Pakistan has a mixed economy with a large part of the production activity in the private sector.

Agricultural production is carried out entirely by private enterprise. In the industrial sector the major portion of value added originates from the private sector. Among the service sectors, insurance, banking, whole-sale and retail trade are almost exclusively run by the private sector. In import and export trade, the Trading Corporation of Pakistan has obtained a relatively small share of the total trade which was until recently a private sector preserve. In the case of foodgrains, the Government only acts as a moderator of market forces. Fertilizer import under aid arrangements is handld by the public sector agencies but its actual distribution in West Pakistan is carried on by the private sector. In transport and communications (services which were developed and nun by the Government) private sector has carved an important share for itself i road and inland water transport. Shi'pping and air transport are carried on n Uargely by mixed public-private enterprise.
2. With this background of economic organization, it may appear surprising that the main emphasis in planning in Pakistan has been on. the public sector. Planning instruments for the private sector i.e., investment-schedules have only covered large-scale industrial sub-sector. Even this is of recent origin. The first attempt at comprehensive modem planning under the First Five-Year Plan, in fact, reduced the private sector to the status of a residual claimant of real resources. Private investment declined during this period compared to the preceding five-year period. During the Second Plan, the private sector strategy involved the setting up of an incentive mechanism sufliciently attractive to obtain a high investment response and evolution of an institutional framework for channelling real resources to the private sector to translate investment demand into physical investment. The absence of detailed and restrictive planning for the private sector combined wifh very powefful incentives and sizeable credit availability had the advantage of turning the private sector into a dynamic force. However, there was very little attention paid to the quality of investment, efficiency in the use of resources and consistency of private sector development with social goals. These factors Paid a number of problems in store for the future.

3. During the Third Plan, as the conflict between pursuit of social objectives and maintenance of powerful incentives for private investment became obvious, many policy shifts were made. These were, however, directed against the specific problem of 'concentration of economic power, rather than precise formulation of a clear strategy for broad-basing the sources of saving and investment in the private sector.
4 For the Fourth Plan, it is imperative to look deeper into the behaviour of . private sector and to start the process of integrating the private sector more adequately into overall national planning. Considerable work needs to be done for evolving sectoral plans and policies for private investmnet as part of a strategy for balanced and healthy development of the areas of the economy primarily run by private enterprise. This should be integrated in the framework of overall national objectives and priorities. A framework has to be evolved for the functioning of private enterprise. While there would be continuing debate on the role of the private sector, including the possibility of nationalisation of certain activities, the ultimate shape would depend upon the political cornplexion of the new Government. However, in any case, it is necessary to start

78

PRIVATE I N V B S ~ E N T

defining the social parameters within which private gector would be allowed to function. This framework would be necessary even with a large. degree of nationalization, because under any system, some role would have to be assigned to private initiative.

5. Planning for the private sector need not imply detailed planning which is in practice for the public sector. It does, however, involve management cf key inputs in line with set targels, proper husbanding of credit availability for private activity and a better coordination of all the policies which affect the private sector. While the task of allocating resources to various types ol investment may have to be left to market forces and relative profitability, market signals should be so adjusted as to be in line with national priorities. The overall profitability of private enterprise should be within the limits of social acceptability to avoid tensions and bitterness. even if it means a slower expailsion of private enterprise than in the past.
6. Knowledge about the priva~esector so far is quite inadequate. With the problems raised by concentration of economic power and the consequent attempt to look more closely into the problems of the private sector, there has been considerable improvement in the flow of data and its meaningful organization. However, enough is still not known to allow movement with confidence. Thus, only the broad framework of a plan for the private sector can be conceived. Gap would have to be filled, as some of the research which is necessary is carried out and results become available.

7. So far even the total magnitude of private fixed investment had been derived indirectly from available data on the use of cement, steel and machinery. In the last couple of years, the Central Statistical Office has completed a study of physical investment in the economy which has now been firmed up. T i also hs gives a sectoral break-up of investment in the public and private sectors. Sectoral figures still leave much to be desired and need to be reviewed in the light af the information regarding physical inputs and financial flows. This work is being carried put. In the meantime, the data need to be used with some caution. Investment in inventories is not yet measured and the saving rates are difficult to determine. Financing picture is not yet complete. A flow of funds analysis was carried out in the State Bank of Pakistan with the help of Planning Commission and C.S.O. for the year 1967-68. The reslilts of this study have helped in an understanding of the financing' mechanism of the private sector. Such analysis is, however,.needed on a continuing basis to give an indication of the movement of different eremen) The financing picture of investment in the manufactuiing sector is becoming clear as a result of the work done by the financial institutions. Very little information is available about other areas, where bulk of financing conles presumably from " own retained earnings ".

