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Pakistan has a mixed economy with a large part of the production activityin the private sector. Agricultural production is carried out entirely by private enter-prise. In the industrial sector the major portion of value added originates fromthe private sector. Among the service sectors, insurance, banking, whole-sale andretail trade are almost exclusively run by the private sector. In import andexport trade, the Trading Corporation of Pakistan has obtained a relatively smallshare 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 marketforces. Fertilizer import under aid arrangements is h a n d ld by the public sectoragencies but its actual distribution in West Pakistan is carried on by the privatesector. In transport and comm unications (services which were developed andnun by the Government) private sector has carved an important share for itselfin road and inland water transport. Shi'pping and air transport are carried onUargely 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 onlycovered large-scale industrial sub-sector. Even this is of recent origin. The firstattempt at comprehensive modem planning under the First Five-Year Plan, in fact,reduced the private sector to the sta tus of a residual claimant of real resources.Private investment declined during this period compared to the preceding five-yearperiod. During the Second Plan, the private sector strategy involved the settingup of an incentive mechanism sufliciently attractive to obtain a high investmentresponse and evolution of an institutional framework for channelling real resourcesto the private sector to translate investment demand into physical investment.The absence of detailed and restrictive planning for the private sector combinedwifh very powefful incentives and sizeable credit availability had the advantageof turning the private sector into a dynam ic force. However, there was verylittle a ttention paid to the quality of investment, efficiency in the use of resourcesand consistency of pr ivate sector development with social goals. These factorsPaid a number of problems in store for the future.

3. During the Third Plan, as the conflict between pursuit of social objectivesand maintenance of powerful incentives for private investment became obvious,many policy shifts were made. These were, however, directed against the speci-fic problem of 'concentration of economic power, rather than precise formu-lation of a clear strategy for broad-basing the sources of saving and investment inthe private sector.

4. For the Fourth Plan, it is imperative to look deeper into the behaviour ofprivate sector and to start the process of integrating the private sector moreadequately into overall nationa l planning. Considerable work needs to be donefor evolving sectoral plans and policies for private investmnet as part of astrategy for balanced and healthy development of the areas of the economyprimarily run by private enterprise. This should be integrated in the frameworkof overall national objectives and priorities. A framework has to be evolvedfor the functioning of private enterprise. While there would be continuingdebate on the role of the private sector, including the possibility of nationalisationof certain activities, the ultimate shape would depend upon the political corn-plexion of the new Government. However, in any case, it is necessary to start


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78 PRIVATE I N V B S ~ E N Tdefining the social parameters within which private gector would be allowedto function. This framework would be necessary even with a large. degree ofnationalization, because under any system, some role would have to be assignedto private initiative.

5. Planning for the private sector need not imply detailed planning whichis in practice for the public sector. It does, however, involve managementcf key inputs in line with set targels, proper husbanding of credit availabilityfor private activity and a better coordination of all the policies which affectthe private sector. While the task of allocating resources to various typesol 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 ofsocial acceptability to avoid tensions and bitterness. even if it means a slowerexpailsion of private enterprise than in the past.6. Knowledge about the priva~e ector so far is quite inadequate. With theproblems raised by concentration of economic power and the consequent attemptto look more closely into the problems of the private sector, there has beenconsiderable 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 iscarried out and results become available.7. So far even the total magnitude of private fixed investment had been derivedindirectly 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 ofphysical investment in the economy which has now been firmed up. This alsogives a sectoral break-up of investment in the public and private sectors. Sectoralfigures still leave much to be desired and need to be reviewed in the light afthe information regarding physical inputs and financial flows. This work is 'being carried put. In the meantime, the data need to be used with somecaution. Investment in inventories is not yet measured and the saving rates aredifficult to determine. Financing picture is not yet complete. A flow of fundsanalysis was carried out in the State Bank of Pakistan with the help of Plan-ning Commission and C.S.O. for the year 1967-68. The reslilts of this studyhave helped in an understanding of the financing' mechanism of the privatesector. Such analysis is, however,.needed on a continuing basis to give an indi-cation of the movement of different eremen) The financing picture of invest-ment in the manufactuiing sector is becoming clear as a result of the work doneby the financial institutions. Very little information is available about otherareas, where bulk of financing conles presumably from "own retained earnings ".

