearly Rs'17million.

39. Because there has been little new capital investment in BIM units,it is still too early to tell if the public sector enterprises will be givenpreferential treatment in the allocation of credit from the financing in-stitutions. For working capital, there have been some complaints thatpublic enterprise units have received preferential treatment by the bankingsystem; it remains to be seen if this will become a significant problem.For long-term financing from sources other than the Government, the respon-sibility lies primarily with the National Development Finance Corporation,which serves only the public enterprises. Decisions will have to be madeabout the allocation of medium- and long-term loans (especially in foreignexchange) between NDFC and financing institutions serving the private sector.

40. In all, there is no clear evidence now of any systematic bias inGovernment policies favoring the public sector or of any basic advantageswhich the public sector has over the private sector, aside from the knowledgethat, already being in the public sector, they cannot be nationalized. Thismay prove an important advantage if the fear of nationalization stiflesprivate investment and leads to a deterioration of large and medium scaleprivate plants. Conversely, though the public sector is operating undercertain handicaps not faced by the private sector, these handicaps can beminimized if the management of the public enterprise units is given suffi-cient autonomy to free it from bureaucracy.

1/ One instance was reported, but quality-differences appear to havebeen a major determining factor in selecting the public sector bidder.

Attachment 1

Structure of State Enterprite in Manufacturing

Holding Corporations and Units Former Names Location Major Products

Federal Chemical and Ceramics Corp.Antibiotics (Pte.) Ltd. (under PIDC) Bulk PenicillinIttehad Chemicals United Chemicals Lahore Caustic Soda, Sulphuric Acid, Chlorine,

HCL, Bl3ach, LimeIttehad Pasticides Insecticides(Pakistan) Ltd. BH Tech, BHC W.P., DDTKurram Chemicals (under PIDC) Rawalpiudi Santonin PowderPak-Bofars Chemicals TabletsPak-Dyes and Chemicals (under PIDC) Sulphur Black, Azo Dyes.Pakistan PVC Arokey Chemicals Ind. Karachi PVC resin, compounds, pipes; causticsodaRavi Engineering Koinoor Engineering Lahor3 No regular productRavi Rayon Koinoor Rayon Lahor- Acetate yarn(l20dn), Alcohol, AceticAcid, AcetoneSind Alkalis Indus Chemicals & Alkalis Karachi Soda Ash, Soda Bicarbonate, Caustic SodaSwat Elutriation (under PIDW) China ClaySynthetic Chemicals Valika Chemicals Ind. Polyethelyne Granules, Mathanol

Federal Light Enginesring Corp.(FLEC)Karachi Pipe Mills Hyesons Steel Mills Karachi G.I. & M.S. Black PipesLahore Engineering and Foundry(LEFM) Ittefag, Ltd. Lahor3 M.S. Bars, Diesel Engines, Thrashers,

Road Rollers, PumpsMetropolitan Steel Steel Corp. of Pakistan Karachi Bars, re-rod, Structurals, MS & SS Prod.,WireNorthern Foundry M.K. Foundry of Eng. Wks. C.I. Spun Soil Pipes & FittingsNowshera Engineering Karini Industries Nowshera Stesl Casting, Rolled Prod., Forgings,Grindiy BalkPakistan Engineering (PELO) BECO Industries Lahor3 Diesel engines, Pumps, Looms, Biker,Mixers, Tawe3n, etc.Pioneer Stesl Model Steel Mills Lahore G.I. & M-.S. PipesQuality Steel General Iron & Steel Wks. Karachi M.S. Prod., Bright Shafting, TowersTextile Corp. of Pakistan (Proposed)

1/ As of August 1974.

ANNEX 4Page 16

Attachment 1

Structure of State Enterpr.ise in Manufacturing

Holding Corporations. a,nd Urits Former Names Location Major Products

National Fertilizer Corp. of PakistanLyallpur Chamicals & Fertilizers,Jaranwala (;u~nder. PIDC), Jaranwala Sulp1huric Acid, Super Phosphate

Lyallpur Chemicals & Fertilizers,, (under PIDC).Mirpur Metheolo Fertilizer, Co. Lyallpur Sulphuric Acid, Super PhosphateNatural Gas F'ertilizers.,

(Pakistan FCr-tilizen Co, (under PIDC) Multan Aimoniumn N-itrate., UreaPak-American Fertilizers. (under PIDC). Daudkhel Amnmonia,Ammonium Sulphate, Sul 1,rIxc

Acid;, GypsumPak-4rab Fertilizer, (proposed)

Pakistan Automobil. GCorp.(PAqO,)Awami Autos Ali Autos Karachi Lt. Com. Vehicles,Toyota), Motor Cycles.

Ford, Bus Chassis;,, Volkswagen, TractorBela Engineering Ch,andhara Diesels Diesel EnginesDomestic Applianc3s Air Can,ditioners.Millat Tractors Rana mT ractors & Equipment T-ractors.National Motors Chandhara Industr-ies, Karachi Bus/T-ruck Chassis(Bed.ford), Comrm. Bodieo

Jeeps (,Toyota)Naya Daur Motors Kandwala Industries Karachi Je.eps,(CJ-5), Foundry Prod.Pakistan Tyre Co. (proposed)Republic lotors H,aroon Industr;ies, Bus/Trick Chassis, Corxm. BodiesSind Engineiring Wazir Ali Engin,e,ering Karachi Pontoons., Rimps, Comm. Bodies, Suz-uki

Cycles, Lambretta, ScootersTrailer Dev. Corp. Jafar Industries Karachi Trailars,, Trollier, Corlin. Bodies

Pakistan Industrial Dev. Co -- Dq)1/Bannu Sugar Mills (under PIDC) Bannu. -White SuearHarnai Woolen Mills (under PIDC) Harnai Woolen Fabrics, Blank'tsIndus Gas Co. (under PIDC) Hyderabad Natural GasKarachi Gas Co. Karachi Gas Natural GasQuaidabad Woolen Mills (under PIDC) Quaidab CarpetsTalpur Textile 1lills (under PIDC) Tando iH.K. Cotton yarn

AN Nil 4Page 17

Attachment 1

Structure of State Enterprise in Manufacturing

HoldinJ Corporations and Units Former Names Location Major Products

State Cement Corp. of Pakistan(SCCP)Associated Cement Cement

Gharibwal Cement Ismaerl Cement Ind. Lahore Cement(reg. and sulphate r3sistant)

Joveden Cement YTalika Cement Karachi. Cenemnt

Maple Le-)f Cement (unjer PIDC) Daudkhel Cement

Mustebhka; Cement Pakistan 9 ment Ind. IRawalpindi Cement

Nationil Cement Pak. Prog. Cement Ind. Cement

Mhite C erent. (under PIDC) Daudkhs, White Cement

Zeal-Pak Cement (under PILC) Hyderabad Cement

Gypsuw & Limeston.e Quuarries Gypsum & Limestone

State Henvy Engineering and MachineTool Corp.

Heavy Mechanical Complex Taxila SugarMills, OH Cranes, Road Roll ers,Tanks, Railway Ecuip., etc.

Pakistan Machine Tool Factory Brake Drums(Bedford), DUie Castin.-s,Jeep Parts

Peoples SteAl Mills Valika Steel Works Karachi Specialty steels, stainless steel

Heavy, Forge and Foundry Taxila Forge and Foundry Products

State Petroleun R fininq and Petro-Chemical Corp.

Natio-vil Refinery National Refinery Asphalt, Kerosene, Diesel, Lube Oil,Naptha

BTX Pro;ect

Pakistan S-teel lills Corp.Karachi 3teel Mill Pig iron, steel billetts

State SLectrical Corp.Heavy Eipctrical Complex NIone TAxi>La Project under preparation; Heavy Trans-

lormers etc.

ANNEX 4Page 18

Attachment 1

Structure of State Enterprise in Manufacturing

Holding Corporations and Units Former Names Location Major Products

National Design and Industrial Services Corp.

Pakistan Tractor Corporation

In addition to these completed, operating companies, PIDC is also rasponsible for the following:

A. Completed Non-Manufacturing ProjectsPakistan Institute of Management, Karachi

B. Closed Completed ProjectsTimber Seasoning Plant, PirawalaHaripur Rosin and Turpentine Factory, HaripurPIDC Dolomite and Silicax Sand Project, Nari Indus

C. Projects Under ConstructionL-arkana-Sugar-Nlillsy Naudero; Dadu Sugar Mills, Pyro Goth; Tarbela Cotton Textil Mills, Tarbela;Harnai Woolen Mills (Balancing & Mod.); General Refractori?s Plant, Hattar; Specialized RefractoriesPlant, Hattar; Dir Forest Industries Complex, Shrinigal; Air Mix L.P. G. Project, Larkana; Air MixL.P. G. Project, Quetta; Management Development Programme of Pak. Inst. of Mgmt., Karachi.

Attachment 21/2/

Distribution of Public Sector Enterprises- by Industry, Region and Control

(September 30, 1974)

Industry Established NewUnits Projects TOTAL

Mazufacturing 56 21 77

Automobile & Farm Equipment 9 1 10Cemcnt 8 3 11Che-,icals, Phar .aceutical 14 1 15Fertilizer 5 9Food & Related Products 1 3 Paper, Board & Forrest Based

Industries 3 1Steel & Engineering 13 4 17Textile 3 2 5Other Manufacturing 1 1 2

Mining 15 - 15

Energy 13 5 18

Gas 4 4 8Electricity 4 1 4Oil 5 1 6

Transport 3 - 3

Construction 1 1 2

Services 3 - 3

'NWAT. 91 27 118

Regional Distribution

Region 3/ . Established New(Province) Units Projects Total

Baluchistan 6 4 10Sind 38 12 50Punjab 35 8 43N.W.F.P. 9 3 12

TOTAL 88 27 115

Distribution by Group

Managing/Agency Established NewControlling Units Projects Total

BIM 49 13 62PIDC 9 9 18Others 4' 33 5 38

TOTAL 91 28 118

1/ As of September 30, 1974.2/ Does not include projects or units under Provincial Industrial Development

(PID) Boards, Fauji Foundation and Provincial Road Transport Corporations.Most of the units under the PID Boards consist of the recently nationalizedvegetable ghee plants. Besides, the PID Boards have various developmentprojects which are in the planning stage.

3/ Excludes three service industries.

1 Includes industries under the Ministry of Natural Resources (Mineral DevelopmentCorporation of Pakistan), Ministry of Production, Ministry of Defense, and otherGovernment agencies.

AN4EX 4

Page 20

Attachment 3

Regional Distribution of Large Scale Industry, 1969/70

Punjab Sind N.W.F.P. Baluchista"n Total

Reporting Units

Numbers 2,052 1,419 98 18 3,587Percent 57.2 39.6 2.7 0.5 100.0

Value of Fixed Assets

Million Rs 2,180 2,099 554 20 4,853Percent 44.9 43.3 11.4 0.4 100.0

Average Daily Employment

Thousand Employees 216.0 169.2 31.0 2.1 418.4Percent 51.6 40.4 7.4 0.5 100.0

Value of Output

Million Rs 5,610 5,221 941 28 11,800Percent 47.5 44.2 8.0 0.3 100.0

Gross Value Added

Million Rs 2,223 2,210 368 10 4,811Percent 46.2 45.9 7.6 0.2 100.0

Source: Census of Manufacturing Industries, 1970

ANNEX 4Page 21

Attachment 4

Growth in BIM Enterprise Sales

(million Rs. current prices)

1971/72 - 1973/74

Product Group 1971/72 1972/73 1973/74 Growth (%)FY72-FY73 FY73-FY-74

Auto and farm equipment 261.8 424.8 952.9 62.2 124.3

Steel and engineering 232.9 455.6 432.1 95.6 -5.2

Gas and oil 163.0 240.5 374.6 47.5 55.6

Chemicals 137.1 212.9 330.0 55.3 55.0

Cement 153.5 185.1 233.1 20.6 25.9

Total 948.3 1,373.8 2,322.7 44.9 69.8

Source: BIM Annual Reports.

ANIZX 4

Attachment 5 Page 2

BIM: Relative Growth of Saies and Employment

1971/72 - 1973/74

a!

Product Groups Annual Growth (%) Growtjh RatioSales Employment Output : Employment

(constant prices)b/

Auto and Farm Equipment 63.0 8.1 7.78

Steel and Engineering 14.3 8.7 1.64

Gas and Oil 27.0 8.5 3.18

Chemicals 31.0 5.9 5.25

Cement 3.4 3.6 0.94

Total 32.0 7.3 4.38

a/ This-may be interpreted as the elasticity of output with respect to en:ployment.

b/ Sales values in 1973/74 were deflated to 1971/72 prices by the generalmanufacturing price index.

Source: Derived from BIM Annual Reports.

ANNEX 4Page 23

Attachment 61/

Estimated Performance from Selected NDFC Projects Proposals -

2/ IncrementalCompanies to which Financial Economic % of total Incremental % of foreignlo.ris have been rate of rate of project cost employment output exchangeapproved return % return % financed by generated exported saved/

NDFC earned

CHEMICALS

Sind Alkalis Ltd. 12.7 31.80 74.48 212 18.24 1.20

Pakistan PVC Ltd. 11.1 17.80 47.48 46 - 51.00

FUEL & POWER

Sui Northern GasPipelines Ltd. 6.0 31.10 12.20 - --

POL (Pakistan Oil-fields Ltd.) 7.9 41.00 11.11 - - 211.00

Pakistan Fert. Co. 21.5 49.00 6.11 - - -

PERAC (AromaticChemicals) 14.5 22.47 5.74 22 79.47 18.78

Fational RefineryLtd. 18.8 27.20 5.01 - - -

Pakistan NationalOils Ltd. - - 4.44 500 - 14.00

AUTOMOBILES

National Wheels Ltd. 16.8 18.90 61.55 240 - 9.20

AGRO-INDUSTRIES

Fauji Cotton Mills 16.2 47.10 22.73 450 27.06 9.34

Pattoki SugarMills Ltd. 13.1 46.60 15.69 857 - 162.00

i/ September 3U, 1974.

2/ As calculated by NDFC staff.

ANNEX 5Page 1

CAPACITY UTILIZATION IN PAKISTAN MANUFACTURING INDUSTRY

Introduction

1. Capacity utilization was less than 40% in the late 1960s due toexcess capacity, shortages of materials and, during the turmoil in EastPakistan at the outset of the 1970s, political unrest and the loss of amajor market and source of raw materials. Since then investment has remainedlow, but production has risen and overall capacity utilization is nowiabout75%. Major influences on investment and production were nationalization,devaluation, a more stable political environment, and improved labor relations.The main issues which face Pakistan today are construction of new capacity,modernization and balancing of installed capacity, better supplies of rawmaterials and working capital, improved economic efficiency, and the removalof infrastructural bottlenecks, especially in power, gas, and transport.

2. Before discussing the detailed data on capacity utilization, in-herent weaknesses in the data due to the following factors must be noted:

(a) Machinery can often be used to produce more thanone product;

(b) Capacity within plants is often imbalanced;

(c) Much capacity is worn out, obsolete, or designed forproducing obsolete goods, and other capacity is newand not fully operational;

(d) Capacity data are often based on the traditional numberof shifts (e.g. one or two) rather than on the technicalmaximum of the equipment;

(e) Trends which appear over time may be due to data im-provements rather than to changed capacity utiliza-tion; and

(f) Both capacity and production data for the late 1960sare distorted by over-reporting to secure more favor-able material import licenses.

Data on capacity utilization -- especially on engineering industries - musttherefore be interpreted with caution.

ANNEX 5Page 2

Capacity Utilization in the 1960s

3. During the late 1960s, capacity utilization averaged less than40%. 1/ Excess capacity, whose installation had been stimulated by overvaluedexchange rates and heavy protection, was the major cause, though shortagesof material inputs were also important.

4. The results of the capacity utilization survey in the 1965/66 Censusof Manufacturing have been analyzed by Gordon Winston, who reports that,adjusted to a standard 2.5 shift basis, the average utilization rate in thisperiod was 33%. 2/ Within this average were wide variations -- from 80% infertilizer to 14% in nonelectric machinery (Attachment 1).

5. According to a study based on 1967/68 production and capacitydata from the Directory of Industrial Establishments in Pakistan 3/, themedian capacity utilization rate in that year, one of the better for pro-duction during the period, was only 40% (Attachment 2) 4/. Nearly 70% ofthe subsectors covered worked at less than 50% of capacity, and over 25%worked at less than one-fourth of capacity (Table 1).

Table 1: CAPACITY UTILIZATION IN FACTORY SECTOR, 1967/68

Range Industries(% utilization) Number % Cum. %

0 -25 16 26.7 26.725 -50 25 41.7 68.450 -75 16 26.7 95.175 -100 3 _ 4.9 100.0

0 -100 60 100.0 100.0

Source: Attachment 2.

1/ The period does not end precisely on January 1, 1970; certain featuresof the 1960s, such as the Export Bonus Scheme, held over until 1972, atwhich time some other basic changes such as nationalization of industryoccurred.

2/ "Capital Utilization in Economic Development", Economic Journal 81:321(March 1971), pp. 36-60.

3/ A. R. Kamal and Talat Alauddin. Capacity Utilization in ManufacturipIndustries of Pakistan (Islamabad: Pakistan Institute of DevelopmentEconomics Working Paper), 1974.

4/ It would be difficult, however, to claim that this was a "normal" year,for industrial growth fluctuated widely from year to year. In the years1965/66, 1967/68 and 1969/70, the industrial production index rose by12-14%. In each of the following years, however, production grew byonly 1-6%, due largely to political unrest (Volume I, Appendix Table8.1).

ANNEX 5Page 3

The actual rates of capacity utilization were almost certainly less, however,for these figures were generally based on capacities under normal shift work-ing practices rather than on technical capacity, and normal practice duringthis period was usually one shift except for continuous process industries.

6. The range of utilization rates by sector shown in Attachment 2is illuminating, for many sectors today still share the same relative posi-tions. For example, in 1967/68, industries working at over 70% of capacityincluded cement, cigarettes, vegetables, petroleum refineries, cotton textiles,soda ash and sugar, most of which still enjoy high capacity utilization rates.Industries with utilization rates of less than 30% included wire drawing,bus bodies, agricultural implements, and steel rerolling, all of which stillappear to be low on the scale. However, others such as petrochemicals,insecticides, textile machinery, and paper now seem to be doing much better.In terms of product end-use, the average rates of capacity utilization in1967/68 were: consumer goods 44%, intermediate goods 39%, and capital goods33%. 1/ Capital utilization tended to be higher in industries dependingmore heavily on indigenous than imported raw materials, a pattern whichappears to have changed somewhat since then because of periodic shortagesof domestic agricultural raw materials such as sugar and cotton, and becauseof the liberalized import regulations discussed below. 2/

Influences

7. The years prior to 1971 were generally favorable for manufacturing.However, while current value of manufacturing output grew about 13% per yearbetween 1959/60 and 1969/70 3/, the real growth tapered off due primarily tothe Indo-Pakistan war in 1965/66 and internal political disturbances after1967/68 (Table 2):

1/ KEmal and Alauddin, op. cit., p. 4.

2/ Liberalization also means there is less pressure to exaggerate reportedcapacity in import dependent industries to obtain larger import alloca-tions.

3/ Volume I, Appendix Table 8.1.

ANNEX 5Page 4

Table 2: REAL GROWTH IN MANUFACTURING OUTPUT, 1961-1969

Fiscal Year 1961 1962 1963 1964 1965 1966 1967 1968 1969

Growth(%) 18.7 16.9 14.9 13.7 11.3 6.2 10.6 7.8 7.4

Source: Derived from 25 Years of Pakistan in Statistics, p. 112.As this covers both East and West Pakistan up to 1968/69,it does not correspond to the rates shown in Volume I, AppendixTable 8.1, which refers only to then West Pakistan. The ratesare based on quantum indices.

The profits made during this period are known only to the entrepreneurs;record keeping was scanty and few firms published audited accounts, butreturns of 30% to 60% on assets reportedly were not uncommon.

8. The overvalued exchange rate, heavy protection from imports, andcapital expenditures by the government to develop private and public manu-facturing (particularly in West Pakistan), all contributed to the favorableclimate - and to the installation of excess, underutilized capacity. Govern-ment capital expenditures were once strongly biased towards manufacturingas shown in Table 3.

Table 3: SHARES OF MANUFACTURING AND AGRICULTURE INGDP AND GOVERNMENT CAPITAL EXPENDITURES,

1959/60 and 1970/71

Sector Percentage Share in RatioGDP Govt. Cap. Exp. GDP: Govt. Exp

1960 1971 1960 1971 1960 1971

Manufacturing 13 16 11 0.3 1.18 53.33

Agriculture 44 29 5 13 8.80 2.23

In 1959/60, for example, the share of manufacturing in GDP was only 1.2 timesits share in government capital expenditures, while that of agriculturewas nearly nine times its share in such expenditures. This emphasis onmanufacturing declined in the later 1960s, however, and by 1970/71 the ratioof GDP to Development Plan expenditures for manufacturing had risen to 53and that for agriculture had fallen to two, a complete reversal of theprevious emphasis. Of industrial fixed capital formation between 1964/65and 1969/70, the public sector contributed about 10% (Annex 6, Attachment 4).

9. Far more important than direct government financing of manufacturingwas the overvalued exchange rate policy. Under the Export Bonus Scheme,capital equipment could be imported at the official exchange rate of Rs 4.76per dollar. Since the open market rate was Rs 12 to 14 per dollar, the

ANNEX 5Page 5

purchase of imported capital equipment was heavily subsidized 1/. In effect,manufacturers could purchase capital equipment for about one-third of itsreal value while they sold many protected domestic commodities and exportproducts at world market value. This led to accelerated investment, capitalintensive processes, and heavy reliance on imported equipment. The induce-ment to invest was augmented by the potential for over-invoicing and blackmarketing which flourished under this exchange regime. An investor couldset up a plant without risking his own money by taking out a foreign exchangeloan for say 70% of project cost, using the loan to import over-invoi&edequipment, selling the foreign exchange held abroad by a cooperating supplieron the Pakistan black market for rupees at roughly three times the officialexchange rate, and then using the profits from the transaction to financethe remaining rupee costs of his project.