'

8. In this Chapter, an attempt has been made to evaluate the experience during the Third Five-Year Plan in' private investment, to identify problem areas which need attention and to evolve targets and broad outlines of a strategy for the Fourth Plan.

Private Baavestmewt during Third kkn ,

9. The targets for private investment for the Third Plan were set in the light of the *and Plan experience. Against a target of Rs. 8,380 million, actual private investment during the Second Plan was Rs. 13,680 million in current . prices, showing an excess of 63 per cent. Private investment increased by three times over this period.

10. For the Third Plan, private investment target was fixed at Rs. 22,000 milf lion in a total Plan s Rs. 52,000 million. The share of the private sector was thus 42 per cent against 44 per cent realized during the Second Plan. The annual rate of acceleration in tbe level of private investment assumed for the realization of this target was 11 per cent. The estimated private investment figure for 1964-65 was Rs. 3,181 million. It was assumed that it would rise to Ks. 5,200 million by 1969-70.
11. Sector-wise distribution of investment targets indicated that 38 per cent of investment was to be in the manufacturing sector and roughly 18 per cent each in Agriculture, Transport and Communications and Housing. A specific target for the Third Plan was to raise the level of private investment in East Pakistan to approach that in West Pakistan. 12. Subsequent studies show that the level of private investment was, in fact, significantly larger than earlier estimates far 1964-65. The estimated figure of Rs. 3,181 million used in the Third Plan document was raised to Rs. 3,440 million in the Final Evaluation of the Second Plan. The latest estimates of C.S.O. indicate private fixed investment of Rs. 4,198 million in 1964-65. On the basis of acceleration implicit in Third Plan targets h r private investment, the revised bench-mark would have resulted in a private investment target of Rs. 28,500 million. It is against this notional target of total private investment that the performance of private investment in the Third Plan should be evaluated. 13. Actual'investment during the Third Five-Year Plan is .expected to reach quite closc to the financial target of Rs. 22,000 million, but shows a sh~rtfall of roughly 24 per cent cmpared with the figure of Rs. 28,500 million. Looking at it in another way, the increase is from Rs. 4,198 million in 1964-65 to an estimate of Rs. 4,300 aijlion for 1969-70. The climate for private investment deteriorated towards the end of the Plan period so that in the final year investment level declined even in current prices. The growth in private investment over the Third Plan period is thus likely to be less than one per cent per annum in current prices. As the indicators point to a price increase of more than 20 per cent over this period, these figures imply a substantial deceleration in real private investment. , 14. Private fixed investment declined as a proportion of GNP from 8.6 per cent in 1964-65 to 5.5 per cent in 1969-70. The year-wise details are given in Table 1 below :-

TABLE B
Private Fixed lnvestnzent
Period 1964-65 . 1965-66 1966-67 * 1967-68 .. 1968-69 (Provisional) 196939-70 (Estimate)

(Rs.Million)

Private GNP Private Fixed (in current Investment Investment market as percentage prices) of GNP

. .. .. ..

.. ..

.. .. .. .. ..
o .

.. .. .. .. ..
-.

.. ..

.. .. .. ..

4,198 3,979 4,203 4,472 4,562 4,300

48,616 53,037 62,411 66,082 72,000 78.600

8.6 75 . 6.7 6.8

6.3

5.5

This, of course, does not. take into account the investment in inventories acclumnulated by the private sector, which would probably nlodify the above conclusions to ,a certain extept.