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

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


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10. For the Third Plan, private investment target was fixed at Rs. 22,000 mil-lion in a total Plan sf Rs. 52,000 million. The share of the private sector was thus42 per cent against 44 per cent realized during the Second Plan. The annualrate of acceleration in tbe level of private investment assumed for the realizationof this target was 11 per cent. The estimated private investment figure for1964-65 was Rs. 3,181 million. It was assumed that it would rise to Ks. 5,200million by 1969-70.11. Sector-wise distribution of investment targets indicated that 38 per cent ofinvestment was to be in the manufacturing sector and roughly 18 per cent eachin Agriculture, Transport and Communications and Housing. A specific targetfor the Third Plan was to raise the level of private investment in East Pakistanto approach that in West Pakistan.

12. Subsequent studies show that the level of private investment was, infact, significantly larger than earlier estimates far 1964-65. The estimated figureof Rs. 3,181 million used in the Third Plan document was raised to Rs. 3,440million in the Final Evaluation of the Second Plan. The latest estimates ofC.S.O. indicate private fixed investment of Rs. 4,198 million in 1964-65. Onthe basis of acceleration implicit in Third Plan targets h r private investment,the revised bench-mark would have resulted in a private investment target ofRs. 28,500 million. It is against this notional target of total private investmentthat the performance of private investment in the Third Plan should be evaluated.

13. Actual'investment during the Third Five-Year Plan is .expected to reachquite closc to the financial target of Rs. 22,000 million, but shows a sh~rtfall froughly 24 per cent cmpared with the figure of Rs. 28,500 million. Looking atit in another way, the increase is from Rs. 4,198 million in 1964-65 to an estimateof Rs. 4,300 aijlion for 1969-70. The climate for private investment deterioratedtowards the end of the Plan period so that in the final year investment leveldeclined even in current prices. The growth in private investment over theThird Plan period is thus likely to be less than one per cent per annum in currentprices. As the indicators point to a price increase of more than 20 per centover this period, these figures imply a substantial deceleration in real privateinvestment. ,

14. Private fixed investment declined as a proportion of GNP from 8.6 percent in 1964-65 to 5.5 per cent in 1969-70. The year-wise details are given inTable 1 below :-TABLE

Private Fixed lnvestnzent (Rs.Million)Private G NP PrivatePeriod Fixed (in current InvestmentInvestment market as percentageprices) of GN P-964-65 . . . . . . 4,198 48,616 8.6

1965-66 . .. . . . 3,979 53,037 7.51966-67 . * o . -. . 4,203 62,411 6.71967-68 . . . . . 4,472 66,082 6.81968-69 (Provisional) . . . 4,562 72,000 6.3196939-70 (Estimate) . . . 4,300 78.600 5.5This, of course, does not. take into account the investment in inventoriesacclumnulated by the private sector, which would probably nlodify the above con-clusions to ,a certain extept.


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15. Sectoral distribution of private investment during the Third Plan indicatesthat investment in agriculture was unchanged in current prices ; in industry theincrease was roughly in line with tI~e ise in price level ; here was a substantialdecline in-investment in the transport sector ; the only substantial increase wasin the housing sector. This picture is in line with general economic trends. Res-trictions on the import of trucks and components is mainly responsible for a sbaqdecline in transport sector. This is explained by a shortfall in non-project assist-ance, which was increasingly used for fertilizer imports and other agriculturalinputs. Besides, there are indications that investment in housing mainly went toluxury housing. Thus, the composition of investment was also not in line with thePlan projections.16. Regional distribution of private investment indicates considerableimbalance. The Third Plan had postulated a rapid increase in privateInvestment in East Palciskin. The target of Rs. 11,008 million for privateinvestment in each wing was set on the basis of very poor knowledge aboutactual behaviour of private investment in the Second Plan. The Third Plan

had started wilh the assumption that East Pakistan was already obtainingone 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 endof the Third Plan would have posed very difficult problems. The target toequalize private investmeni level in the two Wings for the period of five yearswas quite unrealistic.17. In any case, the only chance of raising the share of East Pakistan in privaleinvestment to equality with West Pakistan in the Third Plan depended upon anearly start. Very shav adjustments in policy were needed quite early to pre-p m the ground on, the basis of which improvement in ratio could be expectedtowards the latter part of the Plan.18. The needed policy adjusrments for providing incentives in favour of EastPakistan were delayed by the war in 1965 and the disruption in aid Bows. Theeconomy was being required to islake a difficult adjustment to reduced aid flows.Consequently, policies for the private sector discouraged investment in activitieswhich the private sector had found traditionally more profitable.19. Two Committees were set up (one by CIPCOC and one by the NationalAssembly) to examine the causes of slow rate d capita1 formation in ma