10. Protection from competing imports was the third aspect of Govern-ment policy which stimulated rapid investment in manufacturing assets duringthis period. This protection took several forms. The Export Bonus systemprovided protection by allowing the import of capital equipment at Rs 4.76per dollar, while most industrial raw material imports fell under the cash-cum-bonus rate of Rs 9.24 and non-essential consumer good imports pail thebonus rate of Rs 13.68. Tariffs of varying levels were also imposed onimported goods in part to protect domestic industry. Where the exchangesystem and tariffs were not adequate, quantitative restrictions were some-times used to minimize competition from imported products.

Capacity Utilization in the 1970s

11. Capacity utilization increased from less than 40% in the late 1960sto about 75% by 1974 because of low levels of new investment and increasedproduction. The declining investment trend of the late 1960s acceleratedduring the early 1970s due primarily to the unsettled political situation,nationalization of industry, devaluation and the adoption of a unitaryexchange rate, and import liberalization. Production did, however, increaseafter the takeover of 31 major manufacturing units in 1972 and the return ofmore normal domestic conditions.

1/ Concurrently, certain exports - primarily agricultural commodities -were discriminated against by receiving either the official exchangerate or only slightly more, while most manufactured exports rece~ivedthe full bonus rate.

ANNEX 5Page 6

12. Overall capacity utilization within BIM industries has risen fromabout 57% at takeover to almost 70% (Table 4). 1/

Table 4: AVERAGE RATES OF CAPACITY UTILIZATIONIN BIN SECTORS, 1969/70 and 1973/74

(percentages)

Sector 1970 1974 Increase (%)

Cement 85.3 89.7 5Chemicals 57.6 71.0 23Fertilizer 53.4 59.1 11Motor Vehicles 29.6 54.1 83Textiles 57.4 72.4 26Average

(unweighted) 56.7 69.3 22

Source: Attachment 3.

13. The unweighted average rate of capacity utilization for BIM corpo-rations now range from about 50% to nearly 100% (Attachment 3). But theseaverages disguise the wide variation of performance among individual units,and even within units for different products. In motor vehicles in 1974, forexample, National Motors reported a 2% utilization rate in passenger carsand a 114% utilization in chassis assembly 2/ (Attachment 4). In the causticsoda industry, Ittehad Chemicals reported a 106% rate of capacity utilization,while Pakistan PVC reported only 48% (Attachment 7). Attachments 4-9 shownumerous examples of marked year .to year fluctuations within the same unit.For example, the Natural Gas Fertilizer Plant at Multan was at 80% in 1969/70but had fallen to 24% in 1972/73 (Attachment 6).

1/ Data on capacity utilization in the 1970s comes mostly from theBoard of Industrial Management (BIM), the National Development FinanceCorporation (NDFC), and the Planning Commission. The Board of IndustrialManagement (BIM) has since its inception focussed on production in thetakenover industries and has issued regular reports, but informationon installed capacities are still very weak, especially for the engineeringindustries, and BIM has issued no formal reports on capacity utilizationper se. Recently, however, NDFC undertook a quick study of installedcapacities in BIM enterprises which provides some insights into publicsector capacity utilization.

2/ Since vehicle production facilities are to some extent flexible, partof the passenger car capability may have been used to produce chassis.

ANNEX 5Page 7

14. The Planning Commission recently undertook a preliminary study ofcapacity utilization covering private and public plants in 11 industiies.The study showed a marginal improvement in capacity utilization -- from 80%to 85% - between 1969/70 and 1973/74, excluding sugar and paper 1/ (Table 5).

Table 5: CAPACITY UTILIZATION IN MAJORSTANDARDIZED PRODUCT INDUSTRIES

1969/70 - 1973/74

Capacity Utilization M/a Rai/1970 1973/19 - Ratio

Product 1969/1970 1973/1974 FY74-,FY70

Consumer Products /b 74 76 1iO3Cigarettes 43 45 1.05Cotton Cloth 90 87 0.97Cotton Yarn 92 97 1.05Paper (writing) 100 43 0-43Sugar 147 102 0.69Vegetable Ghee 69 77 1 641

Intermediate Products 85 92 1.08Caustic Soda 90 91 *1 !.01Cement 85 88 1'.04Fertilizer 83 97 1.17Soda Ash 80 96 1.20Sulphuric Acid 86 90 1.05

Total 80 85 1'.06

/a All subtotals and totals are unweighted averages of individualindustries.

/b Total averages on this line exclude paper and sugar (see textand footnote). Values for 1970 and 1974 including these industriesare 90% and 75%.

Source: Attachment 10.

The improvement over the period is generally greater for intermediate thanconsumer products. Again excluding paper and sugar, cotton cloth wals theonly product for which the rate went down, and this was caused by thledramatic decline in'the world cotton textiles market in the last halif of1973/74, not by any fundamental technical problems within the industlry --

1/ Sugar and paper were excluded because of peculiar circumstances' describedin the next paragraph which make the data unsuitable indicators of theactual situation.

ANNEX 5Page 8

in fact, textiles have generally shown some of the highest rates of capac-ity utilization. All intermediate product industries enjoy quite high ratesof capacity utilization, even on a three shift basis.

15. Paper: Paper was excluded from the above averages because, asreflected in Attachment 10, an additional paper mill -- Charsadda -- wasestablished between 1970 and 1974, and with its commissioning the industry'scapacity was boosted from 11,000 tons to 54,000 tons per year, giving theplant a very heavy weight in the industry average. The plant is based onbagasse, and because of technical problems and a shortage of bagasse, itwas only operating at 27% of capacity in 1974.

16. Sugar: Capacity utilization figures for sugar similarly had tobe excluded from the averages in Table 5 because the 147% of three shiftcapacity utilization rate which it experienced in 1969/70 was the result ofan extension of the normal 160 day crushing season to 213 days. Althoughthis did raise the capacity utilization, it is generally not considereddesirable because of the loss of sugar content in cane which is stored forextended periods. 1/ These problems with paper and sugar data underline thevery tentative nature of all average capacity utilization figures.

17. Cigarettes: Cigarette factory utilization data also deserveclarification. Since cigarette production is an interruptable (non-continuous) process, it traditionally works two rather than three shifts,the basis on which all rates in Attachment 10 were calculated. Sincecigarette factories could be run on a three shift basis, the 66% averageutilization reported for two shifts overstates the "real" utilization ofonly 44%.

18. Chemicals: This sector is always given as an example of highcapacity utilization in public enterprise, and does have a heavy concentrationof plants working at close to 100% capacity (Attachment 7). Nonetheless,certain problem units in the sector such as the obsolete methanol unit at theSynthetic Chemicals Plant (formerly Valika) operated at less than 10% ofcapacity in 1973/74. Although increased petroleum prices have hurt some ofPakistan's chemical plants, making their inputs more expensive, others havebeen helped because they use somewhat unusual processes not based on petro-leum feedstocks.

19. Cement: This sector has probably shown the most consistentlygood performance. In 1973/74, five of the ten plants were operating atover 100%'of capacity 2/. In 1975, all but the Charibwal plant should be

1/ That the extension to 213 days actually hurt the recovery rate is notat all certain in this particular case since the recovery rate in 1969/70remained at the usual average rate of 8.5%.

2/ In the case of a continuous process plant working three shifts,operation over 100% implies an avoidance of shutdowns, which wouldallow it to operate for more than the notional 300 days per year.

ANNEX 5Page 9

operating over 95% of capacity (Attachment 8). This industry is based onrelatively abundant, locally available raw materials and enjoys a goodmarket both at home and abroad. As discussed in Annex 3, however, there aresome storm clouds on the industry's horizon because, unless prices to theplants are raised, the minimal 2% return on assets at present will notgenerate the funds necesssary for replacement investments, nor will theprices, which are well below the world market, cover production costs innew plants. 1/

20. Textiles: This industry has long been one of the best performersin terms of capacity utilization and has operated at close to 100% since themid 1960s if not earlier. The cotton yarn and textile mills have beenoperating at 90-100% of capacity for a number of years. The woolen mills,however, have been averaging only 60-70% (Attachment 5). 2/

21. Historical data for the cotton textile industry indicates that,while the utilization of spindles and looms was only 50-60% in 1948 and in1955, by 1965 the utilization rates had risen to 90-100% and have stayedthere ever since; utilization in spinning has exceeded the notional 100%level since 1965 (Attachment 9). Rates much over 100% are not sustainablein the long term, however, for some time must be allowed for maintenance andreplacement. The Burewala Mills management indicates that, because the millhas been working at 100% of capacity since 1968 except during the war, theyhave not had time to replace some 16,000 of their 67,000 spindles with moremodern units as planned.

22. Fertilizer: Capacity utilization in this sector is marked'byyear to year fluctuation. As shown in Attachment 6, rates in some plantshave doubled, then fallen by half from year to year. The Natural GasFertilizer Company at Multan is probably the most volatile performer,its rates of utilization between 1970 and 1974 vary as follows: 80%p, 49%,46%, 24%, 56%. Although the Lyallpur Fertilizer Plant reportedly reached130% of capacity in 1973, in 1974 it had dropped to less than 60% ofcapacity. That fertilizer capacity utilization rates have generally|notgone much above 70% has resulted in corresponding increases in fertilizerimport requirements, which constitute almost 10% of the total importlbill.Management and technical problems are the primary reasons for relativelypoor performance in this high priority sector.

23. Petroleum Products: Data on this industry is limited to onepublic sector unit, National Refinery, which produces asphalt, kerosene,

1/ Returns to the industry have recently been raised above these llevels byan 18% increase in the price of cement.

2/ Data are available only on public sector woolen mills.

ANNEX 5Page 10

diesel fuel, lubricating oils and naptha. It appears to be operating atfull capacity, though flexibility in product mix makes it difficult tomeasure accurately.

24. Motor Vehicles: This sector's capacity utilization has been poor,and some lines appear to operate at only 10-20% of one-shift capacity dueto excess capacity, fragmentation of production among uneconomically scaledplants, and restraints on imported material inputs (Attachment 4). Dataon this sector, however, are either lacking entirely or are very weak becauseof non-homogeneous products and capacity to switch between products.

25. Light Engineering: The Federal Light Engineering Corporation,the BIM holding corporation in this sector, reports an overall rate ofcapacity utilization among its units of about 50%, primarily on a one shiftbasis. The actual utilization of balanced, modern capacity is probablysomewhat higher, but there is little doubt, despite the severe data weaknesses,that capacity utilization in this industry is very poor. Re-rolling, forexample, the largest single component of the light engineering industry, hadan installed three-shift capacity of over 2.5 million tons in 1973/74, butproduction was only 216,000 tons -- less than 10% of capacity. Improvementof capacity utilization in the light engineering sector will almost certainlyrequire consolidation or elimination of the most uneconomical units, sub-stantial investments in modernizing and balancing equipment, and an increasein the availability of raw materials as discussed below.

26. Heavy Engineering: The major operational unit in this sector isthe Heavy Mechanical Complex (HMC), established at Taxila with Chinese aidin the late 1960s. HMC reported one-shift capacity utilization rates of9% in 1972/73 and 24% in 1973/74- During 1974/75 it is hoped HMC willreach 56% utilization, but even this translates into less than 20% on a threeshift basis. HMC management argues that a large industry of its type natural-ly takes time to become fully operational, which is true. A number offundamental problems including product mix, product design, marketing,materials availability and worker training need to be resolved, however,before the plant can reach full capacity production.

27. The Pakistan Machine Tool Factory, also part of BIM's State HeavyEngineering and Machine Tool Corporation, has capacity utilization ratesalmost as low. In 1973/74, for example, it produced only 100 machine toolsagainst a capacity for 300.

Influences on Capacity Utilization

28. Political Factors: Political factors and their economic consequenceshave been major influences on production and investment after 1970. The warin East Pakistan depressed industrial production and investment. Resourceswere drawn away from government programs such as tubewells, road building,and other civil works - programs which formed an important market for Pakistan'sindustrial output. Personal consumption of durable goods was similarlydepressed, which in turn reduced production and investment. Investment in

ANNEX 5Page 11

constant prices dropped by 11% in 1970/71, by over 13% in the following year,and by nearly 23% in 1'32/73. By 1973/74, investment: -- even in curreintprices -- was less than in 1963/64i and in constant prices it was bariely 50%of the ievei 10 years earlier (Table 6).

Table 6: INVESTMENT IN FACTORY SECTOR, 1963/64-1973/74(million Rs)

Fiscal Year 1963/64 1965/66 1967/68 1969/70 19,71/72 1972/73 1973/74

Current Prices 1,208 1,364 1,366 1,592 1,349 1,l158 1,1771959/60 Prices 1,114 1,190 1,054 1,091 838 648 620

Source: Volume I, Appendix Tables 8..3, 8.3.1.

This was associated with real industrial growth of only 1.2% in 1970/71, anda decline of nearly 7% in 1971/72.

29. The separation from East Pakistan in December 1971 meant the lossof a major market for West Pakistan's industrial products and loss of a majorsource of raw materials such as jute for West Pakistan industry. Thisfurther depressed prodiuction. Gone was a major market for cheaper grades ofcotton textiles, household utensils, and other consumer products. Newmarkets and sources of supply have now been found for many of the productsformerly sold to and purchased from East Pakistan, and some trade rep rtedlycontinues with Bangiadesh through third countries. F[owever, the separationof the two wings was a major disruption for West Pakistan industry.

30. Labor unrest seriously affected production and investment iln1971/72 and 1972/73. In February 1972 a series of labor reforms wereenacted to give labor better wages, more security, a greater voice in! man-agement, and a share in profits. Even so, in the first eight months of1972/73, 1.38 million mandays of work were lost due to strikes. However,by the first eight months of 1973/74 the number of days lost to strikeshad fallen to only 520,000.

31. Today, there is some feeling among industrial managers that thependulum has swung too far in labor's favor; it is now very difficult to layoff even "temporary" workers, and management often resents the voice incompany affairs which labor has been given.- On the other hand, it is verydifficult under present laws for iabor to go on strike. On balance, it seemsthat wAge increases have resulted in some increases in worker's realpurchasing power, and the price which owners have paid in terms of laborparticipation in plant management seems small compared with the much improvedindustrial relations prevailing today. Despite these improvements, absenteeismis still reported as a major cause of underproduction in some industries.

ANNEX 5Page 12

Economic Policy

32. Since 1970, two major economic policy decisions -- nationalizationand devaluation -- have had a major impact on investment and production, andthus on capacity utilization. 1/ The Economic Reform Order of January 1972turned over to Government the management of 31 private manufacturing unitsin 10 major industries. The owners were temporarily allowed to retain theirequity in the units, but management was turned over to the BIM, which wascreated for this purpose. Authorization for nationalization was extendedto the shares of these units in August 1973, and on November 29, 1973 orderswere issued to acquire majority ownership in the publicly traded BIM unitsand 100% ownership in those privately held. Nationalization gave the Govern-ment control over some Rs 2,000 million of assets, which, even subtractingthe assets of PIDC units, which were already in the public sector, was about33% of medium and large scale manufacturing assets in Pakistan at the time. 2/The takenover units employed only about 24,000 people, however, or only 5%of the manufacturing labor force, reflecting their heavily capital intensivenature.

33. The impact of nationalization on capacity utilization in the BIMunits is unclear. Some observers claim that the BIM set right a group ofailing firms by giving them high quality management which markedly increasedthe rates of capacity utilization (BIN reports of sales and output, which

1/ A third factor, capacity taxation, has sometimes been mentioned as animpetus to better capacity utilization, but this tax was imposed in 1966on a limited group of industries which already had high capacity utiliza-tion, and capacity utilization, which varied more from year to year thanit did from the periods before and after the tax was imposed, was mainlya function of raw material supplies (Attachment 11). See Sijbren Cnossen,"Capacity Taxation: The Pakistan Experience", IMF Staff Papers 21:1(March 1974).

2/ Data on fixed assets in manufacturing industries are not yet availablebeyond 1969/70, at which time they amounted to Rs 4,852 million (VolumeI, Appendix Table 8.9). Given the depressed investment climate there-after, it is unlikely that fixed assets had risen to more than Rs 5,500million by the time of nationalization (this would require a growthof 6.5% per year). If this estimate is roughly correct, the Governmenttook over about 36% of the manufacturing assets, of which about 3%belonged to PIDC. The estimate of Rs 5,500 million is corroboratedby an alternative estimate of Rs 5,400 based on assets in 1969/70,gross investment in 1970/71 and first half of 1972, and the estimatedgross-to-net investment ratio for the period 1966 to 1969.

AliNEX 5Page 13

use 1971/72 as a base, support this assertion). Others say that BIM manage-ment has yet to achieve the rates of capacity utilization which prevailed inthese firms in the late 1960s before their production was interrupted by thethreat of nationalization and the problems in East Pakistan. Data alre soweak and factors so numerous that neither view can be proven. Furthermore,the views are not necessarily incompatible. It is encouraging neverthelessto see that BIM capacity utilization rates have increased from 57% tb almost70% in the past two years.

34. Nationalization is one of several reasons for low rates of investmentin large scale manufacturing since 1971. Three sometimes overlapping groupsof investors were particularly affected by nationalization-- former ownersof takenover units, participants in the managing agency system (which wasabolished in January 1972), and small savers who invested in the stockmarket, which declined from a base of 100 in 1969/70 to 64.2 by September1974.

35. Rather than drying up completely, investment since nationallizationseems to have shifted towards small scale units, which are less likely tobe nationalized. When the Lahore Engineering and Foundry (LEFO) uniit wastaken over, for example, its former owners set up a number of separalte smallunits based on the individual products which they had manufactured formerly,and within a year or two these units were providing stiff competition to thegovernment managers of the old company. Despite such examples, lit tle isknown about the investment now taking place in the small scale sector, forit is not reported in government statistics. For years the Government hasassumed that this sector was growing at the then assumed population growthrates of 2.7% to 2.9% annually. Even though substantial investment may betaking place in the small scale sector, there is little doubt that national-ization and fear of further nationalization have dampened investment, whichhas -- somewhat ironically -- contributed to improved capacity utililzation.

36. On May 12, 1972, the rupee was devalued from the official rateof Rs 4.76 per dollar to Rs 11 1/. This has somewhat restrained investmentand has increased production and capacity utilization in certain industries,particularly capital goods production. The higher cost of imports and theaccompanying liberalization of import licensing has removed the previousincentives which had led to such high levels of excess capacity, andl thusthere was a desirable drop in investment and concentration on increa singproduction from existing equipment.

37. While devaluation sharply increased the cost of Imported capitalequipment, capital goods import data indicate that devaluation per se wasnot as devastating to investment as some claim; capital goods imports at cur-rent prices rose steadily over the period (Table 7), even though the currentprice value of total manufacturing investment declined (Table 6).

1/ Devaluation of the dollar in February 1973 reduced the exchange rateto Rs 9.9 per dollar.

ANNEX 5Page 14

Table 7: CAPITAL GOODS IMPORTS, 1970/71-1973/74

Year Millions of Rupees

1970/71 1,3851971/72 1,4821972/73 2,4981973/74 3,241/

/a Estimated from 9 months data.

Source: Pakistan Economic Survey,1973/74, p. 74.

Devaluation has clearly helped the investment environment in many industries,especially those producing capital goods and export products. Productionand capacity utilization in these industries has improved significantlysince devaluation. Under the pre-devaluation regime, domestic capital goodsproducers found it extremely difficult to compete with the imported capitalequipment being brought in at Rs 4.76 per dollar. Today plants producingdiesel engines, lathes, flour mills, rice hullers, looms, textile finishingequipment, and equipment for producing vegetable ghee seem to be doing verywell. Before devaluation, for example, there were only two loom manufacturersof any consequence, but today there are more than 50, and manufacturersreport record backlogs of orders. Devaluation has also stimulated pro-duction in export oriented industries such as sports goods, textiles, cutleryand surgical instruments.

Improving Capacity Utilization

38. With investment falling in real terms by about 10.7% per yearbetween 1969/70 and 1973/74, and with production rising in real terms byalmost 3% per year overall, there has been a substantial improvement incapacity utilization. Continuing improvement, however, will increasinglyrequire positive and purposeful steps. These may be categorized loosely interms of improvements required within plants and those required in supportinginputs and infrastructure. In the first category, equipment must be modern-ized and brought into balance. In the second, raw materials and workingcapital must be obtained to allow full-time operation, and infrastructuralimprovements are required, especially in power supplies, though bottlenecksin gas, water and transport also sometimes hinder fuller capacity utilization.

Plant Level Improvements

39. Much of the installed capacity in Pakistan is worn out, obsoleteor technically imbalanced. Worn out equipment is a serious problem becauseof minimal investment in the past ten years and inadequate attention to main-tenance. In cement, for example, some units are at least 50 years old andmust be replaced in the near future.

ANNEX 5Page 15

40. Technological change has also caught up with some industries, espe-cially chemicals, making equipment obsolete even if it is not worn out.The Pakistan PVC plant, for example, is reportedly one of only two plants inthe world based on calcium carbide (which must be imported) and is a fractionof the size required for economic production. BIM management would like toclose it and build a new plant -- which could be done profitably even con-sidering the cost of abandoning the old one -- but political pressures tomaintain existing jobs and achieve other goals now prevent this. Similarly,the former Valika Chemicals Plant produces polyethelene and methanol frommolasses, which was once an almost free by-product of the sugar industry,but due to its demand today as a feed for livestock, its price has risento Rs 300 per ton or more and it is no longer an economical industrilal rawmaterial. Furthermore, the plant has only a 5,000 ton capacity, but againit is kept in operation for social reasons.