15. Sectoral distribution of private investment during the Third Plan indicates that investment in agriculture was unchanged in current prices ; in industry the increase was roughly in line with tI~e rise in price level ; there was a substantial decline in-investment in the transport sector ; the only substantial increase was in the housing sector. This picture is in line with general economic trends. Restrictions on the import of trucks and components is mainly responsible for a s b a q decline in transport sector. This is explained by a shortfall in non-project assistance, which was increasingly used for fertilizer imports and other agricultural inputs. Besides, there are indications that investment in housing mainly went to luxury housing. Thus, the composition of investment was also not in line with the Plan projections. 16. Regional distribution of private investment indicates considerable imbalance. The Third Plan had postulated a rapid increase in private Investment in East Palciskin. The target of Rs. 11,008 million for private investment in each wing was set on the basis of very poor knowledge about actual behaviour of private investment in the Second Plan. The Third Plan had started wilh the assumption that East Pakistan was already obtaining one third of Wtal private investment. In aclual kct, as later estimates showed, East Pakistan's share at the end of the Second Plan was only 23 per cent. From this to raise the share of East Pakistan to 50 per cent even by the end of the Third Plan would have posed very difficult problems. The target to equalize private investmeni level in the two Wings for the period of five years was quite unrealistic. 17. In any case, the only chance of raising the share of East Pakistan in privale investment to equality with West Pakistan in the Third Plan depended upon an early start. Very s h a v adjustments in policy were needed quite early to prep m the ground on, the basis of which improvement in ratio could be expected towards the latter part of the Plan. 18. The needed policy adjusrments for providing incentives in favour of East Pakistan were delayed by the war in 1965 and the disruption in aid Bows. The economy was being required to islake a difficult adjustment to reduced aid flows. n Consequently, policies for the private sector discouraged investment i activities which the private sector had found traditionally more profitable. 19. Two Committees were set up (one by CIPCOC and one by the National Assembly) to examine the causes of slow rate d capita1 formation in m a Pakistan and to recommend measures to improve the situation. The H8im Committee Report (which also drew upon the recornendatism of CdWOQ was nearing finalization in 1969 when the political situation changed the entire outlook, 20. Some measures were taken, in any case, to encourage larger private investment in East Pakistan. These included longer tax-holiday anel lower rates of duty on capital goods in East Pakistan. The Budget for 1969-70 staengthened these measures. Even more powerful was the impact of Government directive to financial institutions to start with a notional allocation of loans on the hsii d 50 per cent for East Pakistan. PICIC and IDBP followeel ipggr&ve goEcim and report considerable improvement in the ratio of loam sanctiomd (not yet disbursed) for East Pakistan. This is a hopeful sign for the ffituae. Disbwsemcnls would Have to catch up with sanctions with a time-lag. PPaC and D B P ex~erienceindicates that there is a considerable increase in the m u m k of potential entrepreneurs in East Pakistan. Since, it was felt that a major cause for he slow growth of privaie enterprise in Easl Pakisisnn was the existence of an equity gap, an Equity Participation Fund was set up by h e

Bovernmeiit in January 1970 to provide a part of the equity finance to new entrants in the indusiaial field. This should help speed up utilization of P I C E and IDBP loans in Bast Pakistan.
21. M ~ s of the recommen&tions on which consensus had been reached in the t House Cormittee have already beer1 implemented. It, however, appeared by the end of t l ~ e Third Plan that the eEort. to strengthen the incentive mechanism in East PaPris~anand the less developed areas of West Pakistan would have to coiitiiaae for dispersing the bene&is of development more v~idely. EBcrts are also needed for encouraging investment in sectors other than large-scale industry which have shown very little improvement in East Pakistan. The regional distribution o private investment is given in a b l e 2 below :f

Private Fixed Investment in Current Prices by Regions

Period
1965-66 1966-67 1967-65 1968-69 (Provisional) 1969-70 (Estimate)

East Pakistan

WestEast Pakistan Pakistan

-

West Paltistan Per cent

76 75 75 74 72 74

..

.. .. ..

..

.. ..
..

..

.. ..

..

.. .. .. .. ..

Total (1965-70)

945.6 1,033.3 1,111.2 1,153.3 1,200.0 5,443.4

2,984.7 3,133.0 3,317.0 3,367.9 3,100.0 15,932.6

24 25 25 26 28 26

As Table 2 shows, private investment in East Pakistan totalled Rs. 5,443 million n during the Tlzird Plan. Comesponding investment i West Pakistan is almost three times. The ratio has moved only moderately from 23 per cent for Bast Pakistan in 1964-65 to 28 per cent in 1969-70.
Bhatsgy for tB~ePrivate Sector

22. Development sirategy in relation to private investment would have to be radicalPy diEeren'l in the Fourth Plan. In the past, the strategy was based essentially on the premise that capital is shy and that enterprise needs to be E brought LIP with the help o special incentives in the form of subsidies, protection and tax concessions. Thus a powerful and effective system of incentives was evolved over the years and w i t h the given framework, private enterprise was 1ef.c free to exercise its options with a view to maximizing its rate of return. Tlie system produced results and has been responsible for a very high rate of industrialization. At times, the response in terns of investnzent demand was rnoE than what the country could match in terms of availability of real resources. Thus, realized invesLment in industry was generally below the level of investment demand registered. 23. However, the cost of development under this strategy for the private sector continued to rise. The cost is to be measured in terms of the maldistribution of income in the economy, concentration of ownership and economic power and growing social tensions. Essentially, the protection of infant industries, which are at times q!~iie inefficient, implies that consumers have to pay high prices. Tax concesslons to industry mean that others have to bear a larger burden of taxation. Provision 01 foreign exchange at a low effective rate to industrial investments

