RESTRICTED Report No. TO-311b I This report was prelpared for use within the Bank and its affiliated organizations. 1lhey do not accept responsibility for its accuracy or completeness. The report may riot be published nor may it be quoted as representing their views. L , . . _ I INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE GUJRANWAIA AND SIALkOT INDUSTRIAL ESTATES WEST PAKTA TAM OcitobhPr 24. 19QA Department of Technical Operations Y, Y!k? TT%T " T.-W M~f%YYT'WA T WV- YL'rn, C'vRREsNC Y EQUI'wALEIMIS 1 F'akistan Rupee = US$0. 21 1 million Rupees = US$2 10, 000 1 uS$ = Rs 4.76 JA Th1n'nA TrOAT fVt.' 'TTT'L ktrrnt±&JF r*.Lj UVI LLun GUJRANWALA AND SIALKOT INDUSTRIAL ESTATES TABLE uF CONTENTS Paragraphs SUIVIMARY Asi-J UCNMUSIONS i I. INTRO:.DuCTlON 1T- 5 II. DEFINITION ANT) CHARACTER OF SLALL INDUSTRIES 6 - 20 Definition and Eligibility for Admission to Estates 6 - 8 Available Data on Small Industries 9 - 10 Role of Small Industries 11 - 13 Character of Small Industries 14 - 18 I'rospects 19 - 20 III. THE SMALL INDIJSTRIES DEVELOPMIENT PROGRAM IN THE SECOND FrVE YEAR PLAN 21 - 39 Program 21 - 27 Administrative Organization 28 - 31 The Small Industries Division of WPIDC 32 - 33 Powers 34 - 36 Activities - 1960-61 and 1961-62 37 - 39 IV. THE INDUSTRIAL ESTATE PROGRAM 40 - 47 V. THE PROf-OSED ESTATES AT GUJRANTWALA AND SIALKOT h8 - 106 Gujranwala 48 - 61 a. rh ra-tpsti,s of thei tfr.mn )48 54 b. Site of the Estate 55 - 56 c. Fn P+ct:T Plort+s R& Plii,1;nr -7 =A- Sialkot 62 - 67 a. Characteisticsof +the + 62 =6 b. Site of the Estate 66 c. AUFactor-y IPlots 6 7 Market Prospects 68 - 74 Settl-em,en.t on "ovsh a Etes 75 =f A Criteria for the Selection of cJUIajJdLLU~ L.J Uli.1 J~ LId~ V. - )1.. vccpants of the Estates81-6 Screening Procedures 87 - 93 A _ :_t__ o___ _i}_l. I tN Assistance 'LU Esdte Ucuaparivts 7L4 - LV Foreign Assistance 102 - 106 VI. ECONOMIC JUSTIFICATION 107 - 114 VIIo CAiPITAL REQUIREMENTS FOR PROJECT AND REuVnER]f Fr(M USERS 115 - i28 Capital Requirements 115 - 119 Charges for Plots & Rentable Community Buildings 120 - 125 Credit for Factory Buildings & Nachinery 126 - 127 Credit for Working Capital 128 TABLE OF CONTENTS (Conttd) VIII. PROPOSE IDA CREDIT 129 - 135 Proposed IDA. Credit 129 - 131 Channeling of the IDA Credit 132 - 135 ANNEE2ulin _U11Ported, raw r,saut:rI.a.l needed L for high quality products (e.g. wood for rackets). But the problem is more basic.. VVwLU1LLLu, ciacrIles karii the industry is relatively urmTechjjanzed) lU ± llCtl-U to achlieve standard quality; the careful handwork required is difficult to obtain from the nomeworkers (many of them children) who form a large fraction of the labor force. The Government is aware of the importance of conformity to standards, but many of the sports goods manufacturers, particularly the smaller ones, are not; they include substandard items in shipments for which higher standards were specified. 73. To solve its problems, the industry must be helped to mechanize, improve its techniques and product quality and learn how to conform strict- ly to quality specifications. This is the type of assistance that can be provicded most effectively through service centers set up in connection with the e,tates. In the meantime, however, certain steps about to be taken, may enable the industry to hold its own and possibly recover some of the grouncl it has lost. In addition to the settinc of minimum prices, the Gov- ernment has recently established a system of strict control of raw mater-- ial st;andards, and wi11 introduce a compulsory inspection system for ex- ports, if the industry does not set up a voluntary inspection system of its own. 74. On the marketing side, the industry itself has plans. The Sialkot Sports Goods Cooperative, with about 190 members, a little less than one quarter of all the sports goods producers in Sialkot, which now imports raw wood, seasons it1 and does some preliminary processing for its members, has e.tablished a subsidiary to undertake marketing. It recently asked the Pakistan Government for a foreign exchange grant of Rs. 500.000 ($105,000 equivalent) to enable it to open sales offices in London, New York and Singanore The London office has alreadv been oDened. Set.tAompnt on the Es~tates 75. Until a substantial number of mnall enterpr ses have made formal application and been definitely approved for admission to the estates, there. V is no bWLasisLO for e.V ating how long it is l- to take to .;Jl - 19 - them, wha-, types of enterprises are likely to settle on them, the respec- tive proport ons of new and going concerns, etc. At this point, it is Possible only to comment on the assumptions underlying WPIDC's development Plans and estimates. At Sialkot. no formal applications for admission have yet been iubmnitted. At Gujranwaia, information was macle public at the end of October 1961 about prospective charges, other conditions of occu- pancy and services to be supplied, and applications were solicited. One hundred and fortv-tThree formal anlniiations have by now been submitted. However, there is no way of telling whether this first batch includes the whole backlog of interested concerns that had been waiting for an opportu- nity to make application or is the beginning of a steady stream. Nloreover, the first applniations, n hinch +.aanvr beej.n +.rnq tor t-he Bank by WPIDC. do not give enough information for a judgment as to what proportion of the applicants are likely to prove s--table o+-pants 76. in attem.pting to est-,mate the rate at which the estates are likely to be filled, however, it must be borne in mind that present rentals for factory- space in and around Gujranwala are in man-y cases well below the proposed charges for an equivalent amount of space on the estates. On the other hand, many of the small industrialists with whom the mssiorL dliscussed the estates attached considerable importance to the fact that the shops on the estates would be more suitable for productive purposes tlan those now available, that there would be room for expansion, that technical and managerial assistance would be provided, and that the estate occupants would receive priority for credit, raw materials, etc. On balance, how- ever, it seems prudent to assume that it may take several years to fill the estates. 77. WPIDC has assumed that as many as 70; of the enterprises settling at Gujranwala would manufacture parts or accessories for mechanically pro- pelled vehicles (scooters, rickshaws, three-wheeled cars, etc.), agricul- tural and textile machinery, refrigeration equipment, etc. Such arrange- ments have proved economic in more industrialized countries, but have not yet been developed in India or Pakistan mainly because small enterprises in these countries have not yet achieved the habits and practices - uni- formity in quality, adherence to delivery dates - required. It is hardly likely that several hundred small firms at Gujranwala can find markets for parts unless some medium or large-scale enterprises settle there and contract firmly for their production. 78. WPIDC has received inquiries, but no commitments, from foreign firms about the possibility of setting up assembly plants near Gujranwala and arranging for parts production with its small enterprises. WPIDC would be willing to let such enterprises settle on the estates themselves, It would undoubtedly be desirable to have medium or large-scale enterprises on the estates or near them. But even if arrangements can be worked out it will take time. At least for several years. therefore, it would not be prudent to expect a large-scale development of this type. - 20 - 79. WPIDC has a]so assumed that 70/`0 of the enterprises settling at Gujranwala wqould be going concerns, operating mainly in and around the town. However, about half of the 118 first applications came from persons, several from as far away as Lahore, planning to set up new enterprises. In ouIr estimates this has been assumed to be the characteristic distribu- tion, which should result in increasing financial requirements since exi-st- ing enterprises are expected to bring along some of their machinery. 80. Of the first 118 applications, only about 30 state complete invest- ment figures. Therefore, not too much weight should be applied to the estimates, but nevertheless some interesting data can be drawn from them. Both at Guiranwala (and at Sialkot, where informal inquiries have been made) the percentage of the applicants that requested large plots (18,000) sq. ft.) was considerablv highpr than nriginallv assumed: this change has been incorporated into WPIDC's revised layout plans. On the other hand, at Guiranwnla, the estimates of bhlldiing costs per sn. ft.