Pakistan and to recommend measures to improve the situation. The H8imCommittee Report (which also drew upon the recornendatism of CdWOQwas nearing finalization in 1969 when the political situation changed the entireoutlook,20. Some measures were taken, in any case, to encourage larger private invest-ment in East Pakistan. These included longer tax-holiday anel lower ratesof duty on capital goods in East Pakistan. The Budget for 1969-70 staengthenedthese measures. Even more powerful was the impact of Government directiveto financial institutions to start with a notional allocation of loans on the hsii d50 per cent for East Pakistan. PICIC and IDBP followeel ipggr&ve goEcimand report considerable improvement in the ratio of loam sanctiomd (not yet

disbursed) for East Pakistan. This is a hopeful sign for the ffituae. Disbwse-mcnls would Have to catch up with sanctions with a time-lag. PPaC andD B P ex~erience ndicates that there is a considerable increase in the m um kof potential entrepreneurs in East Pakistan. Since, it was felt that a majorcause for he slow growth of privaie enterprise in E a s l Pakisisnn was the exist-ence of an equity gap, an Equity Participation Fund was set up by h e


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Bovernmeiit in January 1970 to provide a part of the equity finance to newentrants in the indusiaial field. This should help speed up utilization ofPICE and IDBP loans in Bast Pakistan.21. M ~ s tf the recommen&tions on which consensus had been reached in the

House Cormittee have already beer1 implemented. It, however, appeared bythe end of t l~eThird Plan that the eEort. to strengthen the incentive mechanismin East PaPris~anand the less developed areas of West Pakistan would have tocoiitiiaae for dispersing the bene&is of development more v~idely. EBcrts arealso needed for encouraging investment in sectors other than large-scale industrywhich have shown very little improvement in East Pakistan. The regionaldistribution of private investment is given in a b l e 2 below :-

Private Fixed Investment in Current Prices by Regions

East W e s t E a s t WestPeriod Pakistan Pakistan Pakistan Paltistan- Per cent1965-66 . . . . . .. 945.6 2,984.7 24 761966-67 . .. . . 1,033.3 3,133.0 25 751967-65 . . . . 1,111.2 3,317.0 25 751968-69 (Provisional) . . . . 1,153.3 3,367.9 26 741969-70 (Estimate) .. 1,200.0 3,100.0 28

-72-Total (1965-70) - 5,443.4 15,932.6 26 74

As Table 2 shows, private investment in East Pakistan totalled Rs. 5,443 millionduring the Tlzird Plan. Comesponding investment in West Pakistan is almostthree times. The ratio has moved only moderately from 23 per cent for BastPakistan 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 beradicalPy diEeren'l in the Fourth Plan. In the past, the strategy was based essen-tially on the premise that capital is shy and that enterprise needs to bebrought LIP with the help oE special incentives in the form of subsidies, protectionand tax concessions. Thus a powerful and effective system of incentives wasevolved over the years and w i t h the given framework, private enterprise was1ef.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 rateof industrialization. At times, the response in terns of investnzent demandwas rnoE than what the country could match in terms of availability of realresources. Thus, realized invesLment in industry was generally below the levelof investment demand registered.

23. However, the cost of development under this strategy for the private sectorcontinued to rise. The cost is to be measured in terms of the maldistribution ofincome in the economy, concentration of ownership and economic power and grow-ing social tensions. Essentially, the protection of infant industries, which are at timesq!~iie inefficient, implies that consumers have to pay high prices. Tax conces-slons 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