41. Better technology is needed even in traditional industries suchas sugar and oil seed processing. Much sugar extraction in Pakistan todayis done in wooden crushers which extract only 63-67% of the juice, whereasa good mill should be able to extract 93-94%. This loss of about 1/13 of thesugar processed in rural areas has serious economic implications. The NationalIndustrial Design and Service Corporation is presently investigating improvedsmall-scale crushers and sugar mills to replace the primitive woodpn modelwithout taking the mills out of local areas or ending gur 1/ production.Similar advances are needed in sugar refining mills, many of which are basedon now outdated technology. Substantial oil expelling is still done withthe "Lahore" expeller, a local version of an old British model from the 1930swhich leaves about 8% of the oil behind. Even without going to the expensiveand often unsuitable solvent extraction process, improved hydraulicimodelssuitable for small scale production could bring the residual down to 3-4%.

42. In the engineering industries, technical assistance is requiredin metalurgy. Many quality problems, especially in small scale units, arisefrom use of incorrect materials. This causes failures in hand tools, sugarmill rollers and the like; wastes materials; creates serious consumer con-fidence problems, and leaves capacity in these firms idle.

Raw Materials and Working Capital

43. Shortages of raw materials and working capital to finance them aretwo commonly given reasons for capacity underutilization. Even if thematerials constraint were removed, however, some capacity would probablyremain underutilized because of inadequate market demand. Imported rawmater'Lals licensing was markedly liberalized at devaluation. While manufac-turers regularly cite their need for more imported materials, particularly

1/ Gur is an unrefined sugar (jaggery) made in rural areas by concentratingthe juice from sugar cane through boiling.

ANNEX 5Page 16

steel and non-ferrous metals, this appears to reflect more the tight worldsupply condition in these commodities and the terms on which those importedby the Trading Corporation of Pakistan (TCP), rather than directly by theprivate sector, are made available.

44. Most criticism today is directed not so much at the Governmentimport licensing authorities 1/ as at TCP, which was established in 1967primarily to handle the import of bulkable commodities under barter tradewith state managed economies. The most common complaints - and they generallyfocus on ferrous metals - are that TCP:

(a) Fails to make required amounts available;

(b) Purchases when world prices are high and sells todomestic users at these prices even after world marketprices have fallen; 2/

(c) Discriminates in favor of state enterprises because it:

(1) Makes partial shipments available to them if thefull shipment required to meet the needs of allusers has not arrived;

(2) Allows state enterprises to purchase ungradedbillets and scrap which have a lower price thanthe graded billets which are sold through com-mercial channels; and because it

(3) Makes cuts in allocations to commercial im-porters (who serve the small private firms) andgives full allocations to industrial users (usuallylarge scale and often public firms) when suppliesare limited;

(d) Provides unsatisfactory types and qualities of materialsin an attempt to standardize imports.

1/ Capital equipment imports require a sanction letter from the InvestmentPromotion and Supplies Department, which checks on availability ofdomestic equipment. Materials imports require approval of the provincialgovernment and the Chief Controller, Imports and Exports, which theGovernment claims can usually be obtained in one to three days. Itemshandled by the Trading Corporation of Pakistan such as iron, steel andnon-ferrous metals must be met out of TCP availabilities, which oftenlimits amounts and lengthens delivery times.

2/ For example, TCP once purchased billets at Rs 4,200 per ton, but by thetime they were delivered to the users, the world price for finishedbars had dropped to Rs 3,900 per ton.

ANNEX 5Page 17

45. Most complaints seem to have some basis in fact, and discusisionswith TCP revealed it is aware of the problems and is working to solve themwhere possible. In some cases there are mitigating factors; for example,the failure of TCP to provide required amounts at lowest possible pricesarose partly because its hands are often tied by world market conditions andbecause it needs to use tied credits and barter deals for certain products.Suggestions made for improving the effectiveness of raw material suppliesthrough TCP include:

(a) Allowing other impprters to compete with TCP (in steel,for example) to force TCP to obtain the best possibleprices;

(b) Allowing other importers to handle more non-standarditems to assure that materials with the appropriatespecifications are obtained;

(c) Advertising the price at which TCP supplies to w,hle-salers to reduce profit-takfing by intermediaries;

(d) Encouraging establishment of TCP agents (such as theState Development Authorities/Boards and the SmallScale Industry Boards) to assure better contact withend users; and

(e) Building up stocks of critical materials for off-the-shelfdelivery (thus allowin,g more rapid delivery and shiftingthe stock holding burden to TCP).

These steps, if proven feasible, might significantly increase utilizationof existing capacity.

46. Working capital to finance adequate stocks cf raw materials hasbeen a serious limitation to many firms. They have been caught in thetwo-way pinch of higher material prices and restricted private industrialsector credit, caused partly by the substantial diversion of bank credit andprivate saving (including postal savings, etc) from commercial lending toGovernment deficit financing and to agric4ture. Also, BIM enterpriles aregetting about 25% of all commercial bank credit reserved for the manufacturingsector, which limits that available to private sector units.

47. The need for economic efficiency underlies any discussion ofimproved capacity utilization, but deserves individual mention. Though thestress today is on increased capacity utilization, some capacity is bestleft unutilized. Economic efficiency would probably be improved, folr example,by leaving the Synthetic chemicals plant idle; the Ravi Rayon plant may beanother such example. Until the BIM takeover, Ravi Rayon was by moslt accountsa "disaster" and was running at a fraction of capacity. Today, with increased

ANNEX 5Page 18

credit facilities, an export tax on cotton linters (its primary input), anda 200% to 300% price increase coupled with a 150% tariff on competingimports 1/, it is running at over 100% of capacity. But the economic costis obvious.

Infrastructure

48. Shortages of power, gas, water and transportation facilitiesthreaten to constrain manufacturing output and capacity utilization in thenear future; in some cases, shortages are already a problem.

49. Industry is by far the largest consumer of energy in Pakistan,using 52% of the 341.4 trillion BTU equivalent of all energy inputs inPakistan in 1973/74. 2/ It is also the major consumer of electric power;it constituted, for example, 47.5% of maximum connected demand in the WAPDAsystem in 1973/74. Industry's total demand including suppressed demand forwhich connections have not been made is unclear, but WAPDA reports 11,717applications pending for industrial connections in late 1974. (WAPDA hopesto make about 4,500 connections during 1975, which means an average wait ofroughly three years.) 3/

50. The availability of power to industry is constrained by trans-mission difficulties and generation shortages; the former are particularlyserious in Sind outside of Karachi. Load shedding, which occurs in partbecause transmission facilities between hydro facilities in the north andthermal facilities in the south are lacking, should be reduced once all ofSind is on a common grid and is fully linked to the Northern Zone.

51. Power generation capacity today barely meets demand. WAPDA runsat an exceptionally high 90% load factor. In Karachi, KESC reports that itsspinning 4/ and maintenance reserves are below necessary levels, which was

1/ This is a rough ad valorem equivalent of the specific tariff.

2/ Annual Plan 1974/75, pp. 147-148.

3/ Because of the difficulties manufacturers experience in obtaining con-nections for electricity and other public utilities, Industrial Facil-ities Boards consisting of representatives from public utilities cor-porations, provincial government, financing institutions, and sometimesthe Federal Government, were recently set up in Sind, the Punjab, andNWFP to assist industrial sanction holders. The Boards deal with specialhardship cases where exemptions from normal procedures and waitingperiods have been sought; at least in Sind, routine cases do not comebefore them. The most these Boards can hope to accomplish is a betterdistribution of facilities in short supply; the real need is to increasetheir total availability.

4/ Spinning reserve is the difference between the current flowing froma spinning generator and the current it could potentially produce.

ANNEX 5Page 19

dramatically demonstrated in October 1974 when a 35 hour power shutdown wascaused by failure of the atomic power generation station at the sameltimethat a conventional plant was down for routine maintenance.

52. Last winter (1973/74) WAPDA shed 180 MW at peak times and 100 MWaround the clock on average; the Punjab was particularly hard hit. The powersituation for the next six to nine months looks grim for two reasons.First, water flows in the rivers this year are at a record low, whichmarkedly reduces hydroelectric power potential. Second, problems atTarbela Dam have delayed from early 1976 to early 1977 the start of generationof power from this source. Installation of two 100 MW gas turbine units atMultan is under consideration to meet the emergency, but it is not knownif this can be done in time to repay the cost and whether sufficient naturalgas to run the units can be made available. WAPDA planned for heavy,load shedding during the winter of 1974/75 starting with 100 MW at pleaktimes in December and building to 250 MW later on. They hoped to spareindustry by making the initial cuts in the peak-hour operation of tu be-wells under government control and by seeking staggered weekly holidlays inindustry, staggered two shift operations off of peak evening hours, reducedcommercial and street lighting, and cuts in loads in continuous proc|essplants by 20% during peak hours, but it is not known yet if industrialproduction was maintained. 1/

53. In the longer term, major investments in power generation, trans-mission and distribution will be required if Pakistan industry is to bespared crippling power shortages and electricity is to be available foragriculture and rural industry. WAPDA plans to spend close to $2 billionon these projects over the next five years. KESC will also need to makemajor investments. The Karachi steel mill alone will require 200 MW ofadditional power, which is nearly 60% of the total installed capacity of theKESC system today. KESC management is confident, however, that invest-ments on the drawing boards will meet the anticipated loads.

54. Natural gas shortages have been a serious problem during the pastyear for some industries. The demand in the Punjab and NWFP has out,strippedthe transmission capacity of Sui Northern Gas Pipeline Ltd.; the northernregion was short by some 28-30 MMCFD 2/ in 1973/74, which was particularlyhard on the cement plants and Ravi Rayon. Many new firms cannot get gasconnections. Pakistan's proven gas reserves exceed present demand, so themain short-run problem is distribution facilities. The problem has beencompounded by an unrealistically low price for natural gas which hasartificially inflate'd demand, though this problem was relieved somewhat bythe June 1974 and February 1975 gas price increases.

1/ Unprecedented winter rains from late January permitted these specialmeasures to be discontinued in mid-February.

2/ Million cubic feet per day.

ANNEX 5Page 20

55. Water shortages generally have not yet been a major problem forPakistan industry. However, an acute water shortage was reported at SindIndustrial Trading Estate in late 1974, when it was receiving less than 50%of requirements.

56. The public utility sector's ability to make planned investments isjeopardized by the shortage of the profits and depreciation reserves neededto finance them. WAPDA, for example, was not able to generate any profit inFY74 despite gross revenues of Rs 1.0 billion. On the other hand, KESC,which revalues its assets according to replacement costs and which has afuel clause built into its rate schedule, has been able to earn a positivenet return, generally at least 8%.

57. Transport facilities have not yet been a major bottleneck tocapacity utilization in the industrial sector, although some cement plantshave complained about the shortage of railway wagons to haul cement. 1/ Railtransport facilities are relatively poor, in part because of management andin part because of investment needs. Partly because road transport facil-ities have grown more rapidly, rail freight has been declining since 1965/66and now stands at just over three-quarters of the level reached in that year.Massive investments have been suggested by the National Railways of Pakistanfor the next five years. It is unclear, however, what transportation needswill be after 1980 and therefore what level of investment is required toassure adequate support to the industrial sector.

1/ Occasionally other sectors are affected, for example, the Harnai WoolenMills Ltd. gave disturbed railway bookings as a reason for underutilizedcapacity.

.ANNE;X ,Page 21

Attachment 1

PAKISTAN: Capacity Utilization, 1965/66

Utilization RatesIndustry Adjusted a/ UnadjustJed b/

Fertilizers 79.77 79.77Cotton Textiles 69.73 94.32Leather 62.75 65.48Matches 56.97 142.44Sugar 50.28 94.32Petroleum 45.41 45.41Nonmetallic Minerals

(cement) 42.52 67.16Edible Oils (vegetable

products) 38.11 66.73Tea 36.44 91.09Silk and Art Silk 28.93 72.00Wood, Cork and Furniture 24.07 60.19Soaps/Perfumes 22.85 43.57Miscellaneous Food 22.32 49.43Transport 21.35 53.37Paper 20.87 44.48Miscellaneous Manufacturing 20.81 49.82Printing/Publishing 20.80 52.00Tobacco 19.86 49.66Metal Products 19.48 48.71Rubber 18.97 47.41Miscellaneous Chemicals 18.68 45.26-Beverages 17.76 44.40Footwear 17.75 44.36Basic Metals 16.16 40.40Electric Machinery 16.13 40.33Nonelectric Machinery 14.33 35.82

a/ These rate's are averages (weighted by capacity) ofindustry utilization rates computed fromd annual production(value) and annual production capacity (adjusted to a two-and-a-half shift level if the industry worked less than that) asreported in Census of Manufacturing Industries 1965/66(unpublished, West Pakistan Provincial Ministry of Industries).

b/ Computed as in the first column, but without adjustment of annualproduction capacity to a two-and-a-half shift operation.

Source: Gordon C. Winston, "Capital Utilization in EconomicDevelopment" Economic Journal, 81:321 (March 1971), p.55.

ANNEX 5Page 22

Attachment 2

PAKISTAN: Capacity Utilization Rates inManufacturing Industries (3 Digit SITC Level)

1967/68

Product % Capacity Product % CapacityUtilzation Utilization

Cement 92 Electric Motors 39

Leather Lannisay 39 (Median)Cigarettes 86 Tires and Tubes 38Vegetables 80 Enamelware 37

Auto Assembly 36Petroleum Refineries 75 Radio Assembly 34Cotton Textiles 75 Industrial Gases 33Soda Ash 73 Cutlery 31Sugar 70 Paints & Varnishes 31

Glass (sheet) 30Sulphuric Acid 69 Pharmaceuticals 30Radio Components 69Ceramics 68 Textile Machinery 29Hardboard 67 Wire Drawing 29Bicycles 65 Diesel Engines 28Beverages 62 Bus Bodies 28Plywood 60 Soap & Detergent 28

Pumps (all types) 25Transformers 59 Salt 23Electric Fans 58- Food Processing 22Fertilizers 57 Ag. Implements 22Baby Cycles 56 Edible Oils 21Dyes & Colors 51 Insecticides 21Electric Lamps 50 Petro-Chemicals 21

Rayon 47 Marble 19Caustic Soda. 46 Dry Cell Batteries 18Sewing Machines 44 Wet Cell Batteries 16Asbestos Sheets 43 Paper 16Surgical Instruments 43 Bleaching Powder 15Optical Goods 43 Steel Re-rolling 13Chlorine 42Matches 41 Sulphur Refining 8

Fish Processing 6Switch Glass 2

Source: Derived from A.R. Kamal and Talat Alauddin.Capacity Utilization in Manufacturing Industries of Pakistan.Islamabad: Pakistan Institute of Development Economics, mimeo, ca. 1974.

ANNEX 5Page 23

Attachment 3

PAKISTAN: Average Rates of Capacity Utilization in PublicSector Manufacturing Enterprises, 1969/70-1973/74

Product Group 1969/70 1970/71 1971/72 1972/73 1973/74 RatioFY74: FY70

CementAverage 85.3 86.1 82.6 81.9 89.7 1.05Range (57-111) (39-122) (56-119) (51-124) (60-130)

ChemicalsAverage 57.6 71.6 68.7 73.3 71.0 1.23Range (0-90) (10-109) (10-123) (8-102) (9-119)

FertilizerAverage 53.4 60.7 65.6 72.6 59.1' 1.11Range (40-81) (49-82) (46-88) ('24-130) (43-75)

Motor VehiclesAverage 29.6 24.0 26.2 37.3 54.1 1.83Range (17-53) (11-54) (4-51) (9-72) (2-114)

a/Textiles (woollen)Average 57.4 62.6 65.4 64.4 72.4 1.26Range (25-84) (42-93) (50-100) (45-100) (35-100)

Average (unweighted) 56.7 61.0 61.7 65.9 69.3 1.25(range) (30-85) (24-86) (26-83) (37-82) (54-993

a/ Included is the one cotton yarn plant (Talpur) presently in the public sector.

NOTE: All averages are unweighted. As such the low utilization rates of certaincompanies presently in difficulty may unduly lower the averages. Refer toAttachments 4 through 8 in this Annex for details by sector.

Source: NDFC, unpublished survey data. 1974.

ANNEXAttachment 4 P

PAKISTAN

Capacity Utilization in Public Sector MotorVehicle Plants, 1969/70-1973/74 (percent)

CapacityrProduct Plant (Units) 1969/70 1970/71 1971/72 1972/73 1973/74

Chassis Assy. National Motors 6,000 52.7 5h.3 51.h 71.9 113.7Republic Motors - - - - -

Trai.ler Dev. Corp. - - - - - _

Commercial Vehicle Bodies National Motors 2,300 12.5 18.5 39.7 24.1 47.9Republic Motors - - - - - -Trailer Dev. Corp. _ - - - -

Passenger Cars Nationel Motors 2,L00 11.2 11.1! 14.4 19.7 2.3Republic Motors - - - - - -

Pickups/Jtility Vehicles National Motors - - - - - -

Republic Motors - - - - -

Awani Autos - - - _ _ _

Commercial Vehicles Awani Autos Ltd.Light 2,500 17.0 11.1 h.2 38.6 63.2Heavy 2,L00 40.7 12.2 35.7 8.8 20.5

Scooters & Cycles Awani Autos 6,000 - - 2.5 30.0 65.1

Tractors Millet 3,C00 43.L; 37.0 9.5 31.0 11.6

Avera7e (Unweigrhted) -" 29.6 24.0 26.2 37.3 54.1

a/ Covers only plants on which data are available.

Source: NDFC (Provisional data)

Attachment 5 aN M gPage 25

PAKISTAN

Capacity Utilization in Public SectorTextile Mills, 1969/70-1973/74 (percent)

Capacity

Product Plant (C000) 1969/70 1970/71- 1971/72 1972/73 1973/74

WrJoollen Fabrics Harnai Woollen Mills 364 sq.yds, 56.o 52.0 71.0 92.0 89.0

Worsted Fabrics Harnai Woollen Mills 306 sq.yds. 61.0 50.0 100.0 74.o 70.0

Carpets (Wool) Qaidabad Woollen Mills 112.5 sq.yds. 61.0 76.0 51.0 57.0 77.0

Blankets (Wool) Qaidabad Woollen Mills 57.5 units 25.0 h2.0 50.0 45.0 35.0

Yarn (Cotton) Talpur Textile Mills 2,000 lbs 8b.o 93.0 55.0 100.0 100.0

Average (unweiFhted) 57.4 62.6 65.4 64.4 7L.2

Source: NDFC (Provisional data)

ANNE Attachment 6 Page 5Pae26

PAKISTAN

Capacity Utilization in Public SectorFertilizer Plants, 1969/70-1973/74_(percent)

Capa ci tyProduct Pl,rnt (10te) 1969/70 1970/71 1971/72 1972/73 1973/74

Amnorium Pak-Arab Fert1li7er Co. 10 MT 81.0 82.5 73.8 63.7 66.6

kr=onium Sulphate Pak-Amnerican Fert. Co. 88.6 MT 75.7 62.1 7b.2 6b.6 7L.5

Super Phosphate Lyallpur Chem. & Fert. 12 T 70.0 60.o 88.0 130.0 56.o

" " (Ext) 36 LT l0.0 50.0 46.o 81.0 43.0

Nitrate Natural Gns Fert. Co. 59.2 MT 80.5 Lh9.o h46o 23.7 55.6

Average (Unweighted) 53.h 60.7 65.6 72.6 59.1

Source: NDFC (Provisional data)

Attachment 7 ANNE__5Page 27

PAKISTAN

Capacity UtilzajtIjn in PublicSecto.r Chemical Plaats, 1969/70-1973/74 (percent)

Product Plant CapacitSy 1969/70 1970/71 1971/72 1972/73 1973/7z

Caustic Soda Ittehad Chemicals 26,h00 MT 39-.5 n.a;. n..a. 101.9 105.7Pakistan PVC L,,00O M T 86.7 90.2 91t.1 98.1 L8.c

Soda Ash Sind Alkalis 36,000 MT 71.7 9h.9 83.3 8B.8 100.1

BHC Ittehad Pesticides 1,320 MT 0.5 n.a. 48.6 78.3 82.3

PVC Resin Pakistan, PVC 4.,950 MT n.a. n.a. 10.9 52.2 28.4

Polyethelene Granules Synthetic Chemicals 5,000 MT p5.7 57.1 39.7 39.8 31.14

Aer-tate Yarn Ravi Ravon 3,300 MT n.a. 81.0. 99:,*j 100.0 11.5.0

M-thanol Svnthetic Chemicals 3,000 T 11.3 23.3 19.8 8.1 8. ,

Dyes Pak DVe Chemicals 50 T 61.8 105.4 98. 86.5 6L.5

Santonin Kurram Chemicals 6,000 Kg n.a. 10.3 53. 63.8 1186.

Penicillin Antibiotics Pvt. Ltd. 11.8 mls m.v. 85.9 77.8 83.0 86.5 lrO03

Creosote-Oil Tar Dist. Plant 160 ths Units 83.0 66.3 81.3 52.8 n.a.

Sulphuric Acid Ittehad Chemicals 3,300 MT 90.1 109.6 123.0 100.lL 119.1

Average (UnwTei7hted) 57.6 71.6 68.7 73.3 71.0

Souirce: NTIFC (preliminar.r estimates)

a c:1ac1ilent G ANNEX r

!i. ~ ~~ .. '..

Capacityo%, Utilization, 1969/70-1974/75 (percent)

Capacit,.r 199-/-7 1070,/71. 1071 /-79 1072/-/'3 IQ7'/ 71 Q7/,/7'- 1./

n-. t. ~( '0(y0 >ns __________

Zeal t'.hk 1,080 (->9.5+ i'3.5 77.C 7P,.1 ;9. 100.0

Assoei 'ter* 720! a! 100 1. 103.0 1CX'2 7 ' .6 Cr;_r 1'

2,ha.^rihw.; I 72.? 62.6 ! - tO 33 I !

si .11 s-.eh kc n -V tn!-] 10'1. 96. FJ > > 2 1CK. r 1r. . 6 0 l. Cl .

,T2avedSon 30() 90.1 M . 9 92.L 2999 102. 9°5.'