gives resources to them at the cost of agricultural producers of export commodities. In a number of cases, the profits earned by industrial investors were not profits of efficiency but merely a transfer from other sectors of the economy through high prices. This transfer mechanism was justified in the early stages of development but is placing an intolerable burden on the rest of the society as the size of the industrial sector grows. Concentration of ownership and absence of suflicient degree of competition which could exercise pressures for increasing efficiency compounded the problem.
24. Special measures were indicated in the Third Plan to rectify the situation. Some of these have already been implemented. However, the concern over the problem of concentration of wealth grew towards the end of the Plan period and a sense of greater urgency developed to move speedily. This was reflected in the Socio-Economic Objectives of the Fourth Plan. The process of reform was quickened with the assumption of power by the Martial Law Administration. Special policies were announced for regulating labour-management relations and for curbing the growth of monopoly power. Such ad hoc measures, however. relate to the correction of excesses arising from a system which is basically inequitous and in some cases the corrective measures may go too far and may inhibit enterprise especially among the potential new entrants who provide the only hope for broad-basing the system. It is, therefore, necessary to conceive a comprehensive change in the system. Some elements of a new strategy have emerged in practical measures adopted by the Government. The process would have to be carried further in the Fourth Plan to make it more comprehensive.

we have now developed an aggressive and dynamic private sector, quick to respond to profit incentives and capable of setting up and running large industil business and service enterprises. Apart from the established and the experienra ced, there is a sizable class of potential new entrants who are being attracted by the demonstrated success of the others. The incentive mechanism is no longer needed on a general basis, but more selectively for correcting regional imbalances and reducing the handicaps from which new entrants suffer. 26. Secondly, it is important to realize that the nation as a whole is not prepared to subsidize and protect inefficient industries, merely for the sake of industrialization. The size of the industrial sector is relatively large and the total burden of protection on such a large scale is going to be beyond the endurance of consumers. The distortion being caused in income &stribution and ownership of wealth as a result of protection and concessions to industry is intolerable. The older and more established industries have to acquire the level of efficiency where they would need a minimum of special incentives and protection. They should move to the group on which the burden of the cost of protecting new industries can be partiaIly thrown. 27. A combination of the two considerations mentioned above leads to the conclusion that efficiency and competition should be the key-note of Fourth Plan strategy for the private sector. Since the private sector is, and would continue to be, the dominant force in the forseeable future in the production structure of Pakistan, private sector will be required to play a dynamic role in the overall growth process. So long as this role is based on the generation of new resources by the efforts of the private sector and does not add to the inequalities in income, it is a desirable contribution. A thorough review of the entire incentive mechanism and protection policy should be -ed out, with a view to progressively increasing the pressure on the private sector to be much more cost-conscious. The mere existence of profits in a protected market

Basic Approach to Bsivde Enterprise 25. The first element of the new strategy is the recognition that over the years

IS

not sufficient evidence of efficiency. Profits of protection should be repla& by profits of efficiency. Expansion and growth of the private sector through ii reinvestment of such profits would lead to a much healthier development m n f mizing social tensions. I the size of profits is relatively small and expansion based on this source slows down, this is a necessary cost for a more balanced development in the country.
28. Thirdly, the process of expansion through reinvestment of profits inevitably results in concentration of ownership. Re-investment is undertaken by thosr? who entered the field early. They would grow fast and lead to concentration. Socially the consideration of re-investment becomes a justification for high profits. This was acceptable in the early phase of development. However, this should now be supplemented increasingly by the development of a capital market which would channel household and institutional savings to potential investors both in the form of equity and loan. The institutional framework of the capital market has been considerably strengthened during the Third Plan. A number of new institutions viz. N.I.T., I.C.P. and Equity Fund have filled existing gaps in the capital market. These institutions, after overcoming their initial problems, are poised to take much greater responsibility. Policies are being recommended in a subsequent section to increase the resources at the disposal of such institutions which generally assist the new-comers and those who could not otherwise obtain access to financial resources.

29. Fourthly, the new strategy should seek to evolve a stronger positive approach to the question of regional balance in private investment. Considerable emphasis was'placed during the Third Plan on improving the investment climate in East Pakistan. In the Fourth Plan, the regional consideration would also have to include a growing concern. for location of new industries in the less developed areas of West Pakistan.