- are only about half of the reasonable estimates of the cost of constructing to the stan-- drdsrI. requiiredl hyr theo 'hUilliner by-lt,-rTQ for- then esate+.n Ayjn-rarnoes of' fin.. ancial realities may lead to a scaling down of space requirements or, very possblypto ihtr-> of applications. rrit eri-;a for th-e Se"lection 4ofLI4 Ocupnt othEsaes '.'L...U~J J . LI.L Ii -~L U L'.I- Lu V LuUL LId.LL.:) V4. "I 11 j .LO C1U 81.p ±± T JLhUIIU Sec LVn It'-c1 Y IFJLU1 U±LE L thIIe SmaclUl IndUUsLtr CoJ.LvraLtillo to give priority to industries: a) required to support agriculture and increase the productivity of labor in rural areas. b) processing aricultural products and other local raw materials; c) producing essential consumer and producer goods; d) required for the development of educational, health and transport services; e) in light engineering and services; f) in the traditional arts and crafts; and g) producing for export. 82. In addition, WPIDC plans to apply special criteria for admission to the estates: sizes willingness and ability to mechanize and modernize, market prospects, and ability to undertake the financial obligations - 21 - required to permit establishment on a sound technical basis. Only enter- prises of a minimum economic size would be admitted. Priority would be given to firms that have made some progress towJard modernization and are wil:Ling and able -to mechanize, improve their methods of operation, working conditions, and product standards. WPIDC recognizes that unless the small induastries settling on the estates are large enough to operate on a sound basis and are run by men willing to take advantage of the assistance pro- vided, the estates will not serve their major function which is to prom.note the development of sound and efficient industry. 83. In general, new enterprises settling on the estates would be ex- pected to be fairly well mechanized. Existing enterprises moving to the estates would probably be permitted to mechanize gradually in order to minimize technological unemployment. Mechanization would be insisted upon, however, even at the expense of some technological unemployment, since there is reason to believe that any reduction in demand for labor due to mechanization would be offset by the inerpnsed demand rpsulting from the growth of the small industries on the estates. 84. The market prospects of each applicant would be appraised, taking account of the potentinl increase in the output of his products likely to result from increased mechanization in the industry and the entrance of new enterprises. To the e possible, priori +, wo - b given to enter- prises producing items for export or substitutable for imports. 85. Finally, estimates would be made of the amount each applicant WJUUJ.U L1cave 4.uo orro f0r.'hU .L buJ t rLJ.LUJin%J MalJin . .:IIy CL d. y. ,A_U _J.r..±1.I jJ±Ud.J- 4 -1 quired for efficient operation and of his ability to service and repay these loans. Ireference would be g-iven to th0ose enterprises that could cover the largest percentages of their financial requirements from their own resources. 86. The only enterprises barred from the estates would be those likely . _ e ' - g - _- - - - L2 D- - _ - A - - ' - - e - _ _ _ . L_ L- _Z bU crat Ib: sU.LIUe 11 UUrVUgi± cU2iblVe *lU S, fumes, etC., andU tUhose Ut 11g fully unmechanized. Screening Procedures 87. W4PIDC's responsibility for selecting suitable occupants for the estates would not be limited to making or arranging for personal, techni- cal, financial and market appraisals of applicants for admission. Many applicants who might prove suitable occupants would be unable by tnemselves to select the proper machinery and equipment, plan methods of production, or estimate their prospective production costs and general financial pros- pects. Provision must be made not only for the assessment of plans but for assistance to applicants in the formulation of plans. The task will require tact and persuasiveness, for a large number of small industrialists are not aware that they require assistance. W?IDC's Small Industries Div- ision does not yet have the staff to prepare projects adequately or tc) make - 22 - satisfacto)ry technical and market appraisais, although vWrFIDUs eXperinlt- in the esi.ablishment of large enterprises will certainly be helpful also in the appraisal of smaller enterprises. For some time to come, it would. require the assistanlce of foreign experts if these tasks are to be perform- ed saltisfactorily. 88. WPIDC does not expect to make financial appraisals itself, but in- stead to rely on financial institutions. To the extent possible, thQ assistance of commercial banks would be sought. It is expected, however, that their activiti(es would be limited to assessing the credit records of existing enterprises. They have neither the facilities nor an interest in preparing the estimates of financial prospects that are required to deternine safe limits for loans to existing as well as new enterprises. The bul.k of the responsibility for financial appraisals is expected to be borne by the Industrial Development Bank of Pakistan (IDBP), which was or- ganized in July 196L as the successor to the Pakistan Industrial Finance Corporation (PIECO) with particular responsibility for assisting small and medium-sized indust:r-v (See Annex 5). IDBP intends to operate along simiLar lines as the Pakistan Industrial Credit and Investment Corporation (PICIC) whose narticiL ar responsihilit is the finanGinn of relativelv large enter- prises with substantial foreign exchange requirements. 89. Although IDBP is already making the kind of appraisals which would he required in connection writh the projecti iti s only now building up its staff to meet its new and increased requirements. Financial appraisals of small enterprises are likely in any case to be difficul. becaus of the inadequacy of their accounting systems. In the next few years, therefore, WPTPC wrouAld n-pnobablr finrl it uefll +n hnaer a fr%r .c; inov f1+.eieq1 ^ nain-.r with experience in financial analysis to advise it on financial appraisals. Eventually, it is hoped that 1DBP, assisted by- the co----erci I brnns, crrould take over full responsibility. 90. The procedures to be followed in the preliminary selection of ap- p VXW0LA v *1 UGV V JIIXG1 U- tiI9UJ. I sp LVJU.,l W11 Ul Gv D XW||;sG|V wV1W y-- . plicants for admission are expected to be as follows. W4hen first making foral" application apapplcants would be asked to supply certain basic information which would be outlined on a simple questionnaire. These in- itial applications would be reviewed by a screening committee consisting of WVPIDC officers, WPIDCts civil engineering consultants, and its foreign industrial advisors, and a representative of I±D±BP, possibly with the heip of a representative of a commercial bank. 91. Applicants who passed the first screening would be assisted to de- velop detailed technical and financial programs by the preliminary screen- ing committee. Their financial programs would include estimates of their financial requirements for operation on a technically sound basis, the amounts they would have to borrow, and their prospective earnings. From - 23 - these estimates it could be determined whether they could safely borrow as much as it is estimated they would need. The preparation of these technical and financial programs is expected to take from three to six months. 92. To the extent possible and in particular for questions of highly specialized technical nature, WPIDC will also seek the advice from the AID- financed Pakistan Industrial Technical Assistance Center (PITAC), Lahore, which specializes in light engineering industries. So far the center has concentrated its technical assistance to medium and large industries and to existing enterprises. If this center's services could be used as needed they would be a good complement to the skills WIPIDC would have at its avail. 93. Applicants who could work out technically and financially sound projects would then submit them to a final Allotment Committee consisting of the estate manager. two additional WPIDC officers, two industrialists operating in the branch of industry in which the applicant proposed to op- erate and the District Commissioner who would act as chairman. Decisions of this committee could be appealed to the Board of Directors of WPIDC whose decision wiould be final. Assistance to Estate Occunants 91g The heart of the small industries P.states nroaram is technical assistance. Besides aid within the screening procedures described above the occupnnts of the proposed estates wo ld need conti nued adrice and assist- ance on technical and managerial matters to become efficient producers. The proposedf project includes facilities ann narsonnl +rt ntvri r uch cnin st tance. 