N'apl.e Leaf 225 P89.L lro0.8 102.0 99.2 102.3 10C) 12.2

Nl. ;ov-al Ksrac-:i. 160 111.1 80.8 6P . 12?1.!- 129.S 112.7

Nay-ional. -n8a-. 7r) 111.14 129.1 1119.0 lli .7 110.0 100.C

'½; t 'eTnent ' ('7 3°3 5.7 ,.7 78.0 1ro.c

Tot.gI 70 85s. - 3 86.1 82.6 81.9 89.7 9qn7

a/ rBta i apari t.r a otli.e 7rcm 3 70 tons to 720,00 0 tors r s Otob1er 1 7?.

hb P ti rntei

Source: State Cement Corporation.

AI1~1EX

A-t tac1hmcnt Page 29

JIL V T lu'

Capacitay UtJilizat.ion in theCotton Te Ytile Industrv

19LP - 1972

…------- Spindles--- -------- Looms --- …Hours Percent oiurs Percent

Year- Ier Snorked Capacitj2 WJrked 1 Capaci tvyYear - P er Spindl e'/ Utilizati~n- P Loom1 IJtilizalon

19b8 ),231 5P's9 2s267 31.C1955 hj807 66.8 116.2

1965 7,308 101..5 6i250 86.81968 7 jL15 102.9 6, 196 36.01969 7-295 101.3 6;963 96.7

1970 7 i2 9 0 101.2 7,300 001.!1971 7,42 8 103.2 7;511 10L.31972 70b07 102.9 7,250 100.71973 7j606 105,6 7,086 98.3

1/ Frorn 1965 onward- for year Pnrlig Junie 30.

2/ Houirs -vorked as percenta-e of optimium -workinVy hours of 7,2CO ( hrs/dayfor 3`0 dayrs).

3/ fa-ed c-n workin- rather than insta'led capacity. For spindlres, work4ni-capacity avetaged abolut 951 of installed capacity. For l ooms, it averac-e-aboit 9 Os.

Solirce: Hasan Ali Syed. Markqtin• Sirstem of Cotton Cloth and Yarn, lahore.Roard of EconoMic nTt-uiry, p. 10

Attachment 10 Page 31

PAKISTAN: Capacity Utilization in Major Standardized Product Industries

:969/70 - 1973/74

a! WPork Pattern CapacityPrcduct Capacitv by - - Shifts Days Ciits CluItuLit Utilization

Shift Day Year/Season per day per Year _ __ _,e _

Counsuner ProductsCigarettes (nes)

1969/7y 57 mls 171 mls 51.5 bls 2 300 15 22.37 hls 4,1973/74 67 mis 201 mis 60.4 b]s 2 300 ]8 27.05 bls 45

Cotton Cloth (yds)b/1969/70 900 ths 2.7 mls 810 mIs 3 300 58 725 Mis 901972/74 900 ths 2.7 mis 810 irs 3 300 58 711 mls 37 d/

Cotton Yarn (lb) c/1969/70 621 ths 1.9 mIs 652 mls 3 350 107 602 mls 921973/74 814 ths 2.4 mls 855 mls 3 350 155 £28 mIS 97

Paper (Vritiog)(tons)L969/70 12.2 36.6 11 ths 3 l00 6 11 ths iCC1973/74 60.0 1S0.0 54 ths 3 20c 7 23 ths 42

Sugar (tens)1969/70 10,00O 30,000 408,000 3 16C 20 6C0,000 1471973/74 14,000 42,000 571,200 3 160 24 583,000 102

Vegetable Ghee (tons)1969/70 198 593 178,000 3 300 24 i23,000 691973/74 333 i,COO 300,000 3 3001 28 230,000 77

Intermediate ProductsCaustic Soda (tons)1969/70 30.77 92 27,700 3 300 4 25,000 901973/74 51.11 153 46,000 3 300 5 42,000 91

Cement (tons)1969/7C 3.41 ths 10.2 ths 3.1 mis 3 3c0 9 2,614 851973/74 3.77 the 11 3 ths 3.4 mls 3 30n 9 3,000 8

Fertilizer (N.tons)1969/70 180 540 162 ths 3 300 4 134,000 831973/74 347 1,0-.] 312 ths 3 300 5 30t,000 97

Soda Ash (tors)1969/70 92 276 82.8 ths 3 30C 2 66,680 801973/74 :- 276 82.8 ths 3 -on 2 79.. -

Thiphurir Acid (tons)1969/70, 4U.3 121 36,300 3 300 5 31 ,0411973/7' 45.3 136 40,800 3 300 7 3s6I,904

Average (ur.weighted)[969/70 881973/74 83

a/ All capacities have been taken on a three shift basis regardless of industry practice. Hlcvzever, actual normalnumber of working days have been used.

b/ The capacity utilization rates based on total rather than working capacity were 09;. i.a LUL.I ,cdVu

c/ The average production of the last 12 years has been taken as a surrogate for rated production capa,city perspindler Changes in counts affect actual production capacity. The capacity utilization rates based on totalrather than working capacity are 79% and 80% in the two years.

i/ The number of installed loons dropped from 31,000 to 30,000 while the working capacity remained constant.

Source: Planning Commission, Industry Section, mimeo sheets.

ANNEX ,)Page 31

Attachment 11

PAKISTAN: Impact of Capacity Tax onUtilization Rates

1964/65 - 1972/73

(percentages)

Cotton Cotton VegetableYears Yarn Fabrics Cement Soda Ash Sugar Ghee

Pre-Capacity Tax1964/65 102 85 89 - 66 66

1965/66 95 80 83 - 122 72

1966/67 100 81 86 75 91 61

Post-Capacity Tax1967/68 100 85 84 74 63 681968/69 106 88 94 77 92 691969/70 108 90 80 86 105 741970/71 112 97 84 99 117 73

1971/72 116 76 83 97 69 87

1972/73 112 88 114 92 69 100

Source: A.R. Kamal and Talat Alauddin.Capacity Utilization in Manufacturing Industiies of Pakistan.

Islamabad: Pakistan Institute of Development Economics (mimeo'),ca. 1974, p.11.

A>NEX 6Page 1

INVESTMENT ISSUES AND PRIORITIES IN PAKISTAN INDUSTRY

Introduction

1. Tnvestment in Pakistan manufacturing industrieS has declined -even in current prices - since the mid-1960s. This bliaI- investment per-formance, coupled with modestly rising output in real terms, means that anumber of industries now work at close to full capacity. 1/ New investmentis therefore required. How much of this investment will be forthcomingfrom the private sector is open to question; private investors have been veryhesitant to invest in large scale firms since the nationalization of tenbasic manufacturing sectors. 2/ A marked increase in private sector invest-ment is likely, however, if the investment climate continues to improve. Asshown in Attachment 1, IDBP and PICIC sanctions in 1973/74 were up sharplyover 1972/73, and disbursements, though still minimal, may follow. It isworrisome, however, that dir' ursements were still declining two years aftersanctions began to increase; some sanction holders may not be serious aboutinvesting now, but simply want to have a foot in the door once the invest-ment climate becomes sufficiently attractive. A target of Rs 1.04 billion ofprivate investment in medium and large scale factories has been set for1974/75, but is unlikely to be reached; a year ago such investment wasprojected at Rs 1.4 billion for 1973/74, but only Rs 307 million wereattained.

2. In contrast to private investment trends, public sector invest-ment has risen steadily from its low point in 1970/71 of Rs 68.2 million,and in 1973/74 reached about Rs 470 million (Volume 1, Appendix Fable 8.3).Now, when major new industrial investments are in the offing, importantdecisions must be made regarding:

(a) basic investment strategies;

(b) investment priorities among industries; and

(c) policy instruments to guide investment.

1/ Annex 5 discusses capacity utilization in some detail.

2/ Annex 4 examines nationalization and its effects.

ANNEX 6Page 2

Basic Investment Strategies

3. "Strategies" refers here to the basic policy decisions on sector,location, scale and orientation from which the operational or tacticaldecisions will derive. The wrong strategic choices could lead to highprotection, low economic returns, maldistribution of income, food shortages,drains on foreign exchange reserves, urban congestion, and a myriad of otherproblems. The right choices could forge a dynamic, competitive industrialsector for the future.

Sector

4. Pakistan faces a basic choice about the relative emphasis to beplaced on industrial and agricultural development. As noted in Annex 5,the Government until recently favored industry over agriculture through itscapital budget allocations, exchange rate policies, tariff protection anddomestic pricing policies. It is sometimes argued that the Government canafford to neglect agriculture in favor of manufacturing industries because,in agriculture, the private sector can undertake the required investment.In 1972/73 however, private fixed investment in large and small scale manu-facturing was over Rs 1.0 billion, while estimated private fixed investmentin agriculture was only some Rs 0.6 billion. 1/ Since 1959/60, agriculturehas grown in real terms by an average annual rate of 4.6%, while industryhas grown by nearly 8% per year. The composition of imports suggests theneed for greater agricultural development. In 1965/66, Pakistan was ableto allot 45% of import expenditures to capital goods while agriculturalimport needs were met with about 12%. By 1972-1974; capital goods importshad fallen by half to around 20% of the import bill and agricultural imports(primarily grains, pulses and vegetable oils) had doubled to about 25% ofthe import bill.

5. W4hile agricultural development is clearly a high priority, anda sector in which substantial productivity increases are possible and feasi-ble, Pakistan also has a strong comparative advantage in many areas ofindustrial production. The balance of investment priorities between agri-cultural and industrial imports must be based on the relative economic costsand benefits of specific products in each sector. Pakistan's exportslinsuch fields as surgical equipment and sports goods are well known. Iitproduces cement and fertilizers far below international competitive costs,altlhough this production is subsidized in part by the sale of natural gasat prices less than its opportunity cost. Textile looms and many otherengineering industry products are produced at prices sometimes half t|hat ofcompetitive imports.

1/ Annual Plan 1974-75, p. 18. The balance was reversed in 1973/74, butthis was due largely to the collapse of the private industrial ilnvest-ment climate. In 1974/75 large and small scale manufacturing invest-ment (including BIM units) will exceed that in agriculturp by 20%.

ANNEX 6Page 3

6. Within industry a balance must also be struck between the publicand private sectors, and clear understandings about the role of each areneeded to restore the confidence of private investors. Until the last fewyears, nearly 90% of industrial investment took place in the private sector.Recently the balance began to shift and the public sector is quickly ap-proaching a 50% share in new industrial investment. A continuation of thistrend is expected in the next five years -- it has been suggested thatthree-fourths of industrial investment may take place in the public sectorduring that period. The impact of nationalization on private investmentand production has been examined in Annex 5 and the problems of public sectorunits were discussed in Annex 4. It appears that nationalization may havebrought improved performance in the units nationalized under BIM, but at aserious cost to the development of the private manufacturing sector. In-vestment in private medium and large scale manufacturing sector will recoveronly as the Government can delineate clearly the areas in which private en-terprises can operate without threat of nationalization, and guaranteeacceptable terms for compensation in the event of future nationalization.

Location and Scale

7. The regional distribution of industry is a major issue in Pakistantoday. Sharing the benefits of industrialization more evenly from a geo-graphical point of view is a major social goal. The desire to develop in-dustry in rural areas and more generally in the less developed provincesof NWFP and Baluchistan also reflects the wish to avoid rural/urban driftand urban congestion. Closely related is the issue of large vs. smallscale industry, for the latter is often better suited for rural areas andusually generates more employment per rupee of investment, thus contributingto another important social goal.

Rural/Urban Location

8. Data on the rural/urban distribution of manufacturing activity inPakistan is limited but it is estimated that, in 1971/72, 54% of the manufac-turing labor force was located in the rural areas. 1/ The distribution ofmanufacturing activity by province provides some idea of the rural/urbandistribution, for Baluchistan and NWFP are predominantly rural. Theseprovincial data also demonstrate clearly the reason for Pakistan's concernfor a more equitable distribution of manufacturing among provinces. Policiesfor the distribution of industry should not be unduly biased by the enormous

disparities in the shares of industry among the various provinces, eitherabsolutely or in comparison to land area; such a bias would ignore the factthat, in terms of distribution of population among the provinces, the distri-

bution of industry is somewhat more even. Nevertheless, a crude composite

1/ This includes informal as well as formal manufacturing emplovment.Of formal labor force (i.e. other than self-employed and unpaidfamily workers), only 35% are located in rural areas. Source:IBRD, Economic Situation and Prospects of Pakistan, 1974 (ReportNo. 392-PAK) Annex A, p. 12.

ANN4EX 6Page 4

index of present manufacturing activity indicates that Sind's share is almost90% greater than its share of population, while that for Baluchistan is lessthan 20% of its population share (Table 1).

Table 1: PROVINCIAL DISTRIBUTION OF INDUSTRY

Indicator Year Punjab Sind N.W.F.P. Baluchistan

IndustrializationShare /a 49.6 40.4 9.3 0.7

Fixed assets infactories 1969/70 44.9% 43.3% 11.4% 0.4%

Value added infactories 1969/70 46.2% 45.9% 7.6% 0.2%

Investment insmall scale industry 1971/72 57.6% 28.4% 12.0% 2.0%

Employment infactories 1969/70 51.6% 40.4% 7.4% 0.5%

Value of factoryoutput 1969/70 47.5% 44.2% 8.0% 0.3%

Population Jan. 1974 57.7% 21.6% 16.9% 3.8%Area 1974 25.5% 18.9% 12.9% 42.7%Industrialization

to population ratio 0.85% 1.87% 0.54% 0.18%

/a Unweighted average of shares in factory-related fixed assets, valueadded, employment, value of output, and small scale industryinvestment.

Source: Statistical Division, Ministry of Finance; and InvestmentPromotion and Supplieg Department.

9. The location of industries requires careful planning and consider-ation regardless of persuasive social and political factors which may bepresent; two examples are the Bannu Sugar Mill and Sheringal ForestlIndus-tries Complex. The Bannu mill was located for political reasons in a poorsugarcane growing area. Instead of obtaining the cane required for capacityoperation from an optimal radius of five to ten miles, it must import itfrom up to 100 miles away to obtain even a 70-80% rate of capacity utiliza-tion. The transport costs have made the operation unprofitable. The ForestIndustries Complex was initially planned for one location for politicalreasofis, then several years passed during which the site was shifted to aneven less economical location, again for primarily political reasons. Itwas still not operational in late 1974, though thousands of dollars ofequipment had been imported.

10. While these cases underline the need for careful locational choice,some sacrifice of economic efficiency may be justified for social reasons.Experience from other countries suggests that industries located in ruralareas should either be based on readily available local raw materials, pre-ferably those which lose weight in processing (e.g., sugarcane, lumber and

ANNEX 6Page 5

minerals) or on products with a high value to weight ratio for which trans-port costs are relatively low (e.g. textiles) They should also be suitable

for small scale production in most cases because of t.e low density of therural labor force.

Small Scale Industry

11. While small scale industry is often particularly suited to rurallocations, it has an equally important role to play in the urban areas, forit has a greater employment generation potential than large scale industryfor a given amount of investment I/ and serves as a training ground forentrepreneurship. While clata are incomplete, it appears that small scaleindustry may have been the most rapidly growing sector of the economy since1972. A detailed analysis of small scale industry in Pakistan is beingprepared. 2/ However, two issues may be noted here. First, as mentioned inAnnex 6, raw material and working capital shortages, which are a generalproblem for Pakistan's industries, are acutely felt by many small scale units.Second, past attempts to enLourage small scale industry in rural areas throughthe establishment of industrial estates have been disappointing. Many estates,especially those located away from a major urban center, are occupied to onlva fraction of their potential. (Some of the most successful small scaleindustrial development has taken place outside of industrial estates in the

heart of urban areas; Brandreth Road in Lahore is a prime example.)

12. Because of past industrial estates failures, the Government isuncertain about the best means of promoting small scale industries in ruralareas. One idea being considered is to focus on developing small scaleunits for primary processing of agricultural products at the rural levelfor shipment to larger urban-located industries for final packaging anddistribution. Another is to locate a large scale firm or complex of firms,preferably based on locaLly available materials (e.g. cotton), in a relativelyrural area and use this as the basis for development of a group of ancillarysmall scale units. Economies of scale in raw materials procurement andmarketing are perhaps as important as scale of production, and associatingsmaller units with a large scale unit can help overcome this problem. Inthe Punjab, for example, the provincial development board is consideringestablishment of four relatively large textile mills, each with spindlagein excess of loom capacity. The excess yarn will be sold to small scaleweaving units established in the area. Providing these units with high

1/ In 1969/70, the average small scale industry worker used onlyRs 4,800 of fixed investment, while workers in large s'ale Industryused 2.5 times as much.

2/ For an analysis of small scale industry in Pakistan see the Bankreport "The Role of Small Scale Industry in Pakistan Development:Opportunities and Constraints", forthcoming.

ANNEX 6Page 6

quality yarn and technical assistance in its use will help them overcometheir quality problems. The "mother mill" will also repurchase all outputthat meets established quality standards and will handle marketing for thesmaller units.

Market Orientation of Production

13. Much of Pakistan's past manufacturing investment has been inwardoriented -- focused on needs of the domestic market. The domestic market,however, is not large enough to support plants of economic scale in manyproducts, which makes further backwards integration for local consumptionuneconomic in these lines. Consequently, an increasingly outward orient-ation in new investment is required.

14. The past development of Pakistan's manufacturing sector hasreduced the scope for further import substitution in consumer goods. TodayPakistan faces the question between pursuing further import substitutionby backwards integration in industries which require large scale production,or seeking a more outward orientation with a focus on export goods. AlthoughPakistan has a much larger internal market than many developing countries,it is still too small to allow the scale of production necessary for economicbackwards integration in some industries, of which motor vehicles is perhapsthe most dramatic example. At present Pakistan is producing fewer than10,000 vehicles per year. Nevertheless, the Pakistan Automobile Corporation(PACO) has laid out an ambitious program of backwards integration. Forexample, it plans by June 1977 to have deleted up to 80% of the importedcontent of the Bedford truck, of which 5,000-6,000 units per year are nowbeing produced with a domestic content of about 25%. Similarly, the progres-sive manufacturing program for the Willys CJ6 Jeep calls for a 100% domesticcontent from 1976 onwards despite the minimal present scale of production.

15. While such backwards integration has an obvious appeal, it isnot without cost. At present, the 30% level of domestic content in trucksand jeeps has imposed a cost penalty of about 30% over import prices, andthe consumer gets a lower quality product. The 30% cost premium on adomestic content of;30% translates roughly into a 100% cost penalty ondomestic value added. 1/ The 80% domestic content for the Bedford truck willrequire an estimated 80% tariff protection compared to the present tariffrates on trucks of 15-20% and on cars of 50%. 2/

16. These cost penalties are by no means unique to Pakistan, norare they a reflection on the basic productivity of Pakistani industry; they

1/ This calculation is rough because, among other things, any dutiespaid on imported components would reduce the effective protection.

2/ The tariff rate on cars was increased from 25% to 50% on February 1,1975.

ANNEX 6Page 7

are simply evidence of the hard economic fact that efficient production ofmotor vehicles requires a very substantial scale. Baranson's study of theautomotive industry in developing countries indicates that in India, forexample, a 40% domestic content meant a 60% cost penalty over importedvehicles, while an 80% domestic content implied a cost penalty averagingabout 100% for producing 8,000 vehicles per year of a given make and modeland about 160% for producing only 3,000 vehicles per year. Similar patternsare shown for backwards integration in Brazil, Argentina and Mexico. 1/

17. Backwards integration raises special questions in Pakistan becauseof the public sector participation in manufacturing. In most countries,mnvnufacturing deletion of imported components depends upon Government bansor very high tariffs. In Pakistan, bans can be imposed without going throughthe Central Government process of formal tariff changes by simply decidingwithin the public sector enterprise that the components will not be imported.The facility with which this can be done means that extra caution will berequired to avoid the high costs of excessively rapid backwards integration.

18. Efficient backwards integration depends on proper timing withrespect to development of local markets, for as local consumption increases,efficient backwards integration will become possible. One way to increasethe efficiency at a given level of demand is by use of a technology moresuited to the factor endowment and other local conditions than that used inlarge scale production. The economic justification of investment timingneeds also to take account of the possible benefits for total development,and not just for the initial project, of the establishment of new types ofproduction. Unless such factors justify an earlier investment, however, itis far better to wait until a plant of reasonable scale can be built andutilized fully within a reasonable time than to build a dwarf plant premature-ly. The argument is sometimes heard that a given project should be undertakennow rather than later, even if the present scale of production is insufficientfor economic production, because if investment is delayed, plant and equipmentcosts will rise to the point that the project is no longer economically viable.If prices of plant and equipment went up in isolation, this might be a validargument; normally, however, equipment and final product prices move up moreor less together over the medium and long term. Thus, while delaying aproject three to five years might increase the ultimate investment cost by50% or 100%, the price of the project's output would probably rise by an equalamount.

19. Two policy measures are open to the Pakistan Government whichcould-accelerate the feasible pace of backwards intergration in automobileproduction. The first is to seek a high degree of commonality among partsby limiting the number of makes and models produced; fragmentation of

1/ Jack Baranson: "Automotive Industries in Developing Countries."Washington: World Bank (Occasional Staff Paper No. 8), 1969, p. 30.

ANNEX 6Page 8

production among competing models assures serious economic losses. Thesecond measure is to seek export markets. In the motor vehicle industry,the main export market will probably be spare parts for older models in thenear future. Developing countries often have a strong comparative advantagein this field because the world market for spares is quite fragmented andthus the feasible scale of production is much smaller than for new parts.The export of new parts can also sometimes be done successfully throughparts swapping agreements in which a foreign producer agrees to importcomponents (in this case from Pakistan) in exchange for the right to continueto sell other components (to Pakistan) for which an economical scale ofproduction is not yet possible locally. Similar export oriented activitiesare possible in other industries such as chemicals and heavy engineeringwhere the domestic market is too small to support a plant of the minimumeconomic scale.