30. In the special case of East Pakistan, certain considerations need to bc malysed carefully. The incentive mechanism for encouraging private investors to locate their units in East Pakistan is uniformally available to investors from both wings. In practice, since the resources in the form of re-investible earnings are largely available with entrepreneurs based in West Pakistan, differential incentives in favour of East Pakistan have the effect of inducing such entrepreneurs to invest in East Pakistan. It is possible to devise a package of policies that would divert bulk of the reinvestible resources from West to Eas: Pakistan. This is the only sure way of rapidly accelerating private investment in East Pakistan. However, this is bound to create social terisions. In any society, where labour is local and the management and capital are not integrated within the local set up, mutual confidence is difficult to build up.
31. It would, therefore, be necessary to devise a policy which would assure participation of East Pakistanis both in the management and share-ownership. A personnel policy which seeks to employ 1 1 talent in key managerial jobs, even when it is not considered ideal on narrower efficiency criteria, would be a highly significant factor in bringing about political acceptance of inter-wing capital movements. An enlightened policy towards the development of a professional, managerial class for industrial and service enterprises would be highly desirable in any case. But it is absolutely essential for inter-provincial movements of private capital.
32. At the same time, efforts need to be intensified for the development of sources of capital formation from within East Pakistan. This is not merely a matter of providing incentives. The general climate of profitability can attract investment demand, but this must be backed by command of

84

PRIVATE INVESTMENT

adequate resources. The most important element in building up a class of local entrepreneurs would be the availability of credit and equity support. Specialized credit institutions are now functioning on a separaie bvd2er I'ur the two provinces. Notionally, an equal allocation of half the funds is made lor East Pakistan. It is only if the utilization falls shor~that balance of the funds is redirected to the other province. The experience of the financing in~:~i"l~tions indicated difficulty on the p a t of small entrepreneurs in linding adcq-~a;e equity capital. The setting up of an Equity Fund by the Government d ~ r i n g the final year of the Third Plan is expected to improve the situation considerably.
33. At present, IDBP is willing to go up lo 60 per cent ratio for loan requiring only 40 per cent equity. If 50 per cent ol the equity capilai can be obtained by sale on the market, mder-writing by 'HCP and/or participation by Equity Fund, the investor is required to have a stake in his own enterprise to the extent of 20 per cent. This is the essential minimum to ensure a keen interest on the part of the sponsors in making the venture a success. 1n:provelnent in credit facilities from the banking system which would allow conversion of immovable property and financial assets into liquid loan funds could help meet part of the equity requirements.
34. It must, however, be clearly realized that if a less developed region seeks to develop private investment largely from domestic origin, this is bound to be a slow process. Even with the measures listed above, the process cannot be speeded up suEciently. Domestic savings cannot grow very fast unless the entrepreneurs are left entirely free to exploit the consumer. A healllay growth of private investment in any less developed province would have to include an element of imported capital. Attitude towards such capirsll and enterprise would be a decisive factor in speeding up the development of less developed apeas.

35. Finally, within the overall strategy indicated above, it would be necessary to define the rules of She game within which private enieprise rnu.;l establish its relationships wirh other elements of the society. Private enterprise in a modern industrial society has an inherent tendency to move toward3 lagersized units and aggressive expansion leading towards the problem of cocceatraLion. Pakistan's experience in this respect is, by no means, unique. Oiher countries have passed through similar stages and have evolved techniques for containing an excessive tendency towards concentration while r~aintai~~ing sufficient scope for expansion.

36. Four important sets of measures can be identified for defining the framework for healthy and balanced growth of private enterprise in line wirh national objectives :
(a) Progressive taxation o higher incomes and large concentrz~io~~s f of wealth.

0) Improvement

of legal framework for companies and public account.. abllity o directors. f

(c) Avoidance and regulation of monopolistic powers.

(dl

Protection of labour.

PRIVATE INVESTMENT

85

(a) Tax Policy 37. The first important element is the management of tax policy. With progressive income tax, wealth tax and estate duties, it should be possible to achieve a considerable redistribution of income and contain excessive scncentration of wealth in the hands of individuals. These elements combined \kith the Islamic laws of inheritance can play an important role in achieving distributive goals of the society. While we have had a highly progressive income tax throughout this period, and have added other taxes in recent years, collection of taxes has not been commensurate with the gowtll of private wealth. This was partly due to the deliberate grant of concessions and partly due to loopholes in the Income Tax Law which was basically framed half a century earlier in the context of an entirely dierent society. Modifications and improvements introduced to meet specific problems could not completely modernize the law and make it an eEective instrument of policfr. Some shortcomings would inevitably exist in the tax-collection rnachine~y which cannot be isolated from the overall legal and administrative framework of direct taxation. Apart from the legal avoidance of tax, there is evidence of considerable illegal evasion. Declarations of tax-evaded wealth in 1958 and 1969 support the contention that evasion is practised on a large scale. A thorough overhaul of the tax law and strengthening of tax-collection machinery would be needed to bring the effective incidence of tax in line with the intentions of policy-makers. A new incometax law is being framed and would be effective early in the Fourth Elan period. This should be accompanied by a strengthening of the machinery for administrating direct taxes.