95. At the very outset, applicants admitted to the estates who chose t.0 constuructL tUheir O'wn, 1fa.C4o-Uy buildings 41inste ad 01f having thWi bu;'+"I blyr WPIDC, would be able to obtain technical advice and assistance from WPIDC's c.LVi.L ±%±.Lin coUnULLtiant WIIh aLr responsible fo p.LLJI. an s1u1pe = vising the development of the estates (constructing earthworks, roads, water-works ewage uisposalacdU.Lties, c.j. 96. For enterprises settled on the estates, wPrDC would provLde aurUad range of assistance. The Corporation would establish a Small Industries Service Institute at Lanore and service extension centers at Gujranwala and Sialkot and on the other estates it is in the process of setting up. There would be a service center for each industry heavily represented on an estate or in an urban area, e.g., there would be a light engineering service center on the Guiranwala estate, a sports goods service center on the Sialkot estate and a cutlery and small tools service center at Nizamabad, a town where this type of industry is concentrated and which is some 30 miles - 24 - from Sialkot. The Nizamabad center is also to serve the cutlery and sur- gi cal instr e+s ind Us+ri es e=-` to -ome +to the -t-wo estates- 97. mlh TLiahor T-titut-e woul'd coor AJdia 4d -tA n e w of t;he service centers, and thus would eliminate duplication of effort and fac'i-4ta4ete xhge1, of, T-rene InAdd4tion -4 wo-4 'd wrk o .Lai±.LUL.d. Ui1= tU!2 ~JULICUiUtz;. .111 CLAALU _LU± i13 .LL ~ 1. "MJ±f. L d problems common to all small industries, help elaborate and implement a. prograUd, fuor theil- dev-UlopUJmientU W. UILL11 ULUhe coW±LUy- ! oVerL-d evLeo UUVt=rVe.UtLu.t. effort and. perform all such duties which do not require the direct and close assistance to individual ernterprises which WoUlU be pIrOvideU thrUugLh the service centers. 98. The Lahore Institute and the service centers would provide services to industries - such as demonstrations of machinery and techni.ques, training programs, establishment of quality standards, etc. and assistance to individual firms - such as designs and drawings, advice on technical and management problems, assistance in instituting new methods of production, accounting systems, etc. In addition, they would make surveys of industries and markets, study the potential uses of indigenous raw materials, design special machinery for small industries in and around the estates, etc. Eventually, the service centers would help applicants to the estates prepare their projects and to screen applications. 99. 'the service centers would also serve as conmon facility centErs, that, is, each would be equipped with certain pieces of equipment too specialized and costly to be purchased by individual small firms which could be made available to all enterprises requiring their use. In addition to providing technical and managerial assistance and common facilities, hE'IDC expects to assist occupants of the estates to obtain raw materials and to market their products. 100. Charges for the use of common facilities and for raw materials and marketing services supplied by 1OPIDC wolEd be expected to cover costs fully. For all other types of assistance and service, charges would be nominal at the outset, but would be increased gradually until they, too, completely covered costs. If the small enterprises were to pay from the beginning a substantial Dart cof the cost of the assistance. most of them would rattier prefer not to benefit from it; this would greatly reduce if not totally defeat the desired effect of the assistance. At the outset, services would be made available mainly to the occupants of the estates, but enterprises off the est-ates woilr] hbe permitted to avail themselves of thpmn as nnd 1;o the extent that it became feasible. l0l1, The proposed IDA credit would include the estimated foreign ex- c h an ge ex,yendit,,-c-s and a small part of te+1 1-oa e-n+tn for the setting up of the Service Institute at Lahore and the service extension cen1ters ab purovidala, Sbyfreig aeprts,whic is &ndiscued furtherblow.s anceI to be provided by foreign experts, which is discussed further below. Foe- 1020 ~ 1l Ih Pakisutan- auhrte wo--uid we l comie t[he helpoforine+rt to provide technical assistance and to help them elaborate their plans for assistance -oul - n-u-is TD1_esccs oi -v-MrPIDC! dlfrtscee for the development of small industries depends not the least upon the work-ing out of a sound over-all program for smali industries coordinated with the over-all program for the development of the country. This aspect and tie need for foreign assistance is presently being studied in Pakistan by a t;eam of the Stanford Research Institute; the mission is financed by the Ford Foundation. 'There are prospects that, as a result of these stud- ies, the Ford Foundation might finance a number of experts to go to Pakis- tan for a few years to assist in the elaboration of the development program for srmall industries. 103. Tu give assistance in the implementation of the proposed industrial estat(es' project writh its more narrow scope, it is envisaged that foreign experts would be provided through an industrial consultant firm; they are to assist in the appraisal and screening of enterprises applying for admission on thie two estates and the preparation of their individual projects, assist in promoting patterns of inter-related production between one or more larger scale enterprises and other enterprises on the estates and help in the estab- lishm,ent and initial operation of the small Industries Service Institute, and the service cen-ters on the two estates and at Nizamabad. through which the assistance described further above would be given. Preference is given to a consultant finn over individuals, since a great deal of flexibility is required to effectively carry out the assistance; furthermore, it cannot yet be said with certainty what the specific aualifications of all the ex- perts would have to be and how long everyone of them would be required to re- main in Fakistan The allocatinn nroi ded in the credit would finance the estimated total foreign exchange and a small part of the local expenditures of about 36 man-vynrs. OLL. The assin wtnnG nTnUld be rcnentnrnter on the individual enternrises and the sectors of industries coming on the Gujranwala and Sialkot estates, sI1 thowih they w.oldAi n1i 'n be' in rvlvired,- ton the Pete,rnt. m-nnqi hi _ in advriqin-- on the Lahore Institute's wider functions, and in advice to enterprises outside the eStates. !.-In ore to car out the or;is+-n economi 1 + deti- - be imperative that best use should be made of consultant services already a;vail- abvle in Pakistan such as the PITAC center and of the back- stopping sevices the consultant firm is to give from its home headquarters. All the foreign expertus wiouJl d have PaIlostanLi coWuiterpartUs working J-wLi Ul l11 them II ULIr te UUtset who would be expected to take over the foreign expertst responsibilities when thy hiiau buen tra.Lnied. 105, It would be impractical and too costly to bring to lWest Pakistan foreign experts on a long-term basis in all branches of industry likely to be represented on the two estates. An expert for an industry should not be - 26 - brought in until there is a large enough demand from enterprises both on and oIf the astates to require his service full time. However, it is recog- nized that be;.ore an industry needs the full time services of a foreign ex- pert it wou7.d need technical assistance that cannot be supplied through the service centers and by other experts locally available. Therefore, proviLsion has been made in the proposed IDA credit for foreign experts required for assistance in specialized fields and for particular studies of relatively short duration, and for fellowships abroad of Pakistani personnel, primala- ily those working with the Institute and service centers. 106. A summary of the provision for technical assistance (facilitie, and services) that might be included in the proposed IDA credit is given in Annex 6. Requests for proposals for the consultant services have just boeen sent out by WPIDCj and a contract for such services between WPIDC and a con- sultant firm on terms and conditions satisfactory to IDA would be a cond:ition of effectiveiness of the proposed credit. WPIDC will, in the near future, start its preselection of applicants, but will not finalize plot allocations before the consultant firm has had a chance to review the applications and give its recommendations for possible modifications of the individual pro- iects, - 27 - VI. ECOi1ONlIC JUSTIFICATION 107. The proposed project to establish two estates for primarily small industrial enterprises at Gujranwala and Sialkot has several pur- poses. It is intended, first, to assist several hundred, small enter- prises improve their productive efficiency and increase their earnings by providing them with more adequate working quarters than are now available in theBse to'wns, technical assistance, credit facilities and help in ob- taining raw materials and marketirg. This should also permit some of these small firms to grow into efficient medium sized enterprises. 