20. An export orientation for Pakistan industry would not mean amajor break from the past; in fact, manufactured exports already constitute30-40% of the nation's exports and another 25-30% of its exports are semi-manufactured goods (processed raw materials). Table 2 shows that, in 1972/73,roughly 50% of Pakistan's ten most important exports were manufactures; inaddition, six of the second ten most important were also manufactured goodsincluding garments, footwear, synthetic textiles, surgical instruments,cotton thread and chemicals. The potential for export growth appearslgoodin engineering goods (e.g., machine tools), leather garments, readymadesuits, garments of synthetic and blended fabrics, precious, semi-preciousand colored stones, and parts and components for international sub-contract-ing in the fields of electronics, motor vehicle spares, and other lightengineering products. Many of these products have the additional merit ofbeing suitable for small scale industry production.

Table 2: MAJOR EXPORTS, 1972/73

PercentRank Product of Total Export Value

1 Cotton 22.62 Cotton Fabrics 14.63 Raw Cotton 13.74 Rice 13.35 Leather (finished) 6.46 Carpets and Rugs 3.37 Fish and Preparations 2.78 Sports Goods 1.69 Petroleum and Products 1.510 Cement and Products 1.2

Source: Derived from Pakistan Economic Survey 1973-74,Table 30.

ANNEX 6

Page 9

Investment Priorities and Plans

21. As discussed in Annex 5, capacity limits are being reached in anumber of critical industries. The Annual Plan 1974/75 notes, for example:

"The extremely Low levels of industrial investment whichhave characterized the preceding years mean that no newsubstantial capacity will come into operation in anymajor industry except cotton textiles and sugar. Productionlevels in several key industries will not rise, with con-sequent pressure on availabilities and prices." (p. 116)

It adds that, in addition to new investments, modernization will be requiredto counter declines in some industries due to machinery obsolescence.

General Priorities

22. Federal Government capital expenditures go primarily to agricul-ture, industry (including fuel, minerals and manufacturing), water and power,and transport and communications; in the Third Plan, these four areasaccounted for almost 90% of such expenditures. As shown in Attachment 2,the share going to agriculture since 1960 is roughly double that in thedecade of the 1950's, but it has never exceeded 15% of the total. Prior to1970 the shares going to water and power, and to transport and communicationshad been relatively stable, fluctuating from about 15-20% for each. Theindustrial and physical planning/housing sectors have shown the most notabledeclines as a share of the total, especially after 1970. In the 1974/75ADP, industry received barely half its percentage share of the 1950-55 period(19% vs. 36%). A reversal of this trend may be under way, however; in the1973/74 ADP, manufacturing received only 7.7%, but this nearly doubled to14.5% in the 1974/75 ADP. The share for manufacturing in the Fifth Planperiod (1975-1980) is not yet known.

Manufacturing Priorities

23. For both public and private manufacturing, the following overallpriorities have been laid down by the Government:

(a) agro industries;

(b) basic heavy industry;

(c) export industry;

(d) industries in rural (and particularly backward) areas; and

(e) import substitution industries (particularly for productswith unstable international markets).

ANNEX 6Page 10

These priorities are generally consistent with another set of prioritieswhich rank industries in descending order of desirability according to theirbeing based on:

(a) domestic equipment and domestic materials;

(b) imported equipment and domestic materials;

(c) domestic equipment and imported materials; and

(d) imported equipment and imported materials.

Preference is given to the import of machinery over materials because thelatter involves a recurring foreign exchange liability. There is at 1 leastone low priority area - luxury consumption goods, including radios, tele-visions, refrigerators, passenger cars, etc. These priorities are reflectedin the following list of allocations within industry in the 1973/74 and1974/75 ADPs. 1/

Table 4: SECTORAL ALLOCATION IN ANNUAL DEVELOPMENTPLANS, 1973/74 AND 1974/75

Annual Dev. PlanSector 1973/74 1974/75

Agriculture Inputs 23% ) 44%Agriculture Processing 16% )Iron and Steel and Engineering 37% 50%Other 24% 6%

Total Industry 100% 100%

24. Government investment in the industrial sector is concentrated ona few large projects. In the 1974/75 ADP, for example, 81% of governmentinvestment in industry was allocated to just three projects - Rs 410 millionfor the Karachi Steel Mill, Rs 380 million for the PAK-Arab Fertiliz erProject, and Rs 100 million for the Heavy Foundry and Forge Project atTaxila. Most of the increase in the ADP between 1973/74 and 1974/75! wasabsorbed by the increased demand for funds for these very large projects.

25. The distribution of investment in industry between the publlicand private sectors for the fifth plan period is not yet known, but preli-minary discussions indicate some feeling that up to three-fourths of newmanufacturing investment should take place in the public sector (Attachment3). Within the public sector, industries receiving highest priorityI would

1/ It should be noted that ADPs relate strictly to public sector invest-meents - they do not spell out a proposed allocation of private sectorinvestment as is done in Five-Year Plans.

ANNEX 6Page 11

be steel, petro-chemicals, and fertilizers. Aside from industrial estates,small scale industry and other miscellaneous industries, fertilizer andtextiles would be the priority sectors for private enterprise. The 1975-80investment program of BIM, which will be responsible for implementing manyof the public sector industrial investments, is shown in Attachment 4.

Subsectoral Plans

26. With expanding domestic demand, improved export market prospects,and near maximum rates of capacity utilization in certain industries, subs-tantial investments are needed in many industries between 1975 and 1980. Ex-cluding steel and small scale industries, total investment planned in manufac-turing is estimated at over Rs 25 billion. The Karachi steel plant andrelated investments are expected to require an additional Rs 14 billion, orabout one-third of total manufacturing investment and perhaps 45% of publicsector manufacturing investment.

27. Agro-based Industries. These will be given high priority. Theyare based on domestic raw materials 1/, are easily located for the most partin rural, underdeveloped areas, are appropriate for small scale industry, andhave good export potential.

28. The rice milling industry needs substantial investment. At pre-sent the mills produce about 50% brokens, but with appropriate investmentthis could be brought down easily to 10-15%. However, present pricingpolicies on rice should first be revised to eliminate disincentives toquality rice production (Annex 3).

29. The cotton industry needs investment at all levels - ginning,spinning, weaving and garment making. Present ginning capacity includessubstantial inferior, outmoded equipment, and as a result, the quality ofPakistani cotton is low by world standards. Spinning productivity has fallenfrom the past average of 130 kilograms of yarn per spindle per year to 119kilograms (1973/74). Replacement of obsolete machinery and improved manage-ment is required to restore productivity, and additional spindles are neededto meet domestic and foreign demand for cotton yarn. Some 5,000 looms needto be added, and because of attractive markets for specialized textileproducts, many of these looms should be for products like cotton canvas andterry cloth. There is also strong demand for cotton blends and for clothof greater width than now produced in Pakistan. There is scope for substan-tial investment in garment factories, especially those equipped to caterto export markets.

1/ There are admittedly shortages in some of these raw materials suchas vegetable oils. However, these shortages could be alleviated byproper agricultural development efforts.

ANNEX 6Page 12

30. In the edible oil and vegetable ghee industry, investments areneeded to improve oil extraction rates and to expand total productionicapa-city. Related agricultural investments are needed to develop additionaldomestic supplies of edible oils. Despite a recent problem with disease,groundnuts may be a good source; their development could reduce the vege-table oil industry's dependence on the cotton crop.

31. In the sugar industry, the installed capacit:y seems to be suffi-cient to process currently available sugar. After a record year in 1969/70when 600,000 tons of sugar were produced, production dwindled to 432,000 tonsin 1973. The 1973/74 crop was substantially better - 589,000 tons, but the1974/75 crop is projected at only 475,000 tons. To meet a growing popu-lation's demand and to increase the presently restricted per capita avail-abilities of sugar, Pakistan is planning production capacity of 975,000 tonsby 1980. To do this would require a substantial investment in sugar factories,and whether or not the full amount projected by the Government will be neces-sary is open to some question. First, past utilization of existing millshas been low and might be improved; second, the capacity of some mills mightbe increased by modernization and by raising their technological levelsinstead of building new plants. It now appears that a number of the proposedmills will be located in areas which are not as well suited for sugarcaneas for cotton, wheat and other crops. If so this would reduce the overalltechno/economic efficiency of the plants and thus raise the total requiredinvestments, as well as decrease the value of agricultural production.

32. Some convenience and pre-packaged foods are good candidates forfurther investment - wages of servants are rising, and an increasing numberof women are beginning to work outside the home. There is also apparentlya large export demand for expertly packaged quality food products such asbasmati rice.

33. The forests of Pakistan offer promise for a substantial furniituremaking industry. This industry is well suited to small scale productionin rural areas, uses a very high proportion of labor to capital, and hasa potentially high foreign exchange earnings capacity. Its developmeiitwould have to be done with caution, however; the reserves of walnut have beenseriously reduced by overcutting, and sheesham (Pakistan rosewood) appearsto be in similar danger. Two concurrent strategies would therefore berequired for a permanent furniture making industry: first, an activelprogram of reforestation, afforestation, and selective harvesting is neededto ensure stable, continuing yields. Second, veneering of valuable woodssuch as walnut and rosewood to cores of lower quality woods including chip-board should be used to conserve them (the Pak-German Woodworking Center inPeshawar is actively promoting this technique based on a chipboard made ofbagasse).

34. Chemical Industry. Investments in this sector deserve highpriority in view of its already high average rates of capacity utilization.Cement, petro-chemicals, fertilizers, polyester fibers, and caustic sodaand soda ash appear to be leading candidates.

ANNEX 6Page 13

35. The cement industry is highly export competitive. Efforts shouldfirst be made, however, to increase existing rates of capacity utilization,especially in plants which suffered shutdowns last year. This may require,among other things, improved rail transport facilities (transport problemsclosed the Zeal Pak cement factory last year). Also, the price which thekilns are paying for natural gas, a critical input to the cement productionprocess, should be reviewed. Although gas prices were increased by 50% inFebruary 1975, it appears that prices of domestic gas are still too low interms of their opportunity cost. Partly because of low prices and revenues,gas distribution facilities have lagged behind demand.

36. Production facilities for soda ash, caustic soda, and sulphuricacid are all running at close to 100% of capacity, so further investmentmay be required. Soda ash should be quite attractive -- the internationalprice of this product, which only recently was $150 per ton, has now risento over $350 per ton.

37. Increased production of fertilizer has a very high priority inPakistan because of the foreign exchange currently being spent on its import,the need to expand agricultural production, and the worldwide shortage offertilizer. Attachment 5 shows the projected pattern of demand for anddomestic production of fertilizer. With fertilizer as with cement, thepricing of gas used in its production should be reviewed; natural gas isin danger of being used at an accelerated rate without proper recovery ofits true long term value. The rate of return on fertilizer use is such thatsome increase in price could be borne by the farmers, especially if theywere taught improved techniques and if they received prices for their productscloser to world market levels.

38. Proposals for a petro-chemical plant need careful scrutiny. Forexample: Would the scale of the proposed plant be sufficiently large foreconomic production? Would the necessary product mix be able to matchdomestic market requirements? Would export markets be available to absorbexcess products? The proposed investment is roughly half of the totalproposed for the chemical sector between 1975 and 1980, so a proper evaluationis essential.

39. Engineering Industries. These are apparently being given low in-vestment priority over the next five years, which seems reasonable. Whilesubstantial modernizing and balancing investment may be necessary, presentexcess capacity argues strongly against major new investments. There maybe some capacity constraints in bicycles, high speed diesel engines, andlooms, for example, but with the flexibility of most machine tools and thepredominance of single shift work in the industry, the possibility of shift-ing equipment to these products from other uses and of working additionalshifts should be examined first.

40. The automobile industry is scheduled for major investments overthe next three to five years. As indicated in the above section on backwards

ANNEX 6Page 14

integration, this is a very difficult field because of the required econo-mies of scale; all investments proposed in this area should be scrutinizedcarefully in terms of realistic expected rates of domestic market expansion,the required scales of production, and the potential for reducing the numberof makes and models to minimize fragmentation. While commercial vehicleshave a relatively high priority, passenger cars have been given a low prior-ity, as appears reasonable under present circumstances.

41. The steel industry may consume nearly half of public sectorinvestment in manufacturing between now and 1980. Although PakistarL present-ly imports only 500,000 tons of steel per year, its per capita consumptionof steel is among the lowest in the world and according to some estimatesthe country could easily and profitably use about one million tons per year.The Pakistan Steel Mills Corporation hopes to produce this amount in itsnew Karachi Steel Mills project at Pipri by the end of this decade or early1980/81.

Investment Related Policies

42. To guide investment, the Government commands a broad range ofpolicy instruments related to industrial structure, fiscal and monetarypolicies, trade, and investment approval. As the public sector is alreadyunder relatively direct Government control, these policies are discussedhere in terms of the private sector.

Industrial Structure

43. Perhaps the most pressing need today in the area of industrialpolicy is a clarification of the role that Government intends for rhe privatesector. Restoration of the investment climate will depend largely on theconfidence of those who might invest in large scale manufacturing unitsthat they are not likely to be nationalized, and that they will be able tooperate efficiently and not be discriminated against in favor of publicsector firms. Assurances about adequate compensation in the event ofnationalization are also important. Recent assurances have helped.,

Fiscal and Monetary Policies

44. The major fiscal and monetary policies influencing investmentrelate to compensation for takenover units, taxation, interest rates andcredit availability, and pricing. Closely related to assurances on nation-alization are those that adequate compensation would be paid in the eventof any future takeover. The basis upon which compensation would be calcu-lated should be spelled out. Steps could also be taken to make existingcompensation bonds a more attractive and flexible financial instrument.

ANNEX 6Page 15

45. Corporate income tax rates presently exceed 50% in many cases and,coupled with relatively high personal income taxes on dividends, oftenreduce returns on assets of less than 40-50% to less than those availableon non-taxable government securities and deposit saving schemes. Consider-ation could be given to reducing the maximum rates of taxation and recover-ing the lost revenues by improved collections and lower exemption rates onpersonal income taxes.

46. Present commercial interest rates of 10-13% are negative in realterms because of inflation running 20-25% per year. This encourages capitalintensive investments and discourages savings. A closer linking of interestrates to inflation could generate increased savings and ration availablecapital to the most productive uses, thereby reducing the need for restrictivecredit policies and credit allocations.

47. Price controls seriously restrict the profitability of industriesproducing cement, certain chemicals, and a variety of agricultural products(Annex 3). This limits new investment and replacement of existing assets,which would help prevent future shortages. Efforts should be made to raiseprices to realistic levels. Although some subsidies might still be requiredfor specific income groups, more realistic pricing would reduce the pres-ently heavy burden on Government revenues, making it possible to pay a morelimited set of direct subsidies to these groups.

Trade Policy

48. On the import side, there is a need to reduce the protection givento certain excessively inefficient industries (e.g., some chemical plants)and reverse as soon as possible the apparent present trend towards increasedprotection for manufactured goods. At the same time, a few selective importquotas or bans should be imposed on goods produced by domestic industrieswhere economies of scale are jeopardized by import competition. Policiesto promote industrial exports might include adjustments in the administrationof tax relief on exports and development of an export processing zone.

49. Although import duties were markedly reduced at devaluation, thepresent structure still includes rates ranging to well over 100%. Consider-ation could be given to scaling down the highest rates 1/ (which often give"tailor-made" protection to the most inefficient industries) and to estab-lishing a tariff structure with three bands of nominal protection dependingon the degree of domestic value added starting with say 10-15% for thelowest value added, 15-20% for moderate value added, and 20-25% for thehighest value added. A special office or semi-autonomous organization mightbe established to identify the most highly protected industries and to workwith them to improve their efficiency or to help them shift into other

1/ Such high rates of protection are similar to the multiple exchangerate system which Pakistan abolished in 1972.

ANNEX 6Page 16

more economical lines of production. In this connection, the 25% additionalduty which was imposed in February 1975 on a broad range of manufacturedproducts is a potentially dangerous development in terms of the futureefficiency of Pakistan's industrial sector. If the Government wishes toreduce the consumption of "luxury" consumer goods, this could be done muchbetter with an excise duty on domestic as well as imported goods. Thisapproach would not provide incentives to inefficient import substituteproduction.

50. Quantitative restrictions were, at least on the books, markedlyreduced with devaluation, which was generally very much a step in the rightdirection. However, in a few selected industries where economies of scalein domestic production are jeopardized by market fragmentation from cdmpetingimports, consideration might be given to quantitative restrictions coupledwith direct control over the number of firms established domestically, pricescharged and product quality. As the last two factors are very difficult tocontrol, administrative constraints would necessarily limit severely thenumber of products given quantitative protection, but in certain industriessuch as motor vehicles, such an approach seems essential -- if it is decidedthat the benefits of developing domestic production capacity outweigh thehigher cost of production and the loss of consumer choice.

51. Pakistan has no export processing zone today, though one has beenunder consideration for a number of years. Such a development could stimulateexports by offering exemption from import duties on inputs for export pro-duction and by offering infrastructural facilities to attract foreign'in-vestment in export-oriented industries.

Investment Approval

52. The Government exercises substantial control over the type Andlocation of industries established in Pakistan. 1/ This is done directlythrough Government offices, including the Ministry of Production, Industriesand Town Planning, the Central Investment Promotion and Coordination|Committee and the Economic Council of the National Economic Committe,| andindirectly through capital financing institutions such as PICIC and I'DBPand import licensing authorities such as the Investment Promotion and SuppliesDepartment, the Chief Controller of Imports and Exports and the RegionalLicensing Boards. Further attention needs to be given to both economic eval-uation and marketing. Many of the above bodies already employ measures ofeconomic efficiency including nominal and effective protection, domesticresource cost of earning foreign exchange, and economic rate of return.Expertise in these tools is limited to a relatively few individuals, however,and even indicative cut-off points for acceptable projects often do not

1/ Attachment 6 presents a flow chart of investment proposals.

ANNEX 6Page 17

seem to have been established. Efforts to improve existing expertise couldbe encouraged, and the role of these indicators could be strengthened aspart of the decision making process.

53. Market analysis, a vital prerequisite for both economic andfinancial analysis, is also weak in Pakistan. In the past, investmentdecisions have tended to be oriented more to the technical problems ofdesign and raw material availability than to market demand. Better marketanalysis could improve both the selection of projects and the sales from newand existing units. 1/

1/ For example, in the field of textiles, most Pakistani looms todayhave a bed width of only 39". This is detrimental to the export oftextiles, for cutting tables in European garment factories are alreadyset up for 60" fabric, and the U.S. garment industry is moving from50" to 60" cutting tables. Furthermore, Pakistan still only produces4% of its output in the form of blended fabrics even though (a) theexport markets increasingly demand blended fabrics (e.g. wash andwear); (b) blended fabrics are generally not subject to quotas thatare imposed by many countries on pure cotton fabrics; and (c) evenin Pakistan the rising cost of household servants and laundry isinducing a shift to wash and wear fabrics.

AN-,EX 6Page 18

Attachment 1

1/IDBP and PICIC -- Sanctions and Disbursements,

1967/68 - 1973/7LI

Rupees(mi] lions

800

700

600

500

1400

300

200'Disbil's e.men srVs

100 --

0 68 69 70 71 72 73 774Fiscal Year

1/ Industrial nbvelonment Bank of Pakistan and Pakistan IndustrialCredit and Investment Corporation.

Source: Volume I, Appendix, Tables 8.11 and 8.13.

AN D EX 6

Attachment 2 Page l5

Capital Expenditures of Federal Government, 1950 - 1975

(Dercentage)

Sector Pre Plsn First Plan Second Plan Third Plan ADP a/1950-r5 1955-6o 1960-65 1965-70 197h/75

Agriculture 6 7 13 15 11

Industry,Fuel and Minerals 36 31 28 26 19

Water & Power 13 17 19 15 25b/

Transp. & Comm. 14 17 17 18 24

Physical Plan & icus imi 22 20 15 1 8

Education 5 6 4 5

Health 3 2 1 2 5

ManPower & 4o9. W4lfa-re 1 - - 1 2

Works Program _ - 3 5 1Total 100 100 loL 100 100

a/ Combined Federal/Provincial budget for ADP; excludes allocation (7-8% additional)for Indus Basin/Tarbela.

b/ May include some expenditures for.irrigation programs and the like which aredirectly related to agriculture.

Sources: 1950-1970: Aqdas Ali Kazmi. "Education and Manpower Strategy of Pakistan",p. 238 in Economic Reconstruction in Pakistan, Pakistan EconomicAssociation, 1973.

ADP 1974/75: Annual Plan 1974/75, page 25.

ANNEX 6Page 20

Attachment 3

Relative Shares of Public andPrivate Sectors in Industrial Investment

Fiscal Years 1964 - 1980

Fiscal Private Public TotalYears % Z (billion Rs)

1964 96.7 3.3 1.211965 90.9 9.1 1.461966 90.2 9.8 1.361967 89.7 10.3 1.311968 89.1 10.9 1.371969 92.6 7.4 1.271970 88.8 11.2 1.591971 95.5 4.5 1.521972 92.7 7.3 1.351973 89.5 10.5 1.161974 60.1 39.9 1.181975 58.4 41.6 2.64

1975-1980 27.1 72.9 42.50

Sources: Investment Promotion and Supplies Department,Annual Plan 1974/75, and Bank Staff estimates.

ANNEX 6Page 21

Attachment 4P

BLI Investment Proj:?ct Proposatls1975 - 980

Corporation/Proiect Location Products Cpa city Cost (million Rs)(000's) Locil Fori:7n Tat-.