(b) Company Law and Managing, Agency System 38. Secondly, it is necessary to curb the powers of managing agents and controlling groups which they enjoy at present. The Boards of Directors should be iorced to behave as trustees on behalf of all the shareholders and be accountable for their action. Here again, the Company Law which governs the relations of the directors with shareholders was conceived as early as 1913. The Report of the Company Law Commission which proposes a thorough revision of the existing legislation should be implemented as early as possible. A strong Company Law coupled with setting up of the proposed Securities and Exchange Commission would go a long way towards eliminating the existing malpractices in the management of private enterprise and making broad-based ownership a meaningful reality. 39. An mportant feature of the existing Company Law deserves special mention. The Managing Agency system has been a unique feature of business organization in the Indo-Pak sub-continent. Managing Agency System gives a strong hold on the &airs of the public company to a small group of investors who sponsored the project. This system has out-lived its utility and is an important factor in aggravating the problem of concentration. No amount of wider share distribution would help so long as managing agents retain control of the enterprise. It appears necessary that the managing agency system shouId be abolished and be replaced by professional management which is fully answerable to shareholders and a representative Board of Directors.
(c) Anti-Cartel and Monopoly Legislation 40. The above two are basic instruments for checking undue and unhealthy growth of private enterprise, while leaving wide scope for expansion. These, however, do not meet the problem of monopolies, inter-locking directorates vertical and horizontal integration and cartels. The technological factors favouring large units in various industries tend to narrow the number of enterprises which

86

PRIVATE INVESTMENT

can exist in any field. h the developing countries, where the size of the market is small relative to the minim~m size of an economic unit, only one or two units sari be justified at the outset. Absence of competition provides opportunities to the earlier-comers both to exploit the consumers of their products and to effectively stop others from entering the field when further units may be justified. Some checks have to be exercised by the Government to curb these monopoly powers and to act as an umpire ensuring a fair deal to the elements of society which are likely to be aEected. The manner in which this problem has to be tackled may raise controversies but the desirability of laying down some rules of conduct in such cases is established beyond doubt. A draft law entitled Monopolies and Unfair Trade Practices (Control and Prevention) Ordinance 1969 was published by the a o v e m e n t on 28th June 1969 for eliciting public opinion. The law, modified in the light of comments received, was promulgated in January 1970.

(d) Labour Policy 41. The final and the most important relationship in the private sector is between the employer and the worker. It is impossible for the private sector to function without a clear definition of its relationship with the labcur. In a labour-surplus economy like that of Pakistan, labourers are inherently at a disadvantage in bargaining with the employers for an equitable share of gains from industry. It is, however, possible for particular sections of organized labour to force wage increases in excess of improvements in productivity. It is, therefore, necessary for the Government to define an institutional framework for orderly and just settlement of issues with certain minimum standards laid down. This has been attempted in the new wage policy already announced in July 1969. 42. The above guidelines for regulating the relationship of private enterprise with the rest of the society may appear restrictive. It may be feared that these would have the effect of slowing down the pace of fresh investment. This may be the initial result. However, they are in line with the solutions which other countries have sought for similar problems. The result has generally been a healthier growth of private sector rather than absence of private sector initiative. h fact, from the long-term point of view, private sector should tlnd it more attractive to operate within a framework which is socially acceptable. From the long-term point of view, no sector can maintain its growth while antagonizing and alienating other sections of the society. An acceptable role has to be evolved for the private sector, which can be roughly in line with the discussion above.
43. It is recognized that the pace of private investment growthmay not be as rapid in the Fourth Plan as has been in the past. However, positive approach by the small entrepreneurs and credit availability can help bring some growth in investment from the stagnant level at the end of the Third Plan. Estimates and projections for the Fourth Plan have been built on these assumptions. showing modest growth in large scale industrial investment at a rate roughly in line with the growth in GNP. Larger growth is projected in investment in housing and transport sectors, where an investment response can be expected to policy measures which are in line with the objective of wider dispersal of ownership.