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gives resources to them at the cost of agricultural producers of exportcommodities. In a number of cases, the profits earned by industrial investorswere not profits of efficiency but merely a transfer from other sectors of theeconomy through high prices. This transfer mechanism was justified in the earlystages of development but is placing an intolerable burden on the rest of thesociety as the size of the industrial sector grows. Concentration of ownershipand absence of suflicient degree of competition which could exercise pres-sures 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 theproblem of concentration of wealth grew towards the end of the Plan periodand a sense of greater urgency developed to move speedily. This was reflectedin the Socio-Economic Objectives of the Fourth Plan. The process of reformwas quickened with the assumption of power by the Martial Law Administration.Special policies were announced for regulating labour-management relations andfor curbing the growth of monopoly power. Such ad hoc measures, however.relate to the correction of excesses arising from a system which is basicallyinequitous and in some cases the corrective measures may go too far and mayinhibit enterprise especially among the potential new entrants who provide theonly hope for broad-basing the system. It is, therefore, necessary to conceivea comprehensive change in the system. Some elements of a new strategy haveemerged in practical measures adopted by the Government. The process wouldhave to be carried further in the Fourth Plan to make it more comprehensive.Basic Approach to Bsivde Enterprise

25. The first element of the new strategy is the recognition that over the yearswe have now developed an aggressive and dynamic private sector, quick torespond to profit incentives and capable of setting up and running large indus-trialbusiness and service enterprises. Apart from the established and the experien-ced, there is a sizable class of potential new entrants who are being attractedby the demonstrated success of the others. The incentive mechanism is nolonger needed on a general basis, but more selectively for correcting regionalimbalances and reducing the handicaps from which new entrants suffer.

26. Secondly, it is important to realize that the nation as a whole is not pre-pared to subsidize and protect inefficient industries, merely for the sake ofindustrialization. The size of the industrial sector is relatively large and thetotal burden of protection on such a large scale is going to be beyond theendurance of consumers. The distortion being caused in income &stributionand ownership of wealth as a result of protection and concessions to industryis intolerable. The older and more established industries have to acquire thelevel of efficiency where they would need a minimum of special incentives andprotection. They should move to the group on which the burden of the costof protecting new industries can be partiaIly thrown.

27. A combination of the two considerations mentioned above leads to theconclusion that efficiency and competition should be the key-note of FourthPlan strategy for the private sector. Since the private sector is, and wouldcontinue to be, the dominant force in the forseeable future in the productionstructure of Pakistan, private sector will be required to play a dynamic rolein the overall growth process. So long as this role is based on the generation ofnew resources by the efforts of the private sector and does not add to theinequalities in income, it is a desirable contribution. A thorough review ofthe entire incentive mechanism and protection policy should be -ed out,with a view to progressively increasing the pressure on the private sector to bemuch more cost-conscious. The mere existence of profits in a protected market


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IS not sufficient evidence of efficiency. Profits of protection should be repla&by profits of efficiency. Expansion and growth of the private sector throughreinvestment of such profits would lead to a much healthier development mini-mizing social tensions. If the size of profits is relatively small and expansionbased on this source slows down, this is a necessary cost for a more balanceddevelopment in the country.28. Thirdly, the process of expansion through reinvestment of profits inevitablyresults 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 highprofits. This was acceptable in the early phase of development. However, thisshould now be supplemented increasingly by the development of a capitalmarket which would channel household and institutional savings to potentialinvestors both in the form of equity and loan. The institutional framework ofthe 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 filledexisting gaps in the capital market. These institutions, after overcoming theirinitial problems, are poised to take much greater responsibility. Policies arebeing recommended in a subsequent section to increase the resources at thedisposal of such institutions which generally assist the new-comers and thosewho could not otherwise obtain access to financial resources.

29. Fourthly, the new strategy should seek to evolve a stronger positiveapproach to the question of regional balance in private investment. Considerableemphasis was'placed during the Third Plan on improving the investment climatein East Pakistan. In the Fourth Plan, the regional consideration would alsohave to include a growing concern. for location of new industries in the lessdeveloped areas of West Pakistan.

30. In the special case of East Pakistan, certain considerations need to bcmalysed carefully. The incentive mechanism for encouraging private investorsto locate their units in East Pakistan is uniformally available to investors fromboth wings. In practice, since the resources in the form of re-investible earningsare largely available with entrepreneurs based in West Pakistan, differentialincentives in favour of East Pakistan have the effect of inducing such entrepreneursto invest in East Pakistan. It is possible to devise a package of policies thatwould divert bulk of the reinvestible resources from West to Eas: Pakistan.This is the only sure way of rapidly accelerating private investment in EastPakistan. However, this is bound to create social terisions. In any society,where labour is local and the management and capital are not integrated withinthe local set up, mutual confidence is difficult to build up.31. It would, therefore, be necessary to devise a policy which would assureparticipation of East Pakistanis both in the management and share-ownership.A personnel policy which seeks to employ 11 talent in key managerial jobs,even when it is not considered ideal on narrower efficiency criteria, would bea highly significant factor in bringing about political acceptance of inter-wingcapital movements. An enlightened policy towards the development of a pro-fessional, managerial class for industrial and service enterprises would be highlydesirable in any case. But it is absolutely essential for inter-provincial move-ments of private capital.32. At the same time, efforts need to be intensified for the development ofsources of capital formation from within East Pakistan. This is not merelya matter of providing incentives. The general climate of profitabilitycan attract investment demand, but this must be backed by command of