National Pertilz,er Corporation of2 PakistanNatural Gas .ertilizer Factory (xpans-on) :4ultan Calcium, Ammon- 435.6 ton 228.0 762.0 990.0

ium NitrateNirtrophosphate 310.6 tonUrea (capacity 72.0 tonafter expansion)

Mir ur '.athe.o FertilIz-r Nirp-r Urea 51.300 ton 331.7 71!0.3 071-.-7Mathelo

Frontier FertiLizer Project. Not yet Urea 72.0 ton 160.0 2r40.0 400decided

TOTAL 719.7T-TZ _7d 2 i-.7

State Yeavy En iLteering _ Machine ToolCorporatiorileavy Foundry & Forge Taxila - - 161.84 164.31 326.15Eeavy Mechanical Complex Taxila - - 11.40 13.60 25.00Pakistan Machine Tool Factory Karachi Gear Box & Axles 7.00 30.00 50.00 80.00

for Tractors.Pakistan Machine Tool Factory Karachi Gear Box etc. 10.00 21.00 40.00 61.00

for Peoples Car.Crawler Type Earth Mioving Equipment Karachi - - 80.00 120.00 200.00M.S. Plates Rolling Mills - - - 170.00 180.00 350.00

TOTAL 474.24 567.91 1042.15

Pakistan Automobile CorporationPeoples Light Transport Vehicle. Karachi Passenger Cars 13.8 250.00 350.00 600.00

Utility Vehicles 6.0 to 9.0

Assembly Plant for Trucks/Buses Karachi Truck/Buses Assem- 15.0 to 20.0 39.00 37.00 76.00bly

(Cont'd)

AN}EX 6Page 22

Attachment L

BIM Investment Project Proposals

Corporation/Project Location Products Capacity Cost (million Rs)(000's) Local Foreign Total

Remodeling of existing assembly plant Karachi - - 19.00 10.00 29.00Front axle steering gear box & propellershaft manufacturing plant. Karachi Not yet determined - 23.20 40.00 68.20

Forging & machining of crankshaftcrainshaft etc. Karachi Crankshaft cramshaft 25.0 sets 15.00 37-oo 52.00

and connecting rodskuto-Diesel Engine Plant(Tractor Engine) Karachi Tractor engine 5.0 to 10.0 7.5 12.5 20.00

Clutch m1anufacturing Plant Karachi Depending on re-quirements. - 1.0 5.0 6.oo

Piston Manufacturing Plant Karachi Depending on re- - 2.0 8.0 10.00quirements.

Elictrical Equipment Manufacturing Plant Karachi Not yet deter- - 1.0 8.0 9.0mined

Manufactureof Automotive Wheels. Karachi Wheel Rims 50.o 29.3 .3 7o.6Pakistan Tyres Ltd. Karachi Tyres 050.0 280.0 2ZO. 500

TOTAL 672.00 768.o0 1440.J

Federal Light Engineering CorporationMetropolitan Steel Corporation Ltd. Karachi High Carbon Wire 30.0 tons 5.00 10.00 15.00

(Expansion) Rods.PECO Ltd.(Expansion) Lahore LP Gas Cylinder 40.0 2.00 3.00 5.00PECO Quality Steel Lahore Billets - 10.00 10.00 20.00

KarachiPECO Ltd. Bicycle Plant Expansion.) Lahore Ricvcles 500.0 - 3.50 3.50PECO Ltd. Machine Shop (Balancing) Lahore Engineering - 4.00 3.00 7.00

ProductsNowshera Engg. Cor._Ltd. Nowshera Grind-i-ng-Media - 4.00- 6.o00 1.00

RollinR. ForginF. Plant.PECO Ltd. (Expansion of foundry) Lahore - 12.0 Tons 1.00 7.00 8.00

TITAK 26.oo 42.50 68.50

(Cont'd)

ANNEX 6Page 23

Attachment 4

BIM Investment Project Proposals

Corporation/rroject Location Products Capacity Cost (million Rs)(OOO's) Local Foreign Total

Fetrolewa Refining &Petro-Chemical Corpor-ationPetrochemical Conplzx Karachi Ethylene 75.0 tons 600.00 14oo.00 2000.00B.T.X. Project Karachi Benzone Tokeene 4.75 tons 19.14 33.54 52.68

Toliene 8.87 tonsXylenes. 11.80 tons

Speciality Oils Project Karachi Speciality Oils 16.0 tons 11.44 14.34 26.28Carbon Black - Carbon Black 12.0 tons 34.21. 48.o5 32.26National Refinery Ltd. (Luba Unit & Wax Karachi Lube stocks 100.0 tons 15.00 25.00 4o.ooPlant Wax 15.0 tons

total 679.79 1521.43 2201.22

Pakistan Steel Mills CorporationKarachi Steel Mills Karachi - - 3659.000 5702.000 9361.000

TOTAL 3b59.000 5702.000 9361.000

State Cement CorporationMustehkam Cement Factory Hattar Cement 300.00 tons 45.637 162.660 208.297

(Hazara)NCIL Cement Dandot Cament 300.00 tons 36.880 169.840 206.720

(Jhelum)Spintangi Cement Project. Spintangi Cement 300.00 tons 96.269 174.513 270.732

(SIBI)Pak-Bishi "ement Project. Lasbela Cement 2010.0 tons 525.293 281.970 307.263-Kohat Cement Factory Babri Ban-Cement 300.00 tons 90.970 137.730 228.70C

da(Kohat)

TOTAL 795.049 920.713 1721.752

(Cont'd)

ANNEX 6Page 24

Attachment 4

BIM Investment Project Proposals

Corporation/Project Location rroducts Capacity Cost (million Rs)(000's) Local Foreign Total

State El ict.rical CorporationHeavy Electrical Conplex Taxila Heavy Electrical - 102.396 124.380 226.776

Gear ___3____26TOTAL 102.396 12 ..30 226.776

Federal Chemical & Ceramics CorporationSanitary IVare & Wall Plant (Swat China - Sanitary Ware 2.0 ton 19.853 34.668 54.521

Clay) Wall Tiles 2.4 tonSind Alkalis Ltd.(Expansion) Karachi Soda Ash. 30.0 ton 42.4 60.5 102.900Pakistan PVC Ltd. (Expansion) Karachi Caustic Soda 4.o ton 17.8 43.6 6i.4

PVC Pipes. 1.6 tonPolyester Fiber & Fillamant Yarn Manu- - Polyester Fiber 10.0 to 12.0 70.0 160.0 230.0facturing Plant. & Filament Yarn. tons.

Malathion (Insecticides) - Phosphatic Insec- 2.0 ton 15.0 30.0 45.oticides

Fibere Glass P'lant - Piber Glass 3.0 ton 23.0 47.0 70.0Lithophon - Lithopons 6.0 ton 8.0 12.0 20.0Citric Acid Plant - Citric Acid 3.0 ton 23.0 42.0 65.oPhosphoric Acid Plant - H304 150.0 ton 60.0 140.0 200.0

P2 0 75.0 tonSodium Tri-poly Phosphate & Synthetic De- - SodiL.m Tripoly 15.0 ton 70.0 30.0 100.0t.ergents. Phosphate;Synthe- 15.0 ton

tic Det?rgents.1Mono Sodium Glutamate Plant - Mono Sodium Clu- 3.0 ton 30.0 50.0 80.o

tamateYeast Manufacture (two plants) Lahore Yeast .9 ton 3.20 h.0 7.20

Karachi

TOTAL 302.253 '653.76& 1036.021

(Con t'd)

ANNEX 6Page 25

Attachment 4

BIM Investment Projject Proposals

Corporatinn/Proiect Location Products Capacity Cost (million Rs)(OOO's) Local Foreign Total

Textile Machinery CorporationHeavy T3xtile Machinery Project Not yet Not yet known - 30.0 20.0 50.0

decided.Modernization and Conversion Project -ot yet known 5.0 5.0 10.0

TO TAL 35 25.0 0 0)

Pakistan Industrial Development Corporation.Newsprint Plant Sind Newsprint 30.0 tons 66.0 207.0 273.0Writing & Print-ing Paper Mills Punjab Writing Paper 30.0 tons 200.0 250.0 45o.oDir Forest Industri-s Complex Sheringal Timber processing - 135.09 54.95 l90.04

(NWFP)Kraft Pulp Iills NWFEP Unbleach3d Kraft 46.7 tons 250.0 300.0 550.0

PulpChip Bonrd Factory Sujawal Not yet determined - 5.0 10.0 15.0Chilghazi Pig Iron & Steel Smelting Plant. Baluchis- Steel 200.0 tons 66.o 207.0 273.0

tanMini Steel Mills Mianwali Steel 70.0 tons 337.60 350.0 637.60Tarbela Cotton Textile Mills Tarbela Yarn 25.0 spdls. 12.79 20.55 33.34Textil. Mills Kulachi Yarn 25.0 spdls. 12.79 20.55 33.34

(D.I.Khan)Lakni Yarn 25.0 spdls. 12.79 20.55 33.34

(Bannu)Karak Yarn 25.0 spdls. 12.79 20.55 33.34

(Koh3t)Hangu Yarn 25.0 spdls. 12.79 20.55 33.31k

(Kshat)

(Cont'd)

ANNEX 6Page 26

Attachmeat 4

BIM Investment Project Proposals

Corporation/Project Location Products Capacity Cost (million Rs)

(000's) Local Foreign Total

Pakistan Industrial Development Corporation (Cont'd)Bolan Textils Mills, Boleli (uetta 1. Grey Cloth 4.31 mil.yds.84.42 212.50 296.92

2. Bl3ach3d Cloth 7.38 "t 113.. Dyed/printed 5.51

cloth.4. Polyester/cot- 15.01

ton BlendedFabrics.

5. Surplus yarn 2.03 lbs.Lasbela Textile Mills Uthal Grey Cloth 5.90 mil.yds.66.05 220.13 286.18

Baluchi- Bleached Cloth 11.03 "stan

Dyed/Printed Cloth 9.84 "Polyester/CottonBlend Fabrics 7.51 "Surplus Yarn 3.4o lbs.

Cotton Textile Mills Sind Spindlbs 25.0 tons 15.0 20.0 35-0Shikarpur Sugar Mills Sukkur Sugar 2.0 tons 45.0 77.0 122.0Dadu Sugar Mills DadtiU Sugar 2.0 tons 44.202 75.893 121.095Specializ d Refractories PLant Hattar Magnisite Bricks 9.0 tons 10.00 20.00 30.00

(Ha2ara) MAagnisite Chrome 6.0 tonsKraft Paper Bags Manufacturing Plant. NWFP Not yet determined - 5.00 5.00 10.00Steel Complex KArachi Billets, 230.0 tons 500.00 500.00 1000.00

Coke 200.0 tonsCotton Textile Mills Sind Spindl3s 25.00 15.00 20.00 35.00Quaidabad Woolen Mills (Expansion) Qaidabad Carpet 200.00 sq. yds. 4.00 21.00 25.00Glnss Sheet Project - Glass Sheet 15.00 " 21.00 14.00 35.00Insulating_Material-Froject- I-nsulat-ing material 1.00- t 1S.00 27.00 45.00Aluminum Industries Complex. Khushab Aluminum Sheets 30.00 't 225.00 225.00 450-00Copper Refining & Rolling Mills Kolpur Not yet determined - 150.00 150.00 300.00

BaluchistanFerro-Chrome Processing plant NWFP Not yet determined - 6.6o 18.hO 2,.00Vegetabl3 Ghee Plant Tarbela Vegetable Ghe3 9.00 t.ns -- NOT YET KNOWN-- 12.00

TOTAL 2332.912 3188.623 5433.535

AXLlX 6Page 27

Attachment 5

ions

(ths) FERTILIZER PRODUCTION &1,000

CONSUMPTION900

,,--- - - - - -

800,-

,-00 -- FAUJI'-r---J (proposed)

b00

500

CONSUMPTION NCPKAA400 IMPORTS under construction

300

200 / PRODUCTION ,

200

L - - M P DC 3plonts | -- - r WPIDCpAK~~~~C 1plarrt absorbed by

66 67 68 69 70 71 72 73 74 75 76 77 78 79 BO 81 82Year

Tource: United States Aiency for International Developmert. Pakist.-nEconomic Development Data (as of August ;, 197i4). : Is--, iUSAID, 1974.

ANNEX 7Page 1

FAMILY PLANNING

Development of the Program

1. The first efforts in family planning in Pakistan were undertakenfollowing Partition in 1947. The iakistan Women's Voluntary Service andthe All Pakistan Women's Association sponsored some family planning activi-ties among their social welfare projects. Organized family planning serv-ices were first established in Karachi and Lahore in 1952. The FamilyPlanning Association of Pakistan was formed in 1953, and became affiliatedwith the International Planned Parenthood Federation in 1954.

2. Official participation of the Government in family planningbegan with the first Five-Year Plan (1955-1960) when Rs 500,000 wereallocated to support voluntary family planning activities. In 1958,the Family Planning Board was established under the chairmanship of theDirector-General of Health, and responsibility for implementation of theprogram was given to the Family Planning Association of Pakistan.

3. Public responsibility for program implementation began with'thesecond Five-Year Plan (1960-65) when Rs 30.5 million were allocated bythe Government to a national family planning program. The plan incluaeda National Family Planning Board with corresponding Boards in the Prov-inces, services to be provided at hospitals and dispensaries, the estab-lishment of research and training units including the National ResearchInstitute of Fertility Control, and recruitment of staff members.

4. In the Third Five Year Plan (1965-70), the Government declaredthe population policy objective of a reduction in the crude birth ratefrom 50 to 40 births per 1,000 population by 1970. The program outlinedby this plan received strong backing from the President of the country.Responsibility for implementation was given to the District Family PlanningBoards, while responsibility for financing, monitoring and training inthe program was given to the Provincial Family Planning Boards. Fiftypercent of the money for the program was to be provided by the CentralGovernment and 50% by the Provincial Governments. A budget of Rs 75 mil-lion was provided.

5. During the Third Plan period, the program was based on the use or'dais",(traditional midwives) as part-time field motivators, and of agents(shopkeepers, other merchants) commissioned for the sale of contracepltives.In November 1969 there were about 15,000 dais in the field and 30,0001agents. The dais were supervised by Family Planning Officers (one pe rabout 60 dais) and other administrative personnel. Apparently vacancliesfrequently occurred in these motivator positions due to inadequate perform-ance, but it is acknowledged that the dais employed by the program createdwidespread awareness of the existence of family planning methods.

ANNEX 7Page 2

6. An experiment with a new delivery system was also begun in theSialkot District in December 1969. This delivery system, called theContinuous Motivation System (CMS), served as the basis for the programoutlined in the Fourth Five Year Plan (1970-1975). By 1973, only sevendistricts were under the CMS. A new effort begun during 1973/74 has sinceincorporated most of the localities with densities of 300 or more personsper square mile, however, so that by November 1974 it was estimated that74% of the population was covered by the CMS. An additional 19% werecovered by a variation of the CMS, designed for areas with density under300 persons per square mile.

Current Program Administrative Organization

7. The present family planning program is directed by the PakistanPopulation Planning Council under the chairmanship of the Central Ministerof Health and Social Welfare. The Provincial Ministers for Health andPopulation Planning and the Secretary of the Ministry of Health and SocialWelfare are members of this Council. Other members include representativesof the Ministry of Finance, Planning and Development and other governmentaland private bodies. In each province there is a Provincial PopulationPlanning Board, whose members include the secretaries of Information andFinance.

8. Each district in the CMS has a District Population PlanningOfficer who is under the supervision of the Provincial Board. Under thisindividual are the Senior Population Planning Officers, each of whomsupervises three Population Planning Officers. Each Population PlanningOfficer is responsible for the supervision of six teams of PopulationPlanning Workers. In addition to the Population Planning Workers, thedistricts are served by Lady Welfare Visitors and doctors who provide theclinical services of the program. In the last year there has also beenan increase in the designation of commissioned agents for the sale ofcontraceptives, and the difficulty of recruiting family planning workershas forced some districts to employ dais instead at a replacement rate ofthree dais per family planning worker.

9. In areas with a density lowe: than 300 person per square mile,CMS program personnel are organized into mobile teams consisting of onemale field worker, one Lady Welfare Visitor and one ayah. 1/ Two teamsare supervised by one Population Planning Officer, and the two teamscover a population of about 100,000 persons. The staff are supplementedby dais, covering about 10 villages each, to provide continuous contactwith the population. Facilities proposed include a Family Welfare Clinicwith maternal and child health responsibilities in every hospital and ruralhealth center in the area.

1/ An individual who assists the Lady Welfare Visitor.

ANNEX 7Page 3

10. In addition to the CMS, the family planning program is attemptingto extend post-partum Services staffed by full time Lady Medical Officersand paramedical staff to all major hospitals.

ObJectives of the Continuous Motivation System

11. The CMS, which began as an experiment in Sialkot, is now plannedto cover most of the country. Its objective is to reduce the rate of growthof the population to 1.5% by 1985. Intermediate goals are to have 20% ofall eligible couples practicing contraception by June 1974 and 40% by June1975. If this objective is reached, the birth rate is hoped to declineat least to 40 per 1,000 by June 1975.

12. In the course of the last year and in order to correct certainobvious problems in the field work, some new experiments have been unidertakenwithin the program. One of t-)-ese combines the family planning duties ofthe male workers with health duties in order to assist the provision ofpreventive health services to the population, as well as some curativeservices by providing medicines for minor common ailments. The malelworkermaintains responsibility for organizing group meetings with male membersof the community, but the topic of these meetings is shifted from purefamily planning to general preventive health. All individual motivationis assigned to the female worker of the team. An experiment of thisitypeis being conducted in the district of Kahuta. Other delivery systemlex-periments are underway in Sind emphasizing a comprehensive approach t:o thesolution of several community problems.

Policies of the Continuous Motivation System

13. The CMS is a delivery system which consists of continuouslyvisiting the target population to gather vital statistics, encourageiacceptance or continued practice of family planning, and provide supplies.The target population is composed of couples in which the woman is ok child-bearing age and proven fertility. According to the Sialkot experienLe thereare about 13 eligible couples per 100 population.

14. The motivational work of the team is divided so that the malepartner visits males in the assigned subdivision of the district and thefemale partner visits females. Motivational work is based primarily onindividual contacts, but it is stressed that some of the wor should alsobe with groups. The intended objective is not the acceptance or sale ofcontraceptives, but the achievement of a no-birth record for each clientseach year. The workers receive a basic fixed salary and several all pwances.In the original design of the program, incentives were to be paid on thebasis of the number of target couples who did not have a birth during theyear, so that performance might be judged on decreased fertility ratherthan on acceptance. 1/ Performance was to be measured by reviewing ithe

1/ This was never put into practice because program officials believedthe scheme too cumbersome for proper administration.

ANNEX 7Page 4

records contained in the workers' registers. Each team's first assignmentis to prepare a register on a dual basis. The female worker keeps onerecord and the male workers keeps another. The two records are comple-mentary to each other. The records contain (a) basic demographic data;(b) reasons for acceptance or non-acceptance of family planning; (c) dataon contraceptives used, type and supplies; (d) reasons for change of con-traceptives or discontinuation of use, and (e) vital records on all births(both live and dead). On the basis of these records, it was to be deter-mined at the end of each month how many couples did not have births duringthe past twelve months. These reports were to be verified by the Popula-tion Planning Officer, and bonuses were then to be paid to workers.

Differences Between Workers in the Old System and the CMS

15. The workers under CMS are both male and female in contrast tofield workers who before were exclusively female midwives (dais). Theadvantage of having male field workers is direct motivation of males, whoare believed to play an important role in the decision to accept familyplanning.

16. In contrast to the dais, the new workers have to be literate toenable them to keep records; in addition it is hoped that the workers'literacy will promote community confidence in them. Although this re-quirement may imply that the workers have some social superiority overthe average eligible family planning couple, the advantages of literacywere felt to outweigh the disadvantages.

17. Another difference between the dais and the new field workers isthe level and basis of compensation. Family planning was, for the dais,only a part time activity, so their salaries were set at Rs 15 per month,plus incentive payments for IUD and sterilization referrals, and salescommissions. The new workers are paid on a full-time basis at Rs 150 permonth plus government allowances.

18. The dais and the new workers differ in training received. Thedais received limited training, because it was assumed that they had basicknowledge for contraceptive motivation. As the program progressed, however,it was found that most dais actually lacked the basic knowledge to adviseclients on family planning. Training for the new workers is supposedlycontinuous. A Senior Population Planning Officer is assigned to a groupof 18 teams and is expected to give continuous guidance and training onrecord keeping, contraceptive technology, and motivational techniques.

19. A final difference between the dais and the new workers is theabsence of competing career interests. The dais were midwives who receivedpart of their income from delivering babies. Motivating a woman not tohave a child meant reducing their income from one of the two sources. Thenew workers, on the other hand, are employed full time to avoid this con-flict.

ANNEX 7Page 5

PERFORMANCE OF THE PROGRAM

Measures of Performance

20. The Family Planning Program has measured its performance indifferent ways from 1965 to the present. The most basic method has beento tabulate the sales of different contraceptives as well as the numiberof IUD!s inserted or sterilizations performed in a given time period.This method has been used continuously through the program. This measuremakes comparison between districts and over time impossible, however, dueto different: contraceptive mixes. As a result, the concept of couplie yearsof protection (CYP) was used from the inception of the program in 1965through 1971. According to this measure, one sterilization was equivalentto one CYP; an IUD insertion was equal to 0.75 CYP; and 100 units of con-ventionals ($ondoms and foams) were equal to one CYP. Although not tabu-lated in official records, this report assumes that 13 cycles of oralls wereequal to one CYP. The weights noted above changed over the period 1965-1971. For instance, from July 1968-1971, an IUD equalled 2.3 CYP; asterilization 7.5 CYP; and the conventionals continued to equal .01 bYP.h jasnua.ry 1972, a new concept was introduced -- the "notional accep'tor"(NA) which approximates one couple month of protection (CMP), and there-fore represents at any point in time the number of "continuous users,".According to this measure, one sterilization is equal to IQO notionalaccepto,rs, one IUD insertion equals 12 notional acceptors, one cycle' oforal pills is equal to one notional acceptor, and 4 units of convent!ionalcontraceptives are equal to one notional acceptor. As is evident theweights attached to one sterilization and one unit of conventional cbn-traceptives were greatly increased; the weight for IUD insertions was atfirst increased, but then decreased again.