Private Sector Investment Prosamme for the Fourth Plan 4 . The allocations for the private sector are wsentially indicative and notional. 4
With the exception of large-scale manufacturing, the Government exercises little dim%control ovq the extent and nature of private investment. However,

PRIVATE INVESTMBNT

87

Government does influence private investment and the direction in wnich it is channelled through fiscal and commercial policies and financial aid. The sectoral allocations presented in Table 3 below represent a blend of investment that can be expected to take place from a forecast of historical trends and the investment which is desirable to achieve balanced development. These allocations must not be interpreted as upper limits of permissibls development. Rather, they are designed to secure minkurn socially warranted growth in various sectors. Attempts will be made to tie-in credit and other controllable finances to achieve the pattern and size of the proposed development programme. The policy measures suggested focus attention on the impediments to private investment. The adoption of these policies would be necessary to achieve the proposed targets and ensure healthy and vigorous growth of the private sector.

Private dnvestmnt in the Fourth Plan by Sectors

( Rs. Million)

Sector

1969-70

1974-75 Fowth Plan

Total

Percentage Growth Per

Agriculture . Mmufa3udng, and Mining Quarrying Construction, Electricity and Gas Transport and Communications . Dwellings * Other Services .. .

-.

..

.. .

. o

o .

Total

45. Throughout the Third Plan period, private sector investment was sluggish and depressed. The rate of growth in current prices was less than one per cent per annum. It appears that in no single year real investment exceeded the quantum reached in 1964-65. However, the exceptional circumstances that held investment stagnant are not likely to recur. This must be borne in mind while assessing the feasibility of the proposed allocations. The proposed allocations indicate a growth rate of 6.5 per cent in private investment compared with a stagnant Third Plan performance. This may appear, on the face of it, rather ambitious. However, it may be recalled that during the Third Plan, private sector investment in traditional directions viz., consumer goods industries etc. was deliberately discouraged. On the other hand, the profitability of new priority industries was not fuily established. Policies have been initiated to remove fiscal and other anomalies hindering the progress of. capital goods industries. Growth in consumer goods industries is also being planned to meet the expected consumption demand, with particular emphasis on growth of such industries in East Pakistan. 46. Secondly, it is expected that the measures adopted to induce new-corners in the industrial field during the Third Plan would play a more important role in the Fourth Plan. The new institutions of the capital market would be functioning on a stronger basis, after overcoming their initial problems.

88

PRIVATE INVESTMENT

47. Thirdly, availability of foreign credits from desired sources was a limiting factor for private investment in the Third Plan. HI the final year of the Plan, a deliberate attempt was made to allocate a larger proportion of foreign project assistance to the financial institutions providing loans to the private sector. This policy would be strengthened further in the Fourth Plan. Availability of project loans for the private sector is not likely to prove a significant restraint on priva:e sector investment. This, combined with the functioning of the Equity Participation Fund, would go a long way in activizing the private sector.
48. Fourthly, considerable production capacity has developed within the country in the field of capital goods. Given credit facilities corresponding to what the investors obtain on imported capital goods, considerable increase in private investment can be expected f ~ o m source. Unless private investment hcreases, this the capacity in this group of industries cannot be utilized.

49. The sharp acceleration in private investment in the agricultural sector is based on the assumption that the marginal rate of saving out of increases in income over and above the subsistence level would be significantly higher. Nevertheless, special efforts would be required for achieving the proposed acceleration in agriculture particularly in East Pakistan. There is evidence that agricultural investment has been increasing where necessary inputs are available. With an improvement in the supply of inputs, a considerable proportion of additional agricultural incomes can be absorbed by increased investment. In East Pakisran, a strong programme of agricultural credit would be needed to bring forth the projected increase in private investment.

50. The proposed targets for private investment in man~fsncturing,mining i and quarrying are quite conservative. H is apprehended that the climate for private investment which prevailed at the end of the Third Plan period and the investment decisions made at that time would continue to determine the rate of progress in this sector during the first half of the Fourth Plan period. Better performance may be expected during the second half of the Fourth Plan period. The average growth rate for private investment in industry during the Fourth Plan is thus low. 51. The planned acceleration for housing and transport are high and are designed to correct existing imbalances in the investment pattern. The big increase in the Transport Sector is due to the special emphasis being given to the development of inland water transport in East Pakistan. D B P is earmarking adequate credit to achieve this target. ?.n West Pakistan, growth of urban road transport was limited by a reduced flow of transport equipment and componenhs under aid. Both the need and the saving potential of this sector justify a large programme. Necessary adjustments would have to be made in the innport policy and pricing of transport equipment to obtain the full investment potential in this sector. The large allocation for the Housing Secior reflects the deep concern of the Government over the growing shortage in housing. For this purpose, the lending operations of the House Building Finance Corporation will be enhanced substantially and other institutional arrangements are being devised ta aid and encourage investment in this sector.