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84 PRIVATE INVESTMENTadequate resources. The most important element in building up a class of localentrepreneurs would be the availability of credit and equity support. Specializ-ed credit institutions are now functioning on a separaie bvd2er I'ur th e twoprovinces. Notionally, an equal allocation of half the funds is made lor EastPakistan. It is only if the utilization falls shor~ hat balance of the funds isredirected to the other province. The experience of the financing in~:~i"l~tionsindicated difficulty on the p a t of small entrepreneurs in linding adcq-~a;eequity capital. The setting up of an Equity Fund by the Government d~r ingthe 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 loanrequiring only 40 per cent equity. If 50 per cent ol the equity capilai canbe obtained by sale on the market, mder-writing by 'HCP and/or participationby Equity Fund, the investor is required to have a stake in his own enterpriseto the extent of 20 per cent. This is the essential minimum to ensure a keeninterest on the part of the sponsors in making the venture a success. 1n:prove-lnent in credit facilities from the banking system which would allow conversionof immovable property and financial assets into liquid loan funds could helpmeet part of the equity requirements.34. It must, however, be clearly realized that if a less developed region seeksto develop private investment largely from domestic origin, this is bound to

be a slow process. Even with the measures listed above, the process cannot bespeeded up suEciently. Domestic savings cannot grow very fast unless theentrepreneurs are left entirely free to exploit the consumer. A healllaygrowth of private investment in any less developed province would have toinclude an element of imported capital. Attitude towards such capirsll andenterprise 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 necessaryto define the rules of She game within which private enieprise rnu.;l establishits relationships wirh other elements of the society. Private enterprise in amodern industrial society has an inherent tendency to move toward3 lager-sized units and aggressive expansion leading towards the problem of cocceatra-Lion. Pakistan's experience in this respect is, by no means, unique. Oihercountries have passed through similar stages and have evolved techniques forcontaining an excessive tendency towards concentration while r~aintai~~ingsufficient scope for expansion.

36. Four important sets of measures can be identified for defining the frame-work for healthy and balanced growth of private enterprise in line wirh nationalobjectives :(a) Progressive taxation of higher incomes and large concentrz~io~~sfwealth.0)mprovement of legal framework for companies and public account..abllity of directors.(c) Avoidance and regulation of monopolistic powers.(dl Protection of labour.


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PRIVATE INVESTMENT 85(a) Tax Policy

37. The first important element is the management of tax policy. With pro-gressive income tax, wealth tax and estate duties, it should be possible toachieve a considerable redistribution of income and contain excessive scncentra-tion of wealth in the hands of individuals. These elements combined \kith theIslamic laws of inheritance can play an important role in achieving distributivegoals of the society. While we have had a highly progressive income taxthroughout this period, and have added other taxes in recent years, collectionof taxes has not been commensurate with the gowtll of private wealth. Thiswas partly due to the deliberate grant of concessions and partly due to loop-holes in the Income Tax Law which was basically framed half a century earlierin the context of an entirely dierent society. Modifications and improvementsintroduced to meet specific problems could not completely modernize the lawand make it an eEective instrument of policfr. Some shortcomings wouldinevitably exist in the tax-collection rnachine~y which cannot be isolated fromthe overall legal and administrative framework of direct taxation. Apart fromthe legal avoidance of tax, there is evidence of considerable illegal evasion.Declarations of tax-evaded wealth in 1958 and 1969 support the contention thatevasion is practised on a large scale. A thorough overhaul of the tax law andstrengthening of tax-collection machinery would be needed to bring the effectiveincidence of tax in line with the intentions of policy-makers. A new income-tax law is being framed and would be effective early in the Fourth Elanperiod. This should be accompanied by a strengthening of the machinery foradministrating direct taxes.(b) Company Law and Managing, Agency System

38. Secondly, it is necessary to curb the powers of managing agents andcontrolling groups which they enjoy at present. The Boards of Directorsshould be iorced to behave as trustees on behalf of all the shareholdersand be accountable for their action. Here again, the Company Law whichgoverns the relations of the directors with shareholders was conceived asearly as 1913. The Report of the Company Law Commission which proposesa thorough revision of the existing legislation should be implemented as earlyas possible. A strong Company Law coupled with setting up of the proposedSecurities and Exchange Commission would go a long way towards eliminatingthe existing malpractices in the management of private enterprise and makingbroad-based ownership a meaningful reality.