Perforzmance of the Program Over Time

21. Table 1 presents, performance data from 1965 to 1974. An elfforthas been mad-e to.connvert all the data to Notional Acceptors (NA). Thedata have been di,vided to present results for 8 individual districts(six of which ,have been 1in the CMS at least since December 1971, 1/ andtwo of which were incorporated later). a,s,well as for each province. Itmay be noted that prrogram performance apparently increased from 1965 /66to 19,68169, then decrea,sed until 19,71/72, and is now recovering. Some whohave worked in or wi.th the program discount the results obtained before19.70 ,s a product of misreporting due to pressure to achieve targets.Available evidence.on fertility levels seems.to confirm this view, and

1/ These six districts and the dates of their adoption of CMS are as follows:

Sialkot, December 1969 Lahore, January 1971Peshawar, April 1970 Lyallpur, May 1971Hyderabad, November 1970 Karachi, November 1971

Table 1

-Th1135 OF NOTIONAL ACCEPTORS 1 9BTAINED BY THE SALE OF CONThACEPTIVES BY THEFAMILY PLANNING PROW--- IN SELECTED SUBDIVISIONS OF THE COUNTRYf

1965 - 1974

(Thousands)

196 a 1966- 1967- 1968- 1969- 1970- 1971- 19t 1973-._______ 66 - 67 9 70 _ 71 - 72 _ 73- 74

LYALLPUil 557 1,444 2,811 3,091 2,580 1,263 364 608 987LAHO1RS _12 2,055 2,572 3,168 1,054 422 318 297 494SIALKOT 258 702 1,009 1,370 531 284 175 215 389OTHER DIST. 3,366 8,549 13,152 15,933 15,292 10,673 3,376 5,571 6,843in PUNJAB

HYDEkZABAD 334 971 1,,i25 1,930 1,132 888 428 223 601KARACHI 985 1,942 2,497 2,394 2,122 1,578 649 272 627OTHER DIST. 778 1,866 4,428 5,265 5,191 4,005 1,042 1,076 3,355in SIND

HAZARA 240 403 607 713 557 344 165 139 211PESHAWAR 278 496 364 892 701 95 145 151 343OTHER DIST. 301 505 1,354 1,779 1,514 907 563 437 876in NWFP

QUETTA - 118 66 80 71 54 51 63 151

TOTAL COUNTRY 7,960 19,963 31,317 36,702 30,79:5 2C',5!LL 7,476 9,053 15,078

1/ One notional acceptor = (0.83)) IUD's = (0.01) sterilizations = 1 cycle of' oral pills (4)units of conventional contraceptives.

a/ Ten months.b/ Divided by 11 and multiplied by 12 to adjust for lack of data in one month.

Source: Pakistan Population Planning Council, Nonthly Performance Huports. Sept. 1965 to June 1974

ANNEX 7Page 7

therefore the data prior to 1970 should be regarded accordingly. The admin-istrative structure of the CMS was designed in part to correct problems lead-ing to manipulation of data. Except for seven districts, it was not extendedto the country until 1973, however, and it is possible that data collectedprior to that time are unreliable.

22. A second point to be observed from Table 1 is the simnilarityin performance through time between the districts in the CMS (especiallySialkot), and the rest of the country. The districts within the CMS sys-tem reach their maximum and minimum performance points at about the sametime as the rest of the country.

23. The third observation is that the districts in each province notincluded in the CMS seem to do consistently better than the districts inthe CMS. The implication is either that the old system performs betterthan CMS, or the data are being manipulated to show high performance.Except for a few cases, the argument that differences in performancelevels are due to different mixes of contraceptives does not appearapplicable in this case because the comparisons are between trends inuse rather than actual levels of use.

24. The original performance results have been recalculated to reflectthe assumption that thirteen Notional Acceptors are equivalent to ooe CoupleYear of Protection. 1/ The results of this conversion are compared with thenumber of eligible couples to estimate the proportion who have been coveredfor one year on the basis of the performance obtained. Results are shownin Table 2, indicating that if the country data wete originally correct,coverage of the eligible population was 9% in 1965/66, rose to 37.5% in1968/69, dropped to 7.0% in 1971/72, then rose again to 13.2% in 19703/74.The experience for Sialkot, the first experimental district for thelCMS,is similar to that of the rest of the country through 1968/69. In 11969/70,the performance in Sialkot was reduced to less than half that of the countryand only in 1972/73 does it begin to approach the same level. Experlience ofthe other CMS districts follows a similar pattern. However, these resultsmay be due to misreporting in districts outside the CMS program.

Performance in 1973/74

25. In 1973/74 most of the population of the country was coverzed bythe CMS. Although some of the districts had just entered the registrationstage, it might be expected that the new system corrected the differencesin reporting which existed before. Consequently, comparisons between dis-tricts should be more meaningful.

1/ Thirteen cycles of oral pills are required to protect one woman forone year.

Table 2

ESTJIATED PROPORTIONS OF ELIGIBLE COUPLES PROTECTED BY THE FAMILY PLANNING PROGRA"2IN SELECTED SUBDIVISIONS OF THE COUNTRY

1965 - 1974

(Per cent)

19i6- 1966- 1967- 1968- 1969- 1970- 1971- 19A0- 1973-66- 67 68 69 70 71 72 73- 74

LYALLPUR 9.5 23.8 45.2 48.4 39.1 16.6 5.2 8.4 13.3LAHORE 15.7 38.2 46.6 55.9 18.0 7.0 5.1 4.6 7.5SIALKOT 8.2 21.4 30.0 39.6 14.8 7.7 4.6 5-5 9.7OTHER DIST. 9.0 22.1 34.o 39.0 36.2 24.6 7.5 12.1 14.4in PUNJAB

HYDERABAD 12.7 31.0 56.6 58.2 34.6 25.3 11.8 6.o 15.5KARACHI 20.1 38.1 47.8 44.6 38.2 27-7 14.4 4.5 13.3OTHER DIST. 6.9 15.9 36.7 42.5 40.5 30.5 7.7 7-7 23.3 Oin SIND

HA ZA1A 8.6 13-9 20.4 23.4 17.6 10.6 4.9 4-o 5.9PESHAWAR ii.8 20.3 34.4 34.7 26.3 3.5 5.1 5.2 11.2OTHEi DIST. 4.7 7.6 19.8 25.3 20.8 12.2 7.3 5-5 10.6in NWFP

QUETTA - 16.8 9.0 10.9 9.3 6.8 6.3 7.5 17.9

TOTAL COUNTYY B.9 21.5 32.9 37-5 30.4 19.83 7.0 5.2 13.2

1/ Notional acceptors divided by 13 to obtain years of protection and then divided by numberof eligible couples.

a/ Services provided in ten months only.b/ Divided by 11 and multiplied by 12 to adjust for lack of data in one month.

Source: World Bank estimates, on the basis of Table 1 and 1972 population census.

ANNEX 7Page 9

26. If the services provided by the program and presented in termsof contraceptives sold are real, if the effectiveness of contraception is100%, if there is no wastage of contraceptives, and if the fiequency ofintercourse is that assumed by the Population Planning Council, programdata indicate that program services provided during FY 1974 covered 13.2%of the population with a maximum reduction of the birth rate of the samesize. If we assume that the birth rate without the program is 50 birthsper 1OOO population, and that new acceptors did not previously practicecontraception, the birth rate'-in 1973/74 would have been about 43 birthsper 1,000 population.

27. In contrast to the country results, we can see that the early CMSdistricts generaily performed less well than the test of the country interms of maximum coverage of the-population. This would seem to indicatethat either the CMS is less effective than the old system or the data onperformance for the districts outside the CMS are still misleading. Anotherconsideration is the different contraceptive mix disbursed in differentsectots of the country; so that, if steritizations or IUD insertions aremore predominant in the rest of the country than in the original CMS dis-tricts, then the nimber of notionai acceptors would be greater and wouldbestow ha beniefit to th'e program i'n terms of future rather than short termeffects. However, thi8s would still tend to indicate that the program out-side the CkS system is more effective that in the original CMS districts.

The Relationship of Manpower to Program Resdits

28. By June 1974, i4X of the population was reported to have beencovered by the CMS System, ant i9% by the modified version for less denselypopulated areas. In order tO achieve this, iarge numbers of personnel werehired as popuiation planning workers, some of the dais working for the oldsystem were retained or rehired, and large numbers of selling agents werecontracted and supplied with contraceptives. In addition, a,large nunberof paramedicais joined the program to work in ciinics and help family plan-ning workers.

29. The indices shown in Table 3 draw a comparison bet een the n'umberof motivator-Years 1/ a-nd the number of eligible couples, re'vealing that(if Population Planning Workers and dais are included as motivators), eachmotivator-year in the couitry has to cover an 'average of about 1,057 eligiblecouples. The district with the lowest ratio id Quetta where each motivator-year his to cover 427 eligible coupies, while the province of Sind (excludingHyderabad and Karachi) shows the highest ratio since each motivator has tocover an average of 1,742 eligible couples. In general, the districts thathave been under CMS the longest have a lower ratio than the country as awhole.

1/ A motivator-year is equivalent to the work of a person during onenormal work year, or to the work of several persons adding up toone normal year of work for one person.

ANNEX 7Page 10

30. In addition, the comparison between motivators and Couple Yearsof Protection (Notional Acceptors divided by 13) shown in Table 3 indicatesthat on the average 135 CYP's were provided per motivator-year. The minimumnumber of CYP's per motivator-year is found in Lahore - 45. The maximum isfound in Sind (excluding Hyderabad and Karachi) - 406. The important observa-tion here is that the districts that have been under CMS for a longer periodof time do less well than the districts which were just integrated to CMS.This suggests that productivity in districts with CMS may be lower than innon-CMS districts, or again that there are problems with the data. Anotherplausible explanation is the contraceptive mix offered. 1/

The Costs of the Program in 1973/74

31. Table 4 presents total expenditures of the family planning programby district for 1973/74. These include capital and recurrent expenditures.Some result from costs attached to the districts, some to the Provinces, andsome to the Population Planning Council and its specialized agencies. Thetable also shows the expenditures divided by the total number of notionalacceptors proyided during the year, indicating costs attached to perform-ance. The division was made first including only direct district expendi-tures; then allocating the provincial expenditures to the districts in pro-portion to their direct expenditures; and finally, allocating the countryexpenditures to the provinces in proportion to their total expenditures,and then these costs were allocated by district.

32. The average expenditure per notional acceptor or couple month ofprotection was Rs 5.53 in 1973/74. This implies that the average expenditureper Couple Year of Protection was Rs 71.89. If we assume that three CYP'savert one birth, then the expenditure per birth averted was Rs 215.67. Thisfigure may be too low if the data on performance overstates the number ofnotional acceptors, if the frequency of intercourse is higher than assumed,if some contraceptives are wasted because of drop-outs or change in method,if the fertility of acceptors is lower than that of non-acceptors, and ifcontraceptives are less than 100% effective.

33. The range in expenditure between districts is wide. In Balu-chistan the expenditure per notional acceptor was Rs 21.74, almost fourtimes as much as the average for the country. In Sind (excluding Hyderabadand Karachi), the average was only Rs 3.44.

1/ Conventional contraceptives, such as foam, may result in high numbersof CYPs, because the motivation required for acceptance is lower thanfor other contraceptives (such as sterilization). However, it is wellto remember that the conventionals are less effective than other tech-niques, so that the higher rates of CYP obtained may not necessarilyreflect a higher degree of protection obtained by the acceptors.

ANNEX 7Page 11

Table 3

TNDICES OF IIO'TWIER AVAILABILITY APPRODUCTrITY, FE 197,-l974

Eligible oplples Couple Years of ProtectionMotivators Motivators-

Lyallpur 942 125Lahore 955 5Sialkot 826 80Other Districts of Punjab 892 128

IHyderabad 779 122Karachi 873 122Other Districts of Sind 1,742 406

Hazara 1,276 76Peshaawar 899 103Other Districts of AWF'P 1,248 136

Quetta 427 74

Pakistan 1,057 135

Source: Population Planning Council Performance Reports 1973-1974.

ANNEX 7Page 12

Table 14

EXPEIDITURES IT TrE 7d iiI PLA-`T CGRAJI.7Y 1973 - 1?74

Expe-:dit-Ure per otiontal Acceptor 1/District District

otional and Province a-:dProvincial or District Expernditures Acceptors District Proirrce Country

Lyallpur 3,668,380 987,306 3.72 1;.55 5.51Lahore 3,689,501 494,567 7.46 9.13 11.06Sialkot 2,277,936 388,907 5.86 7.17 8.68Other Districts 24,043,605 6,842,821 3.51 )4.30 5.21of PunjabPinjab HQ RTC 2/ 2,605,962Paid by PPC 3F' h,934,236 8,713,601 3.86 4.73 5.73Total-Punjab 4l,219,620

Hyderabad 1,513,457 601,111 2.52 4.66 5.64Karachi 2,426,348 827,170 2.93 5.41i 6.55,Other Districts ?,,182,875 3,355,165 1.54 2.84 3.44of SindSind HQ RTC 2/ 5,397,754Paid by PPC 3/ 2 337,765 ,783,446 1.91 3.52 .27Total Sind 1 h5,199

NWFP 8 8,062,497 1,h30,4oo 5.64 6.83

Baluchistan 1,379,249District

Baluchistan 928,221HQ RTC 2/Baiuchistan 400,335 150,837 17.95 21.74PPC 31

Total Baluchistan 2,707,605

Central Expenditures:Council,TREC,NRIFC, ID, 14,538,718NPPP 4/

TOTAL 83,386,839 15,078,284 3.41 1t-57 5.53

1/ Central expenditures were allocated to the provinces by multiplying theprovincial expenditures by the ratio of total country expenditures toprovincial expenditures. Provinicial expenditures were allocated to the districtsby multiplying district expenditures by the ratio of provincial to districtexpenditures.

2/ Ileadquarters, Regional Training Center.3/ Population Planning Coujncil.4! Training Research and Evaluation Center; National Research Institute o'

Fertility Control; Inspection Directorate; National Post Partumi Program.

Source: Population Planning Council data.

ANNEX 7Page 13

34. Because expenditures depend to a large extent on the amount andtype of personnel employed, the expenditures are higher in districts withCMS than in non-CMS districts or districts which have just joined CMS.This is because Population Planning Workers are paid at a higher ratelthandais, and because early CMS districts generally employ only Population Plan-ning Workers while recent CMS districts and non-CMS districts tend to employa higher proportion of dais. Lower per worker performance rates in earlyCMS districts may also tend to promote higher expenditures per unit of out-put than is true of recent CMS districts and non-CMS districts.

Summary

(1) It cannot be verified satisfactorily at this time throughavailable service statistics whether or not there areany advantages in using the CMS system over the old systemof dais.

(2) There are questions about the reliability of servicestatistics because of inconsistencies between sets of data.

(3) The effects of-the program on fertility can only beestimated at present. Estimates from service statisticsindicate a maximum decline of 13.2%, but if the assumptionsleading to this estimate are incorrect, as they are likelyto be, the decline may possibly be half that amount.

(4) Performance data do not indicate any advantage to usingPopulation Planning Workers rather than dais.

(5) Expenditure data indicate a cost disadvantage in usingPopulation Planning Workers rather than dais.

THE CONTINUOUS MOTIVATION SYSTEM IN PRACTICE

35. The conceptualization of the Continuous Motivation System (CMS)and the program in practice differ in several ways. In addition, thereare differences between CMS as it worked in Sialkot during the experimentalstage and CMS as it now works around the country. Reasons for the differ-ences between the planned and the actual program include the inoperabilityof the ideal CMS, the different characteristics of the various districts,and the efforts of the leadership of the Population Planning Program toadapt CMS to reality. These differences can be seen more clearly interms of the services conceptualized and those provided by the program.

ANNEX 7Page 14

Problems in the Delivery of Program Services

36. The basic premise of CMS is that continuous contact will motivateeligible couples not only to adopt family planning but also to maintain con-tinuous practice and reduce their fertility. The basic service to clientswas to be "encouragement" to reduce their fertility. Provision of contra-ceptives was to be only a means to reach the objective, rather than theobjective itself. To provide motivation, there were to be four visits ayear to both members of each eligible couple, at intervals of about threemonths. Additional motivation was to be provided in group meetings andthrough the mass media.

37. In practice, the system has failed to provide the hoped formotivation. This failure may be due to several factors. First, not alleligible couples have been registered, as is evident from comparing theestimated number of eligible couples in a district with the number ofeligible couples actually registered. Second, the interval between theregistration visit and the first motivational visit has usually beengreater than three months, and in some cases has reached one year. Third,the average number of visits to registered eligible couples has been lowerthan four per year. More specifically, contacts with men have been moreinfrequent that contacts with women because the hours during which malefield workers are attempting to contact clients are the same hours duringwhich the males are at work. Fourth, field workers have been unable torespond to the clients' requests for unscheduled visits because of theiralready scheduled work load.

38. The content of the specific visits has also been less thanoptimum. Some of the registers studied show that the motivational effortby the workers has been minimal; an expression of unwillingness to adoptfamily planning, especially by younger women with lower parities, has beentaken as an indication to the worker that no further efforts to motivatethose clients should be attempted. In other words, only clients who wantto practice or are practicing family planning have been motivated.

39. In Sialkot it was initially necessary to keep records of thosecouples who had had no births during specific periods of time, as this wasthe basis for incentive payments to the workers. Once incentives were dis-continued, the importance of these records was forgotten, and performancesince theil has been measured in terms of "notional acceptors" or contracep-tives disbursed. Accordingly, the importance of motivation has disappeared,while the importance of disbursing a large amount of contraceptives hasappeared as the primary objective for the field worker. This has createda tendency to emphasize the use of foams, the least effective of the contra-ceptives, since a lower motivational input is necessary to gain their accept-ance by clients. At the beginning, the CMS administration de-emphasized theIUD due to the absence of medical services for followup. This produced anemphasis on conventional contraceptive acceptance, but during the last twoyears the administration emphasis has shifted to motivation toward acceptanceof pills. Thus, from the point of view of the administration the emphasis

ANNEX \7Page 1,5

is on pills, but from the point of view of the worker the emphasis!remainson foams since performance is measured by the number of notional a ceptors.

40. At the beginning of CMS, contraceptive supplies were adequate.In the last two years the availability and distribution of contraceptiveshas proven to be a problem. In addition, frequent brand name changes mayhave tended to produce confusion and discontinuation of use, particularlyof pills.

41. The original plan of the CMS was to recruit relatively we.ll-educated field workers and provide them with continuous training and super-vision. The program has had difficulty recruiting workers -- especiallyfemales -- with the desired level of education, and at present thelprogramis again employing the "dais" that it set out to replace. Currently threedais are used to replace one field worker.

42. Continuous training of field workers does not exist in practiceprimarily because it is not always clear who is responsible for thisfunction. Moreover, the supervision provided field workers may conflictwith the training they received. In one instance, we saw field workers,who are supposed to visit clients only every three months, and who hadgiven a three-months supply of pills to their clients, be admonished bytheir Population Planning Officer for giving a three month supply, "'sincethe pill could produce side effects". The field workers are left io wonderwhether they should visit clients every month to renew supplies or allowclients to go three months with one month's supply.

43. In addition to inadequate supervision of field workers, olthersupervisory duties may be lacking in the field -- such as the review andcorrection of registers. Lack of transportation and office space, andan excessive amount of record keeping, are some of the reasons listLed byofficials for their inability to perform adequate field supervision'.

44. Research and evaluation are supposed to be a characteristic ofthe CMS. In practice, although great amounts of data are produced in thefield, no efforts have been made to use these or other data for researchor evaluation. Evaluation has consisted of monthly tabulation of salesand conversion of these into "notional acceptors", and monthly enumerationof staff personnel.

45. Management of expenditures has often presented difficulties forsupervisory staff because of cash flow problems. The budgeted money isnot always available immediately at the beginning of the fiscal year,so expenditures are very low during the first months of the year; incontrast, during the last months of the year all the budgeted moneyiisavailable and the District Population Planning Officers feel that theywill be branded inefficient and their future budgets may be cut if theydo not spend their total budget. As a consequence, expenditures duringthe last months of the year may be three times the average monthly figurefor the year.

ANNEX 7Page 16

Improvement of the Delivery of Program Services

46. There are positive as well as negative aspects to the implementa-tion of the Population Planning Program. The commitment of program leadersto its success is impressive, and they have a positive attitude toward forwardexperimentation. Above all, the Population Planning Program has achieved somesuccess, and has resolved some of the present problems which will increasethe effectiveness of the program. CMS has just been expanded to the wholecountry and its effects on fertility will not be seen for some time. Manyof the problems mentioned above were provoked or worsened by the rapid expan-sion of the program.

47. Although program expansion may have been premature, it would nowbe an error to reduce it in size. One desirable change may be, however,to limit it to high density areas (that is, higher than the present lowlimit of 300 persons per square mile), and to use the modified CMS (mobileunits) for the rest of the country. Further intensification in the useof field workers, calling for additional staffing, does not seem to benecessary. The country does not have the capacity at present to trainadditional personnel because it must first give intensified training toexisting personnel to improve their skills. Supervision of field work,emphasis on fertility reduction, and use of continuous evaluation orientedtoward program improvement are policy measures which may aid the successof the program. Finally, the program needs to consolidate gains from thepast and ensure that services offered are being provided in an effectiveway. Increased coverage by means of increasing service areas is notnecessarily the best solution. More intensive coverage in existingdistricts may, at this stage, be-the best approach.

ANNEX 8Page 1

THE HEALTH SECTOR

1. The few avaiiabie data reveal poor health conditionis in Pakistan.this is basically due to environmental conditions, malnutrition and generalpoverty. Although effarts have been made to improve medical care, therehave been monetary and mahpower constraints, an absence of kidowledge ofconditions, aiid iack of realistic planning to produce a health system forthe poor. Poverty makes it difficuit for peopie to improve their environ-metit their hutrition and their general standdrd of living, and rapid!(morethan 3%) popuiation growth has reduced the gains of economic growth oa apet capita basis.