108. The estates would be one feature of the program for small indus- tries intended to make possible an increase in the exports and/or reduc- tion in the imports of oroducts of these industries. Pakistants handicraft and other small industries are reported to have had exports of Rs 44 mil- lion l,$9.2 mrillion) in 1960. (FignrP.s for earlier years do not distinguish between large and small industries.) The target of the National Small Indus-triAs Cornorationa whicth was resnonsihn Vh for nromoting exoorts of handicraft and small industries, was to double them by the end of the Sec- ond Plnn per-iod (L965) It many be difficnl+. to -chiere an inerease Of thi s magni-tude in so short a period, especially because exports apparently rose in l9etC) aS a resu1lt of the introduction in 1959 of the export bonus scheme, under which exporters are permitted to retain for unrestricted use a portion of the foreitrn exchange they earn. However, active promotionl efforts should yield some increase. The emphasis is on handicraft exports, but evffoyrts ev~n also mad~ e,t -or-^mote expo,-rts of4 o-t-her m 1r.-I indsrTh ies.* Ex- ports of the sports goods and surgical instruments industries alone are estimalted at Rs 13 2 ril'ion (US$2.8 11-lron) in 1959 (sport goods A Rs 10.8 million, surgical instriments - Rs 2.h million). Improvements in the effi- ciency of these indus4uries and pror.lot-iona1 effforts slho,.' ;cesthse figures. 109. Imports of selected items of the type produced by metal products a.nU LiI.ghteijgiL1-ing eUteUplses UUJad-1WLa anU O_LcL,I'U amio-unted 1ir L959 to Rs 64 million ($13.4 million) for all of Pakistan and Rs 49 million ($P.L)J rLL±..lJLon) for0 WetO i aLone. ( nex 7 ) SidL. .s at Gujranwala and Sialkot Would p2obably not be able to match import quality for some time, but improvemenits in their techniques should enable utem to replace these imports in part as their production increases. 110. A rnodest increase in the output of export commodities likely to be produced on the estates (e.g. sports goods) or in import substitute com- modities would in itself result in a reasonable economic return on the in- vestment on this project. But the project has an additional and broader purpose - to demonstrate to entrepreneurs with limited financial resources and limited access to foreign technical skills the possibility of profitable utilization of modern machinery and methods and of expansion. In Pakistan, as in most developing countries, industrialization has taken place mainly through the establishment of large-scale industries, requiring substantial - 28 - investment and the employment of foreign technical and management experts. If the iaLge number of potential entrepreneurs with limited financial re- sources and knowledge of modern methods could be made aware that they, too, could employ these modern methods and expand, the process of industrial- ization could be accelerated. ill. The estates seem to offer the most economical as well as effective means for achieving the ends sought. Additional factory space is required at present in both Gujranwala and Sialkot. Quarters of the standard that woul1 be provided on the estates could probably be made available at a lower cost there than through the construction of individual buildings which would require individual utility connections. More imnortant. however, the estates offer a means through which the most promising enterprises - those able to make use of modiern machinery and methods andi wdillinr to take advantage of the advice and assistance offered - could be brought together and incThceed t.o nv-lT 1 ±.hemscz1u of' +hese facilities= Soma of thof e enter- prises might then expand into medium-scale enterprises, with economic bene- fits to Pakistann. In some cases, they mnght even expand to the point iwihere they would have to seek larger quarters off the estates to provide for ex- nnnsqton- i -. e.h pt estats.+. woul serve as n.q nurseries fo sf zm-all en+.erprisq. 119= However- the n-ct5ir'+. miust tQill hb regrded a pimental= Experience is too limited to make it possible to estimate firmly the direct and indirect benefits of the estates vo their occupants Ad to +he economy as a whole. 113. On the other hand, the cost of the project would not be high. A sulbstantlaLq fratio ofr the expenitu 4 would --IAbL,e flor machnr an14up ment. Most of the costs would be recovered from the occupants of the estates. There is ro basiJ s f'or a ' ifULedstIi l,l e fs m1ate au tuo lhou0w LUJAi it U souUl take to fil:L the estates, but they should be filled in a reasonable time. If iU proves Ud±iffcuu uv tvtL-ac1t enough jilia±Ll enuLerpr±ses, 'wrDUC is pre- pared to ad9mit more medium sized enterprises than it now plans to. There is a demand for space from medium sized enterprises and the estates, with their well-located sites and facilities, would undoubtedly be attractive to lthem. l14. Evren a modest development would probably result in a reasonable return on the investment involved. There is a good chance also that the esta-tes would serve to accelerate industrialization. For these reasons, the project seems economically justifiable. - 29 - VII. CAPITAL REQUIRWqENTS FOR PROJECT AND RECO-VERY FROM USERS Capital Requirements 115. The capital requirements for the project include: (1) the require- ments fnr the the-mel vp.e.s that, i - the niirchasp nri ce of the sites and the cost of preparing the land, installing basic facilities and con- s ctr ,'rwng n-vi +io r 1%iii I rl-ngs;c! (2 ) +he nc of' +the frto.rvr )ni I ri naq ;=nr the machinery -to be installed in them; and (3) the requirements for the Smali Ir.dus_t.e_1s Sertvrice Institu+te Wnd th-e se-rvJce centersc 1 16 ThA.e est4at. of, - requrements aPar th e estates are based onthe estimates prepared by W.PIDC's consultants, the Republic Engineering Cor- j.104. dLI± 4i T±.~d.1 t L-- A-..._ -I - -eI tL i.A - O * 1J±U 4-LI- eIIV_- j1 L~ porat-ion of- Lah0re. (ForL-W- detailsO, see t::R ex 8 11i.) . SJLinIce thedevlopen of the two estates is expected to be completed by June 1963, it is unli.kely th at actual costs will exceed by a sizable margin the estimates which, for purposes of establishing charges to the estate occupants (discussed in para.graphs 20V-12;), include a conLi,'gerlCy reser-ve Uf 10%. 117. Requirements for factory buildings and machinery cannot be estinia- ted firmly at present. There is no basis for an accurate prediction as to the size of establishment enterprises would wish to set up at the outset or their industrial distribution, nor as to the amount of machinery they wrould bring with them. Moreover, information on the fixed capital requiremertts or small enterprises of the type likely to settle on the estates is meager and unreliable. However, rough estimates have been made, based on the opinions of the Small Industries Division of WPIDC and its consultants and such in- formation as the mission was able to gather and from the first applications. (For details see Annex 9). 118. Since the exact requiremnents for floor space and machinery ancd equi.pment of the Small Industries Service Institute and the service centers will be firmed up by WPIDC at a later date with the help of the foreign assistance team, the estimated costs of the Institute and the centers 1;See fol].owing paragraph) should be considered as tentative. 119., Estimates of total capital requirements by major categories, excluding the cost of the foreign assistance, are given below (in million Rupees): of which, foreign Gujranwala Sialkot Total exchange (102 acres) (100 acres) Estate Development 3.58 3.80 7.38 0.95 Factory Buildinas and Artisans 1workshops 22.60 21.75 44.35 8.87 Machinerv and eauiDment 24.30 23.40 47.70 23.85 Sub-total 48.95 93943 777 Institute and centers - - 375 1 2 Total 103018 34.99 (;in m;i11;inn Tl.S1 AmHn1p;vn nt.) 91 _(s7 7 A~ Charves for Plots and Rentable Community Buildings 120= IjJPTTDC wolAri l the nlcots for 99 yerars instead of selling them outright in order to retain greater control over their use, but lessees won]ldi hnpve the right to transfer leases, qubie.t to nrior apnroval by the corporation. Charges for leasehold rights to plots and rents paid for rentable comrn,rznity buildings would be the sources through which lkPTTn would reccver the bulk of its investment in the estates. 1/ 121. The rentals for rentable community buildings would cover their ment. cost and the major portion of the operating cost of the service cent1±ers, at least for some tie. , w-ul1 beL/ 1-r by1 LVqDTID, -whVI V-LA. be reimbursed by the Government. The charges for leasehold rights to plots w-uld cover, theI, remainng aia expeditres excldin eAend4ur o the water system, which would be covered separately. The costs to be re- COVeered fromJ [1e ssees is esU LMIatIe,Ud at Rs 2.63 II onL.LfLU11 1U1 ULIJ.LdJIwALd. acIILL Rs 2.87 million for Sialkot. The amount to be paid by an individual lessee would be determi ined b-y the relationship between thLe area of his plot arid the area covered by all factory buildings, artisanst workshops, rentable comnrullunity- -buildings, arnd service centers. The crlarge as th-us determi-uned would be increased by 10%, to allow for vacancies. It is estimated that the charge for a 10,000 sq. ft. plot would be Rs 8,250 at Gujraniwala and Rs 9,321 at Sialkot. 