39. An mportant feature of the existing Company Law deserves special men-tion. The Managing Agency system has been a unique feature of businessorganization in the Indo-Pak sub-continent. Managing Agency Systemgives a strong hold on the &airs of the public company to a small groupof investors who sponsored the project. This system has out-lived its utilityand is an important factor in aggravating the problem of concentration.No amount of wider share distribution would help so long as managing agentsretain control of the enterprise. It appears necessary that the managing agencysystem shouId be abolished and be replaced by professional management whichis 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 unhealthygrowth of private enterprise, while leaving wide scope for expansion. These,however, do not meet the problem of monopolies, inter-locking directorates verticaland horizontal integration and cartels. The technological factors favouringlarge units in various industries tend to narrow the number of enterprises which


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86 PRIVATE INVESTMENTcan exist in any field. h he developing countries, where the size of the marketis small relative to the minim~m ize of an economic unit, only one or two unitssari be justified at the outset. Absence of competition provides opportunities tothe earlier-comers both to exploit the consumers of their products and toeffectively stop others from entering the field when further units may bejustified. Some checks have to be exercised by the Government to curb thesemonopoly powers and to act as an umpire ensuring a fair deal to the elementsof society which are likely to be aEected. The manner in which this problemhas to be tackled may raise controversies but the desirability of laying downsome rules of conduct in such cases is established beyond doubt. A draft lawentitled Monopolies and Unfair Trade Practices (Control and Prevention)Ordinance 1969 was published by the a ovement on 28th June 1969 for elicit-ing public opinion. The law, modified in the light of comments received, waspromulgated in January 1970.(d) Labour Policy

41. The final and the most important relationship in the private sector isbetween the employer and the worker. It is impossible for the private sectorto function without a clear definition of its relationship with the labcur. In alabour-surplus economy like that of Pakistan, labourers are inherently at adisadvantage in bargaining with the employers for an equitable share of gainsfrom industry. It is, however, possible for particular sections of organizedlabour to force wage increases in excess of improvements in productivity. It is,therefore, necessary for the Government to define an institutional frameworkfor orderly and just settlement of issues with certain minimum standards laiddown. This has been attempted in the new wage policy already announced inJuly 1969.42. The above guidelines for regulating the relationship of private enterprisewith the rest of the society may appear restrictive. It may be feared that thesewould have the effect of slowing down the pace of fresh investment. This maybe the initial result. However, they are in line with the solutions which othercountries have sought for similar problems. The result has generally been ahealthier growth of private sector rather than absence of private sector initia-tive. h fact, from the long-term point of view, private sector should tlnd itmore attractive to operate within a framework which is socially acceptable.From the long-term point of view, no sector can maintain its growth whileantagonizing and alienating other sections of the society. An acceptable rolehas to be evolved for the private sector, which can be roughly in line with thediscussion above.43. It is recognized that the pace of private investment growthmay not be asrapid in the Fourth Plan as has been in the past. However, positive approachby the small entrepreneurs and credit availability can help bring some growthin investment from the stagnant level at the end of the Third Plan. Estimatesand projections for the Fourth Plan have been built on these assumptions.showing modest growth in large scale industrial investment at a rate roughly inline with the growth in GNP. Larger growth is projected in investment in hous-ing and transport sectors, where an investment response can be expected topolicy measures which are in line with the objective of wider dispersal of owner-ship.