A. The Heaith Situation

2. There are very inadequate data on the incidence, prevalence andfatality of diseases in Pakistan. The most comprehensive data are thosefrom reports ohi diseased treated in health institutions (Tabie 1), and onreported cases of comminuniciabie disease (Table 2). While these use differ-efit disease classifications and suggest somewhat different patterns ofdisease- they con fiiii the tajor role of ga8tro-intestinai, respiratoryand inifectious diseases. Gastro-intestinai di8eases amount for 25-30% ofpatients treated by health institutions and for 48% of reported cases|ofcommunicable disease. Tuiberculosts accounts for 20% of reported comfimuni-cable disease; but only iL5-2;5 of patients seen at health institutilons.On the other hand, othei respiratbry disea8se account for 15-20% of healthinstittitioj pstiedts. Maiaria, enteric fever, smaipox, measles, whoopingcough, influendaj mUmps' aid diptieria head the list of communicable fevers.On the othet hand, deficiency diseases were reported as the reason only1-2% of patients are seen at health institutions, but nutritional deficien-cies are a major aspect of the health problems of a large share of totalpatients.

3. More indicative perhaps of overall health conditi6ns in at leastone area of the cotuntry is a survey taken in northern areas in 1974, andpublished by the Plahning Commission. 1/ This survey covered about 1% ofthe po'pulation of foiur villages (Rahimabad ahd Bargobala in the GiigitDistrict, NUit in the Nagar District and Shergilla in the Punial District).Out of the 1i727 cases studied in the sampled population, 45.1 per thousandsuffered ascariasis;;36.4 per thousand suffer'ed from goiter; 27.2 per thousandhad chronic bronchitisi 23.5 per thousand suffered pneumonia; 22.0 p6r thou-sand suffered from anemia; and 20.8 per thousand suffered from rheumatoidarthiritis. The principal causes of mortality were found to be pneu2oniawith a death rate of 29.5 per thousand, rheumatoid arthiritis with al death

1/ Planning Commission, Government of Pakistan. A Baseline Sample Surveyof Northern Areas, March 5, 1974.

ANNEX 8Page 2

Table 1: HEALTH INSTITUTION BASED DATA ON SICKNESS

Disease Percentage of total

1. Gastro-intestinal diseases, including parasitic 25-30

2. Respiratory diseases 15-20

3. Fevers 10-15

4. Diseases of the skin and areolar tissue 5-10

5. Malaria 5-8

6. Diseases of the eyes 5-6

7. Injuries, general and local 4-6

8. Diseases of the ear and nose 4-6

9. Dental diseases 3-5

10. Diseases of the heart and circulatory syster 3-4

11. Diseases of bones, joints, muscles, etc. 2-3

12. Diseases of the nervous system 2-3

13. Tubercolosis (T.B.), all forms 1.5-3\80% T.B.of lungs)

1l. Infectious/communicable diseases 1.5-2.5

15. Deficiency diseases 1-2

16. Diseases of lymphatic system and endocrines 0.75-1

17. Tumors 0.5-1

18. Other diseases 1.5-2

Source: Planning Division, Ministry of Finance, Planning and Development.

-Table 2: C0MMUNICABLE DISEASES NOTIFIABLE IN PAKISTAN IN 1973

Punjab Sind N.W.F.P. Baluchistan TotalDiseases Cn fl t.hQ CaRgp peaths Cases D Athg nS.s fl t h negths

I.' Smallpox 415 50 7,848 897 194 35 801 140 9,258 1,1222. Influenza - - 3,165 1 - - - - 3,165 13. Typhus - 55 - - - 55 -4. Whooping cough 53 - 4,446 - 187 7 - 4,686 -5. Poliomyolitis - - 911 38 - - - - 911 386. Relapsing fever - - 26 - - - 26 -7 Cerebrospinal - - 516 40 - - - - 516 408 C Chickenpox 140 - 149 1 - _, 228 - 517 19. Diptheria 2 - 1,239 49 - - - 1,241 491.0. Leprosy - - 311 - - - 65 - 376 -11. Sprue - - 406 _- - - 406 -12. Puerperal fever - - 447 2 - - - - 447 213. Scarlet fever - - 60 - - - - - 60 -14. Enteric fever 616 65 7.469 2 772 - 857 - 9,714 6715. Dysentery 15,931 92 50,001 39 15,170 - 5,478 33 86,580 16416. Tuberculosis 3,155 348 24,641 85 3,680 _ 1,780 81 33,256 51417. Frysipelas - - 130 - - - - 130 _18. Measles 363 159 3,904 161 442 _ 294 - 5,003 32019. Mumps 97 - 2,377 6 57 _- -_ 531 6

159,468 2,324

Source: Ministry of Health.

ANNEX 8Page 4

rate of 17.4 per thousand; dysentery and enteritis with a death rate of 10.4per thousand, pyrexia of unknown origin with a death rate of 5.8 per thousand:tuberculosis and measles with a death rate of 2.3 per thousand each; and small-pox, rabies and ascariasis with a death rate of 0.6 per thousand each. Thissame report shows an infant mortality rate for the studied villages of 273per thousand births. These results of course cannot be generalized becauseof the size of the sample, the limited geographical area, and the large num-ber of subdivisions made for diseases.

4. A life table prepared by the Planning Commission, 1/ based on Popu-lation Growth Surveys in 1968 and 1971, gives an expectation of life at birthof 52.9 years for males and 51.8 for females. It is important to notice thaLaccording to this life table the expectation of life is higher for males thanfor females up to age 40; from then on the situation reverses and expectationof life for females is higher than for males. The lower expectation of lifefor females at younger ages, characteristic of the Indian subcontinent, isdue in part to better care given to male children and the high risk of preg-nancy. Expectations of life at birth of around 50 years are relatively lowby modern standards. Of special importance is the fact that infant mortalityrates are still very high (over 100 deaths before age one per thousand births).

B. Factors related to Bad Health

5. The poor health of the population is basically related topoverty, which partly reflects the high population density and growthand which contrib te to bad environmental conditions and malnutrition.

(1) Environmental conditions

6. Most of the population live in rural areas without adequate sys-tems for collection and disposal of excreta and refuse. Bodily elimi-niationis usually done in open fields where the excreta serve as breeding groundsfor disease vectors. One of the most urgent health needs is the provisionof sanitary latrines appropriate to the cultural framework of Pakistan'srural population.

7. Lack of pure and safe water supply is a basic problem. Althoughnatural sources of pure water are often available, the water is usuallycontaminated before it is consumed. This reflects lack of education ofthe population, lack of soap, lack of latrines, and lack of special waterprovisions for animals. Although provisions of piped water to villagesmay be an expensive proposition at present, publich health education andlow cost latrine construction can go a long way toward solving this prob-lem. Even in urban areas proper drainage facilities are lacking and refuselies open as breeding grounds of disease vectors. Air pollution is alsobeginning to affect industrial areas and to be a cause of concern becauseof the diseases it may provoke.

1/ Planning Commission, Government of Pakistan, mimeo.

ANNEX 8Page 5

(2) Malnutrition

8. A large part of the population of Pakistan suffers from under-nourishment. Although food production capacity is adequate to meet theminimum dietary requirements of the entire population, this does nothappen in part due to unequal distribution of food and to inadequatefacilities for food preservation.

9. The main foods of vegetable origin are wheat, rice, fruits andvegetables. The main foods of animal origin are buffalo milk, beef, bulffalo,mutton, poultry and fish. About one-third of protein consumption is fromanimal origin and two-thirds from vegetable.

10. While low income groups suffer the most from malnutrition, theproblem of distribution exists also at the houshold level. The wage earner(male) consumes the biggest and better share of the foods available withthe consequent concentration of malnutrition in women, especially whenpregnant, and in infants and children of pre-school age.

11. Inadequate facilities for the preservation of food are respohsiblefor loss of a sizeable portion of the grains produced. Limited transporta-tion facilities also. restrict food consumption largely to-the productslofthat area. Additional problems are the lack of dietary education to helpthe population to consume inexpensive but nutritionally rich foods, andadulteration of foods, which seems to be very frequent.

12. Evidence of imalnutrition is obtained from nutrition and healithsurveys. 1/ These surveys indicate that caloric intake is on the averiageadequate, especially in rural areas, but that this intake varies withincome so that poor people only get a fraction of the minimum requirements.The primary problem with protein intake is one of quality; only about 12%of the protein intake of persons identified as suffering from malnutritionis from animal origin. For both the urban and rural populations there isdeficiency of Vitamin A, Riboflavin, Vitamin C, iron and iodine. The urbanpopulation shows also a deficiency of calcium intake. The surveys suggeststhat malnutrition is very prevalent (especially among pregnant and lactatingwomen) and a principal primary and secondary cause of disease, both producingdisease and reducing resistance to other diseases.

1/ Three reports were available for this report: Directorate of NutritionSurvey and Research, Ministry of Health, Labor and Family Planning(Health Division), Government of Pakistan, Nutrition Survey of WestPakistan (February 1965 - November 1966): A Report, June 1970. Ministryof Health, Report on the Extent of Malnutrition in Flood Affected Areasof Punjab and Sind, mimeographed (1974). Planning Commission, Govern-ment of Pakistan, A Baseline Sample Survey of Northern Areas, March 5,1974.

ANNEX 8Page 6

(3) Excessive population growth

13. The excessive growth of population has contributed to the badhealth of the population by putting pressure on the nutritional resources,making the environment more crowded and therefore more dangerous, and bydiffusing the gains produced by the economy.

14. Preliminary results of the 1972 census indicate a populationof 64.9 million persons for Pakistan. By mid-1974 the estimates give apopulation of 70 million. This is more than twice the population of 1951and indicates an acceleration of the rate of growth. This growth hasincreased the proportion of people in the younger age group (0-14),which today accounts for about 45% of the total population. Sind andBaluchistan provinces were the largest gainers between 1961 and 1972,when Sind increased its population by 66.9% and Baluchistan by 78%. Therural population was 74% of the total in the 1972 census.

15. During the last ten years the GNP has grown only at an average rateof 4.3% per year. With a rate of growth of population of 3% per year,practically 70% of the gains in the economy have been absorbed by populationincrease rather than higher standards of living. In the last two years GNPhas grown at about 6.5%, but reduction in the rate of growth in populationis still necessary before economic growth can have a quick impact on percapita GNP.

16. In the last 20 years the physical index of crop production hasrisen by 100%, but food crops have only increased by 79% while the popu-lation has more than doubled. Thus there has been a reduction in percapita agricultural and food production.

(c) Health Services in Pakistan

17. In order to improve health in Pakistan it is necessary both toimprove social and economic conditions which, with conconmitant improve-ments in environment and nutrition, can have direct effects on health,and to prepare and implement health measures to prevent and cure disease.This includes a health system which provides environmental, preventive andcurative services and also health education for the population. Healthplans call first for knowledge of conditions of alternative ways of pro-viding health services, and of available resources. Once this knowledge isin hand, objectives and content of the program can be set in light of avail-able resources.

18. Health services in Pakistan have progressed substantially sincej947, but are far from adequate. The emphasis has been on curative health.There have also been preventive health programs, but with little emphasison environmental conditions. The number of doctors in the country isestimated to be about 10,000 at present (see Table 3), compared with 1,200in 1947. In the same period the number of nurses has increased from almostnone to about 3,000, and the number of hospital beds from about 14,000 to37,000. This implies that there is now one doctor per 7,000 persons, onenurse for 23,000 people and one hospital bed per 1,800 persons.

ANNEX 8Page 7

Table 3: HEALTH PEHSONNEL AND HEALTH INSTITUTIONZ C-UNE 1974

Category Number Population per facility

Personnel 1/

1. Doctors 10,000 7,000

2. Dental Surgeons 700 100,000

3. Nurses 3,000 23,300

4. Health Visitor 1,000 70,000

5. MIidwives 2,700 25,900

6. Physiotherapists 150 )i66,700

7. Pharmacists 500 14,000

8. Dental Hygienists NIL -

9. 1ledical Technologists 100 700,000

10. Dispensers 8,000 8,750

11. Sanitary Inspectors 1,450 48,300

Health Institutions:

12. Hospital beds 37,000 1,800

13. Dispensaries 2,h00 29,200

14. M.C.H. Centres 715 97,900

1/ These are estimates of the number o-' persons available withihl the country

Source:Planning Coruission (Health Section) Government of PakistanGuidelines for The Fifth FIVE YEAR PLAN (1975-80) Health and Population PlanningOctober 197h.

ANNEX 8Page 8

19. In rural areas, however, the situation is much worse. The ruralpopulation comprises about 75% of the total, but 80% of professional medicalpersonnel are in urban areas. Thus there is one doctor per 25,000 peoplein rural areas. Distribution of hospital beds is as bad; although thereis one hospital bed per about 600 people in urban areas, there is only onehospital bed for 13,000 people in rural areas. Furthermore, for the wholecountry there are only 2,800 dispensaries, which constitute the smallestunit for the provision of health, and only 1,850 of these are in ruralareas. Because of limited professional medical services, the ruralpopulation must either use the services of Hakims, Homeopaths and similarpersonnel or go without services. The non-professional medical personnel(Hakims and others) are estimated to be about 40,000, or one per 1,750persons.

20. This situation is further compounded by the fact that only afew professionals practice their trade in Government institutions. Gov-ernment health service staffs are thus inadequate to carry out theirresponsibilities in environmental, preventive and curative health care.In the area of preventive services, the government has had major campaignsagainst malaria, tuberculosis and smallpox. The malaria eradicationcampaign initiated in 1960 had great success until about 1967, when malariawas thought to be completely eliminated. But failure to exert proper vigilanceand new resistance of the vector to DDT has again increased the importanceof this disease to the point that Health Ministry staff are talking aboutthe possibility of 10 to 15 million people being affected by malaria in1975 (estimates indicate 20 million affected in 1960).

21. The tuberculosis campaign, on the the other hand, seems to havebeen more successful. TB clinics and widespread testing and vaccinationhave greatly reduced the importance of this disease since the vaccinationprogram began in 1950. The smallpox campaign has also been very successful.In 1974 the Health Authorities reported that the number of cases was s6 fewthat smallpox could be considered as non-existent in Pakistan. However,surveillance is to continue to prevent a resurgence.

(2) Planning for Health in the Past

22. Past efforts to reduce health problems have largely been based onthe idea that obvious problems have to be attacked immediately, and thatcurative services must be provided. Planning has not been based on thelong run, as exemplified by the Malaria Eradication Campaign.

23. Planning has also emphasized input requirements rather than objec-tives to be achieved and resource availabilities. An example is the People'sHealth Scheme (PHS). For the last two years the government has been workingon this scheme, which is to create one Basic Health Unit (BHU) for every10,000 persons in densely populated areas and 5,000 persons in sparselypopulated areas, and to build a structure of higher type service facilities

ANNEX 8Page 9

on top of the BHU. Inputs in every respect have been estimated, but man-power and other resources are inadequate and no implementation has yet takenplace. The PHS is not geared to solve the health problems of the countrybut rather to give an umbrella of curative services.

(D) Problems in Planning for Health in Pakistan

24. The United Nations Development Program (UNDP), the World HealthOrganization (WHO) and the Government of Pakistan are cooperating in anexercise which should be of help in the formulation of a more realisticand effective health sector plan. In doing so they will have to cons:iderthe implications of the past planning experience in Pakistan. They willhave to make up for non-existent data and be realistic about the resourcesavailable.

(1) Absence of data collection and analysis

25. The Health Department in each province is in charge of datacollection on vital statistics and health services. The few statisticsnow collected are not representative of what is happening in Pakistan.Data on incidence of disease come basically from the few hospitals around thecountry.and the cases that- have been treated in those hospitals. Exceptfor nutrition surveys and a few surveys in specific geographical areas, thereare no data on the prevalence of specific diseases. There is no idea at anymoment of how many people are infected with malaria, tuberculosis, dysentery,etc.

26. Vital statistics are non-existent. The recorded cases amount topossibly 10% of the actual occurrence of births and deaths. Estimate's ofmortality and fertility have been obtained through the use of sample sur-veys, and experimental registrations by other sections in the Government.The Population Growth Estimation project, the Population Growth Survey andthe National Impact Survey are examples of the efforts to collect suc|hinformation. The third decennial census taken in September 1972 has yet toprovide any tabulations that permit examination of the quality of thel censusand analysis leading to meaningful conclusions about the population. A newstudy is planned for 1975 as part of the World Fertility Survey. It isexpected that tabulation and analysis of the results of this survey will takeless time than the census and will result in information useful for policymeasures regarding family planning.

(2) Financial Constraints

27. The public health budget for 1972/73 was Rs 322 million, or|Rs 4.73per capita, including Rs 139 million in the development budget and Rs 183million in the non-development budget. For 1973/74 the budget was aboutRs 415 million, or about Rs 5.93 per capita. This total corresponds to only0.5% of GNP, indicating no increase in the relative size of budget expendi-tures for over the past 15 years.

ANNEX 8Page 10

28. Private sector expenditures on health seem equally low. Veryrough estimates of private expenditures, made by the Government for thePeople's Health Program 1/, indicate that for 1972 about Rs 1,600 millionwere spent. This figure is about five times that spent in the public healthbudget, and raises per capita public and private health expenditure to about3.2% of GNP.

29. Expansion of Government health services, especially for the ruralpopulation, depends on expansion of the budget in real terms. Until now,a large part of the health budget has been financed by foreign aid, especiallyfrom the United States and from UNDP and WHO. Even if this aid continues inthe future as planned, meaningful changes in health will only be accomplishedwith a greater commitment on the part of the Government.

(3) Manpower Constraints

30. At present there are not enough professionals in health. TheGovernment is making efforts to increase health personnel by opening newmedical colleges and expanding admissions in already existing colleges. Theproblems of their concentration in urban areas and migration to foreigncountries, however, remain. These problems raise several questions aboutthe type of personnel to be trained. One clear need is for a greater numberof paramedical personnel. It is not necessary for doctors to deliver ashigh a proportion of the services as at present. Neither is it clear that alldoctors need to be trained to the same highly specialized standards. If ahealth assessment determines that this high level is not uniformly necessary,training could be shortened and outmigration reduced. But even in thiscircumstance there is no guarantee that the health personnel will work onhealth or go to rural areas unless greater rewards and more attractive work-ing and living conditions are created. The rural population will also haveto be taught to accept male doctors and paramedicals, since few females liketo work in rural areas.

31. People trained in environmental and preventive medicine are alsobadly needed. Present medical personnel are almost entirely oriented tocurative services. Unless preventive and environmental services are equallydeveloped, curative medicine will remain a palliative measure that doeslittle to reduce the overall incidence of disease.

32. The new experiment of health guards (HG) underway in the northernareas, using local people with very brief training, needs to be strengthened.First, the training seems to be inadequate. Secondly, although the initialorientation was toward preventive and environmental health, it is moreattractive for the HG and for the public to deliver medicines, so the HG'sare becoming new curative agents. Thirdly, the present method of not paying

1/ Government of Pakistan, Health Programme, (mimeo), no date (SecondVersion).

ANNEX 8Page 1a

HGs implies that the workers have to sacrifice some time from earning theirown livelihood for the provision of the services. Rewards in terms offuture education and even monetary payments for environmental and preventiveservices should be worked into the system. Proper supervision and coordinationwith other health services are also required. Finally, a supply of medicineneeds to be assured if continuous effective results are to be obtained.Since the HG method of involving the community in the prevention of diseasemay prove a quick and low cost way of providing health personnel and servicesin rural areas, it should be looked at more closely.

(4) Administrative Problems

33. The health delivery system in Pakistan is plagued by administrativeproblems. There are problems in the performance of functions, in themaintenance of physical facilities, in the logistics of moving drugs andmoney, in coordination between provincial and federal government, inrecruitment, and in supervision and in use of a management information system.

34. Most field workers have never seen their job descriptions. Over-work on the staff makes it difficult to perform the multiple functionsthey are supposed to perform. To expect a rural health center to performenvironmental, preventive and curative services when it is badly understaffedby underpaid personnel who are confronted with a myriad of persons tin needof curative services is not realistic. The staff is barely able to meetdemands for curative services. If more services are to be provided betterstaffing must be provided, and if environmental and preventive services areto have priority over curative services, then rural health centers must bestaffed by personnel trained in these specialities.

35. Once physical facilities have been provided, it seems to be for-gotten that they have to be maintained to avoid their fast deterioration.This raises the question of whether the Government should own the physicalfacilities needed for the provision of services or whether they should berented from the private sector. The problem is observed in respect tobuildings and vehicles. Buildings give the impression that they have notbeen painted or taken care of for years, but they continue serving evenwhen badly kept. Vehicles, however, offer a particular problem. OrLce theybreak down and no repairs are made, they cease to provide the services theywere intended for.

36. To provide drugs and money for salaries and other expendi-tures in the field seems to be a difficult problem for the health insti-tutions. Salaries are not paid on time and the morale of the staff isaffected, adding to the difficulties of recruiting and of persuading staffto remain in rural areas. Once supplies reach the field they are badlykept. There are no facilities for refrigeration of vaccines. It is notclear whether the problem of supplies reflects a shortage at the provinciallevel or the lack of a distribution system, or both..

ANNEX 8Page 12

37. Federal and Provincial Government program departments do notcooperate. One of the reasons for the resurgence of malaria has been thelack of support from provincial health organizations. Even the Health Guardsexperiment does not seem to be coordinated with the dispensaries in theirrespective villages. Family planning clinics located in front of healthservices stay empty while big groups of women wait to see the doctor in thehealth unit. Facilities and services could be coordinated in order bothto save staff and building expenses and to expose the women to familyplanning without adding to their waiting time.

38. Although on paper there is a large number of health units, inpractice some of these health units are not staffed. At the same timeapplicants for the vacant positions wait for long periods of time to beappointed. Health posts which are unstaffed are a visible reminder tothe population that the promised services are not being rendered.

39. The lack of knowledge of their assigned functions by healthpersonnel, lack of data in units performed, and lack of supervision andguidance of individual health units reflect a lack of management. Evenremote health posts should be checked by surprise once in a while to determineif they are working properly and, if not, why not. Decisions have to be madein the field on how to improve services, but without data collection andwithout supervision the job is impossible. It is, therefore, necessary toimprove these activities so efficiency can be increased and the relativelysmall budgets can go further. Service data do not necessarily measureeffectiveness of a program but they are a helpful tool of management inpinpointing weaknesses and suggesting improvements.