122. WIIDC would not recover the expenditures of its Small Industries Division for planning the estates. Its adtinistrative expenses are covered by a grant from the Provincial Government. Interest during construction on loans incurred for the purchase of sites and their development would be covered bvr a service charge equal to 2.5% of the recoverable investment costs which would be included in the total charge or rental. 1=23. The lessee of a factory plot could pay the charge for his lease- hold right in full on signing the lease agreement or over a period not exceeding 23 years thereafter, including a grace period of three years. A minimum down payment of 20°' would be required. Based on present cost estimates, the lessee of a 10,000 sq. ft. plot, making a dowm payment of 20% and paying the balance over the maximum,n allowable period of 20 years would, assuming an interest rate of 7% per annum, have to pay Rs 51 ($10.71) per month at Gujranwala and Rs 58 ($12.18) at Sialkot. 124. The amount of the down payment and the period over which the balance would be payable would be determined in the light of the lessee's financial resources, the additional obligations he would be incurring for a factory building, machinery and equipment and his working capital recquire- ments. 1/ List of rentable and non-rentable community buildings are given in Annex 8. - 31 - 1 25 TI , A;1+iO, +OA c-harge f l rgt o p sof the esta-tes would pay a monthly charge to cover the cost of administering and maint-Filling, th-r estts Ti ; s ;eS4-4,4 1+ 4lt-1-+ +" - nS_1 A u,iw. C.O tiuc)ucUI UL* .L -VL .O O L L t -VLIlA- .1I.c - 5w amount to Rs 320 per year for a plot of 10,000 sq. ft. on both estates; charges wol- Ld b0le suLb0 Ject0 to modiifi c atllLUn1 as .I4 ULLL_LI t--1. p res eOntII plan is not to require payment of this charge for the first three years after U1e s.lgn,-ng of a -lease agreement,t CUrLLU for .Vaucovy D-LLLU1L1dgs W.[IQ Pacrullery 126. Enterprises settling on the estates wouid pay thie fui-l costi of thei:r factory buildings, machinery and equipment but would be able to obtain iong-term credit at 7 to 7-2% a rea.onable rate for Pakistan, to finance construction and purchase. iDID would make loans to enterprises constructing thei;^ own factories, as most are expected to. It is expected that such loans would be repayable in not more than 20 years and be limited to 70, of the estimated cost of the buildings. '&IDC would construct buildings for the r emainder and sell on IDBP terms or those for the sale of leasehold rights. 127. MIachinery and equipment are to be made available on a hire-purchase basis by ID]3P. A down payment of 25% to 40% would be required as a minimum (the more specialized the machinery, the higher the down payment). The balance would be payable in a period shorter than the estimated life of the machinery or equipment, and in no case exceeding ten years. WJPIDC has agreed to assume 75% of the bad debts arising from IDBP loans to estate enterprises. CredLt for wVorking Carital 128. IDBP is authorized also to inake short-term advances or loans for working capital in an amount not exceeding 25% of IDBP's total advances to the enterprise. The commercial banks have indicated that they, too, are prepared to make short-term loans to the occupants of the estates provided that WPI-DC (or the '-overnment) assumes 100% of the bad debts of such loans. An effort shiould be made to have commercial banks participate to the fullest extent possible in providing credit to the occupants of the estates. However, the reauest of the commercial banks that NIPIDC should bear the whole risk is not reasonable and does not assure that the banks consider the credit - worthiness of the estate enternri _es as oqrefnl v ais they shnud. Negotliations to this effect are now in progress between AWPIDC and the commercial banlks. - 32 - VIII. PROPOSED IDA CREDIT 129. Inclusion in the IDA credit of $10.8 million equivalent to cover half of the estimated capital requirements for the project (about $21.6 million cn the basis of the present estimates, see paragrpph 119), might. be considered appropriate. However, because of the tentative character of the estimates of capital requirements and the difficulty of determining over how long a period expenditures would be made, it is proposed that the present IDA credit include $5.7 million for that purpose or slightly more than one fourth of the estimated total cost of the project. If additional funds are required and appear justified, one or more additional credits could be con- sidered at some time in the future. 130. It in nrnnosed that the credit shouild also include $0.8 million for consultant services and fellowships. In all, the proposed IDA credit woul d amount, to $66.5 mn11lion, 131. Up to the amoulnt of the credit, foreign exchange expendituLres woulc be reimbursed in full plus a portion of the local expenditures to bring disbursemen.ts up to Co% of the $13 mllion. Disbursements woll-d not be de- pendent upon the sources of financing for the capital expenditures of the p_iv-tc enter-pr3 ses and -'ere ruppees., but, not fore4g exhre,wr ther- V" - . v .i~4W.L~ ..ALVI v ~L ~I U . L gn.E exchange we.'" '-e wise available to the enterprises the foreign exchange included in the credit coulI be made ava"ilable by p-rchasing such foreign exchange *wlth rapees. Although there might be individual enterprises which could contribute mcore thUn 50l of the costs of their individual projects (defined as the costs of the plots, which include a proportionate share of the development costs of the E!states, the costs of buildings, machinery, equipment and working capital), it is unlikely that enterprises would, on the average, contribute more than about 40% of these costs. On such an assumption, the credit would cover less than the enterprises' non-equity requirements under the project. Channeling of the IDA Credit 132. The proposed IDA Credit of $6.5 million would be granted to the Government of Pakistan free of interest for 50 years with no repayment during the first ten years, and repayment of 1% of the principal in each of the next ten years and 3% of the principal in each of the last 30 years. There would be a service charge of 3/4% per year on the amount outstanding. The credit to the Pakistan Government would be covered by a Credit Agreement. The Pakistan Government would make the proceeds of the credit available to the P'rovince of West Pakistan at IDA terms. 133. The Province of West Pakistan in turn would pass on the credit; amourLt to WP&IDC, of which an estimated $1.2 million would be given in the form of a grant to cover the estimated foreign exchange and part of the local costs of the foreign consultant services and fellowships ($0.8 mil- lion) and of the Service Institute and the service centers ($0.4 million), - 33 - al' 1i.he remaining $5.3 million in the form of a loan bearing interest of 4% and for 25 years including a grace period of five years. 134. WPIDC would use part of the $5.3 million portion of the credit - an estimated $0.7 mi illon - to cover its own foreign exchange and part of its local expenditures incurred in the development of the estates, the const:ruction of artisans' workshops and the construction of factory bulld- ings of occupants that do not choose to construct their own. VWIDC would receive 7% for credit it extended to estate occupants for the purchase of leasehold rights and factory buildings. 135. The remaining $4.6 million of the credit would be channelled thirough TDBP to occupants of the estates, for the construction of factory buildings and the purchase of machinery and equipment. Any loans for these funds would be made avaiLable for various periods of time at 7% interest per year. It is tentatively envisaged that of the interest spread of 3% (between 4 and 7%), IDBP woluld keep 11-2% while WPIDC would keep the remaining 1-l2% to cover part of the expenses incurred by the latter in the technical screening of applicants. It is possible that for its loans for imported machinery, IDBP would charge 7T% to cover foreign exchange fluctuations. Apart froin such charge, the foreign exchange risk would not be borne by the estate occu- pants. Conclusion 136. On the basis outlined, the project is suitable for an IDA credit of $6.5 million equivalent. October 19, 1962 1IJL]EX 1 Page 1 Assistance to Small Scale Industry in India The mission spent five days in India visiting small industries estates and service institutes in and around Delhi and Calcutta. A stud-y of Indi an experience seeriied useful because the Indian program of assistance to smiall industries, on which the Pakistan program is general:Ly modeled, has alreacdy been in operation f'or several years. Small Industries in India Lhe term "small industries" is defined more broadly in India than in ei.ther viwing of Pakistan (i.t is ctef'i.ned diiierentliy in East and 'viest Pakistan) andl its scope has been progressively enlarged. In 1960, the term was delfined to m..ean enterprises em-llovin2 fewer than 5C) workers if power was u.sed, or 100 workers if no polier was used. The employment limits were subseqzuentlv raised to 50 or 100 workers per shift. respectivelv. 