Private Sector Investment Prosamme for the Fourth Plan44.The allocations for the private sector are wsentially indicative and notional.With the exception of large-scale manufacturing, the Government exercises little

dim%control ovq the extent and nature of private investment. However,


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PRIVATE INVESTMBNT 87Government does influence private investment and the direction in wnich it ischannelled through fiscal and commercial policies and financial aid. Thesectoral allocations presented in Table 3 below represent a blend of investmentthat can be expected to take place from a forecast of historical trends andthe investment which is desirable to achieve balanced development. Theseallocations must not be interpreted as upper limits of permissibls development.Rather, they are designed to secure minkurn socially warranted growth invarious sectors. Attempts will be made to tie-in credit and other controllablefinances to achieve the pattern and size of the proposed development programme.The policy measures suggested focus attention on the impediments to privateinvestment. The adoption of these policies would be necessary to achieve theproposed targets and ensure healthy and vigorous growth of the private sector.

Private dnvestmnt in the Fourth Plan by Sectors( Rs. Million)

Sector Total Percentage1969-70 1974-75 Fowth GrowthPlan Per

Agriculture -. . .Mmufa3udng, and Mining QuarryingConstruction, Electricity and Gas .Transport and Communications ..Dwellings - . o *Other Services . o . .

Total45. Throughout the Third Plan period, private sector investment was sluggishand depressed. The rate of growth in current prices was less than one per centper annum. It appears that in no single year real investment exceeded

the quantum reached in 1964-65. However, the exceptional circumstances thatheld investment stagnant are not likely to recur. This must be borne in mindwhile assessing the feasibility of the proposed allocations. The proposedallocations indicate a growth rate of 6.5 per cent in private investmentcompared with a stagnant Third Plan performance. This may appear, onthe face of it, rather ambitious. However, it may be recalled that duringthe Third Plan, private sector investment in traditional directions viz.,consumer goods industries etc. was deliberately discouraged. On the otherhand, the profitability of new priority industries was not fuily established.Policies have been initiated to remove fiscal and other anomalies hinderingthe progress of. capital goods industries. Growth in consumer goods industriesis also being planned to meet the expected consumption demand, withparticular emphasis on growth of such industries in East Pakistan.46. Secondly, it is expected that the measures adopted to induce new-cornersin 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 befunctioning on a stronger basis, after overcoming their initial problems.


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88 PRIVATE INVESTMENT47. Thirdly, availability of foreign credits from desired sources was a limitingfactor for private investment in the Third Plan. H I the final year of the Plan,a deliberate attempt was made to allocate a larger proportion of foreign projectassistance to the financial institutions providing loans to the private sector. Thispolicy would be strengthened further in the Fourth Plan. Availability of pro-ject loans for the private sector is not likely to prove a significant restraint onpriva:e sector investment. This, combined with the functioning of the EquityParticipation Fund, would go a long way in activizing the private sector.48. Fourthly, considerable production capacity has developed within the countryin the field of capital goods. Given credit facilities corresponding to what theinvestors obtain on imported capital goods, considerable increase in privateinvestment can be expected f~ o mhis source. Unless private investment hcreases,the capacity in this group of industries cannot be utilized.49. The sharp acceleration in private investment in the agricultural sectoris based on the assumption that the marginal rate of saving out of increases inincome over and above the subsistence level would be significantly higher.Nevertheless, special efforts would be required for achieving the proposedacceleration in agriculture particularly in East Pakistan. There is evidence thatagricultural investment has been increasing where necessary inputs are available.With an improvement in the supply of inputs, a considerable proportion of addi-tional agricultural incomes can be absorbed by increased investment. In EastPakisran, a strong programme of agricultural credit would be needed to bringforth the projected increase in private investment.50. The proposed targets for private investment in man~fsncturing,miningand quarrying are quite conservative. H is apprehended that the climate forprivate investment which prevailed at the end of the Third Plan period and theinvestment decisions made at that time would continue to determine the rate ofprogress in this sector during the first half of the Fourth Plan period. Betterperformance may be expected during the second half of the Fourth Plan period.The average growth rate for private investment in industry during the FourthPlan is thus low.51. The planned acceleration for housing and transport are high and aredesigned 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 develop-ment of inland water transport in East Pakistan. D B P is earmarking adequatecredit to achieve this target. ?.nWest Pakistan, growth of urban road transportwas limited by a reduced flow of transport equipment and componenhs underaid. Both the need and the saving potential of this sector justify a large pro-gramme. Necessary adjustments would have to be made in the innport policyand pricing of transport equipment to obtain the full investment potential in thissector. The large allocation for the Housing Secior reflects the deep concernof the Government over the growing shortage in housing. For this purpose, thelending operations of the House Building Finance Corporation will be enhancedsubstantially and other institutional arrangements are being devised ta aid andencourage investment in this sector.