52. In the Fourth Plan it is proposed to stimulate the private sector in East Pakistan while dampening the growth impulses in this sector in West Pakistan. Private investment in East Pakistan is projected to increase at

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89

16.7% per annum against virtually no growth in West Pakistan. This can be seen from the following table :TABLE 4 Private Investment in the Fourth Plan by Regions
(Rs. Million)
1969-70 1974-75

Total-Fourth Plan
(1970-75)

East Pakistan
West Pakistan

. o

..
..

.. ..
..

1,200 3,100 4,300

2,600 3,300 5,900

10,000 16,000 26,000

All Pakistan

53. In West Pakistan the dampening of the growth impulses in the private sector will be a natural consequence of the fiscal and monetary policies which have to be adopted in the Fourth Plan. Resources have to be transferred from West to East Pakistan. These resources will be mobilised through increased direct taxation, the burden of which will fall heavily on company incomes and profits. This will make profits smaller and private investment less attractive. It will also reduce the investible surplus with the private sector. The result will be a drastic slowing down in the growth in private investment in West Pakistan.
54. In East Pakistan it is proposed to increase investment in the private sector from Rs. 1200 million in 1969-70 to Rs. 2600 million in 1974-75. This may seem to be an ambitious target in the light of recent trends. However, in view of the measures already taken and the policy package announced with the budget of 1970-71 to activate the private sector, this target does not seem at all unrealistic. After all, private investment increased at an annual rate of around 20% in the Second Plan in West Pakistan and there is no reason why this cannot be in achieved in East Pakistan in fourth plan.

55. Amongst the measures ihat have already been taken to accelerate private investment in East Pakistan the more important ones are : differential rates of interest, taxes and import duties in favour of East Pakistan; strengthening of the institutional frame-work; easier availability of credit; the setting up of the Equity Participation Fund; greater availability of foreign credits from traditional sources ; and improvement of the infrastructure. The salient features of the already mentioned comprehensive policy package for promoting private investment in East Pakistan and the less developed regions of West Pakistan are : ( i ) Commercial banks, including National Bank of Pakistan, will be encouraged to hold shares in the Equity Participation Fund and participate in equity investment in less developed regions. (ii) Central Government and the State Bank of Pakistan shall formulate programmes, and assist in implementing these, for the speedy development of a capital market in East Pakistan including the Dacca Stock Exchange. (iii) The system of joint ventures between EPIDC/EPSIC and the private entrepreneurs will be extended with greater responsibility of management vesting in the private entrepreneurs selected on business considerations.

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PRIVATE INVESTMENT

(iv) The existing arrangements between the large banks and the East Pakistan
Small Industries Corporation will be improved and extended in order to effect full implementation of the proposal for the establishment of the Consortium of banks for aiding capital financing of the small industries in East Pakistan. (v) Soft credits from traditional sources will be allocated to the Small Industries corporations. (vi) As far as possible the debt equity ratio for IDBP/$ICIC loans should be 60 : 40 for projects in less developed areas and even 70 : 30 in case of special projects. (vii) Industries set up during the Fourth Five-Year Plan and located ih industrial estates established by the Government in the 4-year tax holiday zones will be given further exemption for two years in respect of 50 % and 25 % of the income respectively of the first and the second year of the extended period. This concession will also be available in similar circumstances in the comparable areas of West Pakistan which enjoy 5-year tax holiday. (viii) The Equity Participation Fund will issue, as and when the need arises, in n terest free debentures redeemable after 8 years. Companies investing i these debentures will be given tax credit of 50% of their investment in these debentures. While this scheme will secure for the Equity Participation Fund the real benefit of interest free funds, it will also give the investor an average annual tax free return of 12-112%. Coinpanies investing in the fresh share capital of the Equity Participation Fund to be raised through public offers wjll also be eligible for the 50% tax credit. (ix) Preferential terms will be given to less developed regions by development banks both for rupee and extem&lfinancing. 56. In the Third Plan, the developmeilt and innplernentation of policies to stim~~late private investment in East Pakistan was unavoidably delayed. This resulted in a sizable short-fall in implementation of the private sector plan. For the Fourth Plan a good begining has been inade by the announcement of a cornprehei~sivcpolicy package in the very first year. This should ensme the f~~lfilment of the Fourth Plan target of private investment in East Pakistan.