1Iore recently, -11 employment limits have been eli.L-inated, and the only require- ment an enterprise must meet to be classed as a small inndnstrv at presert is that its fixed assets amount to less than Rs 500,000. According to the 1958 Census of Xanufacturing Industries, 73% o:f a]l industri.dl units in Tndi were snlall indlustries (o.robablv defined as onterprises employing urp to 50 workers if power was used, or 100 workers if no nowT,er was used'); these enterpri.ses er%-p1ovc] aboout 80.'' of the workers but probably no more tlan 10% of t.e productive c+pital of industry. Government Program for Sma'1l Industries Public expenditures on small industries (including cottage indus- tries) rose fronm anr Pa Rs P. r.il i n +ihe Firth Ir Ve Ye- Plan period (1951-56) to Rs 1,800 million in the Second Plan period (1956-61); the Th7 -o -.-.L. )d4U, LII In 16-. AN1A(RX 1 Page 2 Inclus'riO. Estates The small industries estates program, which forms an important reaC4ure u± th- I-e overa.LL progra±Ur for smIri1Ll ULLO UstLrieO, LLLa Ua4lray ra.L he substEantial proportions. To the end of Mlarch 1961, expenditures on es to as 1O^.7 2m1'i n - and 'e re etal- e UateS WJIEU tUII d~ LU0 £THS 10O*. -17LL1-1U11, li UIII.'Ie Vt=eitz ;2' :OudLUt'c ±1i U.Pt'.±=L tion, 40 completed but not yet functioning, 24 under construction and 29 where pruli-runal-y WuifK kaCqLuziujoii 0f lalni, pepaiaution± Uof e-UaLU estimates, etc.) was under way. On the 52 estates already in operation, Ulthre were l,000 enterprises, emplloying 1320UU persouns ana producing goods with an estimated annual value of Rs 140 million ($29.3 million equivalent,) . The Indian estates differ from the proposed lNest Pakistan estates in several respects. In India, normally the Small Industries Corporatlions not; only cevelop the land (i.e. clear it, install basic facilities, etic.) but erect factory buildings. In West Pakistan, small industries will be allowed to erect their own buildings if they choose and it is expected that most of them will do so. In India, rentals on most estates have been fixed a-t half the true economic rent for the first five years, and this conce!ssion is expected to be continued for some time longer on a number of estates. On the proposed Pakistan estates, charges are expected to cover all the costs of investment and maintenance; technical assistance would be providedc for a nominal fee at first, although it is hoped that charges could be raised to cover most if not all of the costs eventua3ly. The Indian estates are generally smaller than the proposed Pakistan estates. Iethods of development have been less economical in IncLia than they are expected to be in Pakistan, mainly because the propor- tion of the total area used for factory plots has been rather low. The Indian Third Five Year Plan provides for the establishment of 300 new estates at a total cost of Rs 270 million, or Es 900,000 per estate. This is only about one-quarter of the estimated cost of each of the proposed Pakistan estates at Gujranwala and Sialkot, and this despite the fact that the Indiar, Ligure includes, while the Pakistan figure excludes, the cost of factory buildings. The Indian estates (even very small ones) have been developed in stages. An example is the Okhla estate near Delhi which the mission visited, and wlhch is expected ultimately to cover an area of 110 acres or about as large an area as will ht covered hv each of' the proposed Guiqrn- wala and Sialkot estates. In the Iirst stage, which ended in 1958, only hO aeres were dvelonnpd nnd fant.ory hnildin ngs erected. The Smnll Incustries Corporation is now developing another 40 acres and putting up anCther liO buiildings. No date has been set for the com-pletion of the development. ANNEX 1 Page 3 At least on the Okhla estate, the enterprises are larger on the average than the enterprises on the Gujranwala and Sialkot estates are expec-ted to Ibe. ThInan extension centers like the estates are more modest than the pro )osed Pakistan centers, however their fields of activities areno f'1yIv comnpara,bl-- e. Results of T-Anc- Q-al - I - ndustr4es E~st4ates Program U 4 44J.., TAJ.tJaL.4I The am of the Indi an small -ndustries estates program has been to aid indus-lirial growth in areas outside the large cities where most India industry is n c et At first, estates were established in middle-sized cities and satellite areas of large cities, but in the last few yYears the Government has begun to establish estates also inr coapcara- tively underdeveloped rural areas, in order to stem the movement to the cities wrich has resulted in serious overcrowding and press are on alL social facilities - water, electricity, sanitation, transportation, etc. The estates in middle-sized cities and satellite areas of :Large cities have generally proved successful. At Okhla, which is a satellite area estate, the enterprises visited by the mission seemed generally well- rim and all of them had expanded their operations considerably since they moved on to the estate. Operators of small enterprises off the estate are apparently eager to locate there. Although formal applicants have to pay three months rent in advance, 400 persons have applied formally for the 4h buildings now under construction. The number is not large compared wrLth the number of small enterprises in the Delhi area, which is estiumated at 25,000, but it is significant that 400 small industrialists have been willing to tie up funds merely to be considered for admission. The appeal of these estates does not seem to be low rents. A:Lthough rents on the estates are generally only half the true economic rent, they are sometimes higher and are rarely significantly lower than r?nts for the same amount of space off the estates, The principal attrac- tion seems to be the preference given to tenants by the Government for credit, raw materials and foreign exchange licenses. The rural estates on which the Government is placing increasing emphasis (it plans to establish at least one estate in each of the 350 districts in India) have been less successful. On many of the estates already established, a number of factory buildings are still unoccupied. The difficulty seems to be the distance from sources of raw materials and markets. ANNE.Y 1 Page 4 More ::1 VL ree.l,the autoriie CLU beenO. eFrLe+n U*.rQ L estates for small enterprises feeding components to larger firms. These est ates haveS not- yet- provedu sceful. Large mlanuflact-urers have s.>ov little interest in contracting for the manufacture of components outside their plants, in part because of the fCilure of small enterprises to meet quality standards and to keep promised delivery dates, in part because the large manufacturers do not yet appreciate the poten-tial econoilic advaltages of relying on other firms for some of their requirements. Conclusions Indian experience with estates suggests a number of points which mightl be useful to the Pakistan Government in its planning. Pl Main:ly because of the small proportion of the total area of the estates used for factory plots (generally 30-55%), Indian development costs have been high. The decision of the Pakistan authorities to use about 65-75% of the estate area for factory plots should result in savings. 2) Experience at Okhla (and other Indian estates) indicatee the feasibility of development in stages. 3) The poor results achieved to date by some rural estates and estates for small enterprises contracting to produce components for larger enterprises suggests that caution should be exercised in proceeding with such estates. 4) The important role played by the small industries service centers in the small industries program deserves particular attention. Both the scope of the services provided (they include technical advisory services, common facilities and t;raining for all grades of workers, apprentices, supervisors and managers) and their high standard are impressive. The centers have served small enterprises off the estates as well 2S those loc2tea on thyn- At Okhln. for exnmnle- nnlr 30% of the work of the Light Engineering Service Center is for enterprises on the estat6es ANNEX 2 WEST PAKISTAN S1MALL INDUSTRI1S CCIRPORATION Schemes Approve by the GcZtMment, Allocations of Funas anci ZxpendiitUres (In Million Rupees) Estimatedl .196-1961 196'L-1962 Total Budget Alloca- Expendi- Budget Allocation Name of Scheme Cost Provision tion tures Provision Loan Grant Total Development of sericulture industries Not 0.88 0.2:3 0.4 0.'34 0.44 0.74 lWool weaving and sLpinning centers Available 0,50 0.03 0.45 0.40 0.05 O.45 Pottery research d[evelopment centers (GLjrat and Bhag) 0.21 :1.00 0.20 0-`05 - 0.05 0.05 Eight carpet development centers '" 1.32 0.10 0.92 0.61 0.31. 