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


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PRIVATE INVESTMENT 8916.7% per annum against virtually no growth in West Pakistan. This can beseen from the following table :-

TABLEPrivate Investment in the Fourth Plan by Regions

(Rs. Million)1969-70 1974-75 Total-Fourth Plan(1970-75)

East Pakistan . o . 1,200 2,600 10,000West Pakistan . . 3,100 3,300 16,000All Pakistan . . . 4,300 5,900 26,000

53. In West Pakistan the dampening of the growth impulses in the privatesector will be a natural consequence of the fiscal and monetary policies which haveto be adopted in the Fourth Plan. Resources have to be transferred from West toEast Pakistan. These resources will be mobilised through increased direct taxa-tion, the burden of which will fall heavily on company incomes and profits. Thiswill make profits smaller and private investment less attractive. It will also reducethe investible surplus with the private sector. The result will be a drastic slowingdown in the growth in private investment in West Pakistan.54. In East Pakistan it is proposed to increase investment in the privatesector from Rs. 1200 million in 1969-70 to Rs. 2600 million in 1974-75. This mayseem to be an ambitious target in the light of recent trends. However, in view ofthe measures already taken and the policy package announced with the budget of1970-71 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 theSecond Plan in West Pakistan and there is no reason why this cannot be in achieved

inEast Pakistan in fourth plan.55. Amongst the measures ihat have already been taken to accelerate privateinvestment in East Pakistan the more important ones are : differential rates ofinterest, taxes and import duties in favour of East Pakistan; strengthening of theinstitutional frame-work; easier availability of credit; the setting up of the EquityParticipation Fund; greater availability of foreign credits from traditional sources ;and improvement of the infrastructure. The salient features of the already men-tioned comprehensive policy package for promoting private investment in EastPakistan and the less developed regions of West Pakistan are :( i ) Commercial banks, including National Bank of Pakistan, will be en-couraged to hold shares in the Equity Participation Fund and partici-pate in equity investment in less developed regions.

( i i ) Central Government and the State Bank of Pakistan shall formulateprogrammes, and assist in implementing these, for the speedy develop-ment of a capital market in East Pakistan including the Dacca StockExchange.

(iii) The system of joint ventures between EPIDC/EPSIC and the privateentrepreneurs will be extended with greater responsibility of manage-ment vesting in the private entrepreneurs selected on business consi-derations.


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80 PRIVATE INVESTMENT(iv) The existing arrangements between the large banks and the East PakistanSmall Industries Corporation will be improved and extended in orderto effect full implementation of the proposal for the establishment ofthe Consortium of banks for aiding capital financing of the small in-dustries in East Pakistan.(v) Soft credits from traditional sources will be allocated to the Small In-dustries corporations.(vi) As far as possible the debt equity ratio for IDBP/$ICIC loans shouldbe 60 :40 for projects in less developed areas and even 70 :30 in caseof special projects.(vii) Industries set up during the Fourth Five-Year Plan and located ihindustrial estates established by the Government in the 4-year tax holi-day zones will be given further exemption for two years in respect of50% and 25% of the income respectively of the first and the second yearof the extended period. This concession will also be available in similar

circumstances in the comparable areas of West Pakistan which enjoy5-year tax holiday.(viii) TheEquity Participation Fund will issue, as and when the need arises, interest free debentures redeemable after 8 years. Companies investing inthese debentures will be given tax credit of 50% of their investment inthese debentures. While this scheme will secure for the Equity Parti-cipation Fund the real benefit of interest free funds, it will also give theinvestor an average annual tax free return of 12-112%. Coinpaniesinvesting in the fresh share capital of the Equity Participation Fund tobe raised through public offers wjll also be eligible for the 50% tax credit.(ix) Preferential terms will be given to less developed regions by developmentbanks both for rupee and extem&l inancing.

56. In the Third Plan, the developmeilt and innplernentation of policies tostim~~laterivate investment in East Pakistan was unavoidably delayed. This resul-ted in a sizable short-fall in implementation of the private sector plan. For theFourth Plan a good begining has been inade by the announcement of a corn-prehei~sivcpolicy package in the very first year. This should ensme the f~ ~lfil-ment of the Fourth Plan target of private investment in East Pakistan.

4th5yplanch-6editing

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