0.92 'rwelve cottage industries clevelopment centers " 1.54 0.2 6 0.85 0.40 0.45 0.85 Eight sales and display depots 0.54 0.1:L 0.25 0.;25 - 0.25 Rural industries extension service program 1.45 o.o6 - 00 - 0.07 0.07 Sports goods service center -Sialkot 1.08 0.07 - - 0.]12 - 0.12 0.12 Small. industry survey organization 0.03 0,08 0.08 0.02 - - - - Eight Small I.ndustries Estates 14.80 0.10 0.10 0.01 4.00 4.00 - 4.00 Metal industries common facility center - Shikarpur 0.30 - - 0.12 - 0.12 0.13 'West Pakistan design and publicity center - Lahore 0.73 - - - 0.22 - 0.22 0.22 Small textile service center - Multan 1.04 - - - 0.'34 0.:14 0.20 0.34 Light engineering service center - Gujranwala 2.46 - - - 0.20 - 0.20 0.20 Cutlery and small tool service center - Nizamabad 0.97 - - 0.41 0.11 0.30 0.41 Sewing machine estate, Lahore 0.42 - - - 0.'36 0.36 - 0.3 Matting development center - Kcot Adu 0.10 - - - 0.:L0 - 0.10 0.10 Rural indlustrial service p'Llot project - Peshawar 1.45 0.45 0.46 0.09 0.36 - 0.36 0.36 Total Schemes 5.75 1.64 1.05 9.56 6.61 2.95 9.57' Headquarters and zonal offLcers 0.51 - _.55 05 GRAND TOTAL 2.15 1.6o 6.61 24 1LO.07O INDUSTRIAL ESTATES PROGRIA Elast LwT-s+ Pakistan Pakistan Karachi Tc,tal Original Alloc.-:tion of the Second Five-Year- Plan Number of units i6 7 1 24 Total investment (in Rs million) 24.0 10.5 1.5 36.0 Latest revised estimate for the Second Five-Year Plan Period Number of units 18 8 - 26 Total inves-tment (in Rs million) 66.0 18.3 - 54.3 Allocation of funds for the first two years (1960/61 and 1961/62) Number of units 7 8 - 15 Amount (in Rs million) 24.3 4.1 _ 28.4 ANNEYX ) rPTTT .MlcmP DAWTCrPAMk T1\TT)TCTZV'QTAT Th TMTnlPNM~T PnOPPnQAVTTP\i -tJE -T. S.RIA..KJ-.- --N - -INDUSTRIh L .LtJtT CO. OR-TIO PIDCG the predecessor of the two provincial Industrial Develop- metL u I.,dorporatiUL1n waVds sUdaUA±Lw1CU 1in Apij L ±70. PIDC -l was ce wDith the objective of promoting industrial enterprises, which private indus- try wsis either unable or unwilling to undertke. It has been the policy of the Corporation to supplement rather than to replace private enterprises. nTT^.A J____.! - ..n.1 *3 - _' I-_ _ :_ PCa ltlerefore, has refrained from establishing industries in ieLds n1 which private industry is active. Emphasis was put on the promotion rather thian owriership of industries and PIDC followed the policy of se'lling its enterprises to private investors as soon as practicable. These general policies have not changed with the dissolution of the former PIDC, and the establishment on June 4, 1962, of the West Pakistan Industrial Develop- ment Corporation. PIDC by early 1962 had established 54 projects in both wings, and had another 16 projects (13 in East Pakistan and 3 in West Pakistan) under consideration. PIDC's total investments by the end of 1961 have been about $300 million equivalent, of which some 30% were private par- ticipations. According to its ordinance, WPIDC is responsible for planning, promoting, organizing and implementing programs for the development of the following industrial sectors: jute, paper, heavy industries, in- cluding iron and steel, shipbuilding, heavy chemicals, fertilizers, pharmaceuticals, dye stuffs, sugar, marine fisheries, industries based on forest products and cottage and small industries. WPIDC is also res- ponsible for the exploration, and exploitation of minerals, including coal and peat. The authorized share capital of WPIDC is Rs 10.0 million, of which Rs 4.5 million have been paid up by the Provincial Government. The Board of Directors is appointed by the West Pakistan Government, which also hzas to approve the projects proposed by the Corporation. All re- sources undertaken by I1PIDC come from budgetary grants of the Province, such orivate capital as WPIDC is able to attract and foreign aid as well as loans and working capital obtained from Pakistani banks on normal commercial terms. Ai'JlNEX 5 Page 1 The Industrial Development Bank of Pakistan The Industrial Development Bank of Pakistan (IDBP) was estab- lishecl by an ordinance of the Government of Pakistan of July- 29, 1961, as the successoi to the Pakistan Industrial Finance Corporation (PIFCO). The reorganization had been recommended by the Credit Enquiry Commission, in order to provide Pakistan vith a credit institution with special responsi- bility for financing small and medium-scale industry and with the author-- itv t) nro-nidrf fo'repign exYrnchag as well as locni eurrepncy financing, TDE…P h.as a share capital of Po 30 mil.!ion,P1… fully p idn p 51 of the shares are held by the Government and the rest by commercial and cooperative bar.ks-, lns _ance cosmpanie-Ss, -er.sion fnsand inAilyidU-01S. The Bank is authorized to accept long-term deposits from the public, to borrow. from the Government to issue a sell bonds and debentures, and, for the purpose of making loans in foreign currencies, to borrow such cur- rencss fro, theIBPmL or- arly ot-her instit_utULion. liThe ZAL ofL -Lts bonds andl debentures issued and outstanding and its contingent liabilities in respect of guarantees or under-w-iting agreements may not exceed five times the amoun-; of its paid-up share capital and reserves, but there is no limi- tation on its borro-wings from the Govurlurlent or its foreign excui8u borrow- ings. IDBP is authorized to provide financing only for industrial devel-- opmenl., but may- make funds ava8iiable both for modernizing and boalacing t'X- isting enterp)rises and for establishing new ones. liore specifically, the BDnk iLS aiuthlorlzea to conducT tne following types oI transactions: (1) Advancing anid lending money and opening cash credits for the specific purpose of assisting an industrial concern; (2) G-uaranteeing loans, credits and debts raised or granted to or incurred by an industrial concern and repayable within a period not exceeding 20 years; (3) Granting loans to or subscribing to debentures of industrial concerns; (4) Selling and utilizing the proceeds of sale of all property whether movable or immovable; (5) Underwriting the issue of stocks, bonds or deben- tures by industrial concerns; (6) Drawing, accepting, discounting, buying and selling bills of exchange and other negotiable instruments; (7) Borrowing and granting credits in foreign exchange; AIEWEX i Page 2 '8) Borrowing money for the purpose of its business and giving security for money so borrowed by pledging assets or otherwise; (9) Carrying out surveys of and research on industries and maintaining statistics; (10) Administering, as agent of the Central Government, such loans and in such a manner as the Central Government may direct. IDi3P may grant loans to limited companies, partnerships and soLe proprietary concerns. All loans must be adequately secured by pledge, mortgage, hypothecation or assignment of property, including prospective assets, and loans for fixed assets may not exceed 70% of the estimated val- ue of the assets offered as security. The terms of its loans may not ex- ceed 20 ;years, and the amount of any individual loan or guarantee may not exceed Rs 1.0 million (or Rs 0.5 million in the case of foreign exchange loans) excent, with the annroval of the Gnvernmpnt. However- the Bank ma;y finance without limit certain sectors of industry (mining, jute and cotton manufacture, and inlinne transport). Although IDBP's main responslbil+y is the financing of -mall enterprises, it is not required to confine its financial assistance to such enter-prises. It is aii+)1-4 7.f to fi- Pin!r'o nnnr +peC-,ni r,ellr anrd firn n cially sound project within the framework of the investment schedules for the private sector Tn n4'n+ ;+ m- C+ 'ri- rn.oPonno i- (1). J industr-ie t 4- i JlJ.4.Acfltcb uQse u indiger.4d6.eous raw4 mmateo llA ,J ' (2) industries wihich earn or save foreign esxchange; (3)D ~Ismial.Jl. and med1iw.-sUAML0Lize indLuLsLtrie WIchLLIIIa re ex- pected to make the largest net contribution to natioa4i.. -L o _ ;t 4 4. _.P 4 ..4 -e n IDBP-.L ZUi J.S Il makes technIIcLLLd4, Ji.Laia.WLC.L adIIU tecoUVoIIJ.c3 apprlsa}LsD of projects submitted for financing, Projects recommended by management for financing are reviewed by a Technical Advisory Committee, consisting of engineers, industrialists and representatives of the Government and the State Bank of Pakistan and those approved by the Committee will be su'mitted for final approval by the Board. Besides appraising projects, IDBP's staff inspects and appraises fixed assets offered as security and suoervises the execution of its pro- jects to insure that its funds are properly utilized. IDBP has a staff at present of about 50 engineers, economists and financial analysts; it ex- pects to engage consultants as and to the extent necessary. ANNEX :; Page 3 IDBP took over all the business of PIFCO when it began operations on August 1, 1961. Including loans made by PIFO, the total amount oI loans approved up to August 31, 1961, was as foLlows: Loans Sanctioned Amount Disbursed (in million Rupees) Rupee Loans 17.42 1500 Foreign Exchange Loans 13.08 7.14 30.50 22.11 At that date IDBP had under consideration applications from aboat 250 industrial enterprises for rupee loans totaling nearly Rs 8.0 million. The Drincipal limitation on its lending activities is a lack of resource5s. especLally foreign exchange. IDf3P has entered into an agreement with the West Palcistan Indus- trial Develonment Cornoration (WPIDC) to undertake leriding onerations in furtherance of the Corporation's Small Industries Development Program. To date; Rs C.n million have been allocated to WTPTDC for that niirnose hv the Government and have been placed by it at the disposal of the Bank. A -- t Summary of Provision for Technical Assistance (r acl Uites anu Services) Lo bue ircluded in 'Propo±sedU LtA Credt t for Two Industrial Estates at Gujranwala and Sialkot Foreign Total Exchange (In thous. Rupees) A. Facilities (Capital Cost only) Small industries Service Institute, Lahore 1,100 350 Light Engineering Service Center, Gujranwala 1,450 600 Sports Goods Service Center, Sialkot 600 170 Cutlery and Small Tools Service Center, Nizamabad 600 200 3,750 1,320 788,000 277,000 Estimated IDA Contribution $385,000 B. Consultant Services 1) Small Industries Service Institute, Lahore: 1 Senior Advisor (Management Consultant) with economic and engineering background 1 Industrial Economist with experience in financial analysis 1 Expert in Industrial Engineering and pro- ductivity 1 Expert in Cost Accounting 2) 'iervice Centers on the Gujranwala and Sialkot EsqtatesP.c anri at Nizam.abad:,ri 1 Machine Tool and W4orkshop Expert 1 Expert in Woodworking 1 Expert in the manufacture of cutlery goods and s',_,l 1 +$t0ols Va.rious medium to short-term technicians in :!C:e.- &1 i C!; f4 D1 An oro toi +h olf+l of leather goods, specialised fabrics, knitted goods, heat treatm.ent, el31ectropllatir.gp enamelln,14.. annodizing, non-ferrous metal sheet rerolling, u Vo.Uuri- O work, etc. IA CoA,r ibto Qon5°,U°U°V C. £ llow "spa for .PdAbrL,i 'ersorruiel TTIA ±b $ 5°b°°° A.JJ.J2%1ontUI± i U LUThLLII _'p U, UV $i-p,i85,ooo say $1,200 000 IDA wTould contribute 100% of the foreign exchange expenditures and an esti- mated 21% of the local expenditures. A --- r Rd'JI'Z!A 7 Pakistan Imports ir, 1959 of Selected E'etal Products, of Tools, and 1iachinery and Equipment, Farts and Accessories (In thousand Rupees) Wdest Fakistan Total Implements 1,600.5 2,195.1 Builders Hardware 182.7 362.1 Metal Lamps 101.5 183.3 Lamp Parts, Piiscellaneous 44.6 65.5 Domestic Hardware 144.0 232.8 Enamelled Ironware 119.5 322.7 Hardware, .iisce.Llaneous 5,813.6 9,377.4 Oil Engine Parts 3,657.9 4,340.0 Typewriter Parts 376.9 524.3 Sewing Machine Parts 3,301.6 3,552.6 Bolts and Nuts 1,201.0 1,781.5 Nails, Rivets, Washers 3,295.3 3,799.3 Wire Nails 830.9 2.908.6 Cycle Accessories 1,824.0 2,590.0 Vehicle Part.s 26;441.1 32.161.0 Source. Cent -Iral Stat[listia.L Off iJ_ £e Annual Report for 1959. AFNEX 13 Page 1 The Gost of the Estates at Gujranwala and Sialkot Land Costs The cost of the land is based on actual prices paid by WPIDC: Rs 12.25N (12.q7q) pnr aerp for the Guiranwala estate and Rs 1563o ($3,2B4) per acre for Sialkot. Development Costs The cost of development includes the cost of preparing the land (layout and leveling); con.structing roads, landscaping -Ma, nn ins rna the water supply-, sewage disposal and electricity systems; and the consultants' fee which is $< of the cost of developmentv, as descbed above, n onf, all community buildings. In the case of electricity, provision has been made onl for - 1tee lgv,+v sine te LJt,+- -A Td- ------ Deelpmen Authorlty (WAPDA) will supply electricity directly to the occupants of the estates. Community Buildings Each estate would have the folloing non-rentable community bu ldings - an administration building, dispensary and a Lire station, and the following rentable community buildings - a manager's residence, can- teens, a postv office, buildings for commercial oanKs and tne Industrial Development Bank of Palcistan, a water works, a supply and marketing depot and a display center. A club house and guest house are expected to be constructed either by YJPIDC or by the occupants of the estates. ANNEX 8 Page 2 TABLE 1 INDUSTRIAL ESTATE AT GUJRAINWALA R.ti maft.pd Cani t.al Tnvpqtrmnnt. (102 acres) Rupees 1. Land Acquisition 1,250,000 2. Development and Basic Facilities: (E) Site Preparation 8,600 Ic)) -R-acls, Br-dges drin3 - --1,-40.0n ~LJ ILUCUAL-) ~ 1£JLU± Ur, t,L djU iL4~ wiorks and culverts I.Ic) Landscaping J.JAJ..LC (cl) SelaLge Disposal System 353.¢800 k '; t,J e±tricity System u143UUV (i') W4ater Supply 583,800 Subtotal 1,600,720 (g) Contingency 160,072 Total 1,760,792 3. Non-Rentable Corrmunity Buildings 119,000 Contingency 11,900 Total 130,900 4. Rentable Community Buildings 299. 000 Contingency Pq,j9nn -Th-q + t2 I 900±m Pq TotalI investme.rn.nt C. AINNEX 8 Page 3 TABLE 2 INDUSTRIAL ESTATE AT SIALKOT Estimated Capital Investment (100 acres) Rupees 1. Land Acquisition 1,563,000 2. Deve:Lopment and Basic Facilities: (a) Site Preparation 16,000 (b) Rorads Drainage Works and Culverts 4!98,ono (c) Landscaping 40,000 (dI) SEDW.-, age+ 0i-4s nyt 25oo( (e) E:Lectricity System 156,00() (f) iljatr Supl 57 7,100)r 1,522,10() IV UL.L L ,) I £4, )%L J M-n fl~4. ..L - - .L.. ty 1- rigs :Jn-'eta11LHU±eCrnLL .U -vlILI±U L ULL±J± -L;,0U Contingency _______ Total 130, 900 4. Rentable Cormmunity Buildings 299,000 Contingency 29,900 TPotal 328,900 5. Consultant's Fees 106,705 Total investment 3,803,815 ANNEX E9 Page 1 Assumptions for Estimates of Capital Requireinents for (a) Factory Build- ings and Artisans' Wdorkshops and (b) Machinery and Equipment for the Proposed Industrial Estates at Gujranwala and Sialkot Size of Estates and Area Used for Factory Plots The sites selected for the Gujranwala and Sialkot estates have an area of respectively 102 and 100 acres. It is planned that about 727' of the total. area of each estate(some 3.2 million square feet at Gujran-. wala and some 3.1 million sauare feet at Sialkot) would be usable for factory plots Floor Space for Factory Buildings Regulations for the estates provide that factory buildings should ocCrinv no more thm.n c: of' nln+_.. of 1iA'fnn_ Ictl of nlnot.q of 1().000 snuare _ , -- - - - . - -_ , - - - - - , _ _ - - - _ - - - - - - _ _, _ _ _, , feet and 60% of' plots of 5,000 square feet. WPIDC's consultants assumed thAt. n1 1a IDu}i,-ei uvr-Q ,.w ml, A b a -s lr a rypemi, ible, However/_ the fi rst applications for admission to Gujranwala and preliminary inquiries about Silkot in,dicat,e that -m-any prospectiv o ts pl-n tpt up sr,ler builidings than would be permitted by the regulations) Based on these aoppli- cations and iinquirie.-sp it has beer Psu,e htuemorsae of faczr buildings on each estate would be equal to about 40% of the total area of land used for P-4to- plots, or 1.3 On lo square feet at-4 -l -uw' an 11 U~ .L.L JCA. U±) jJJ VU.A. , U.L ..Lo..YJ HII.L.L.L4.VUI D1_UcXLLd. - L- A C6'. L .UJ. A (1 1.25 million square feet at Sialkot. Cost of Factory Buildings W,PIDC's consultants estimated the cost of constructing factory buildings at Rs 20 per square foot of covered floor area. Estimates of current costs obtained by the mission in Pakistan ranged from Rs 8 to Rs 20 and averaged Rs 13-14 per square foot; in India, they averaged Rs 14 per square foot. Allowance has been made for possible increases in con- struction costs and it has been assumed that building costs would amount to Rs 17 per square foot of covered floor area on the average, or Rs 22.10 million at Gujranwala and Rs 21.25 million at Sialkot. Cost of Artisans' Workshops The cost of constructing a 600 square feet artisan's workshop has been estimated by WPIDC's consultants at Rs 10,000; in total, build- ing costs of 50 workshops would amount to Rs 0.5 million for each estate. Cost, of Machinery and Equipment of Occupants Republic Engineering estimated that the cost of machinery and equipment would be equal to the cost of the factory buildings (i.e., REs 20 per square foot). Professor Bredo of the Stanford Research Institute ANN EX 9 Page 2 w^ho hoc! beeno advising t51thee Paolb,sswa ofovjC.ernmnent on ;y nSicrd'u ; t:1r ct.tc c. mated the cost of machinery and equipment first at Rs 15 per square foot and later at Rs 30 per square foot. All e e ae none of tlhem are supported by studies of costs. In an attempt to establish a firmer basis for this estimate, the issOCion1 U made s Lme 14Ut:± dLUUUI.. ULt th value of IICLULrL.L y ii lace lI rZ;- presentatiive small industrial establishments in Pakistan and India. It received estimates ranging from Rs 8 to Rs 2h per square foot and averagVing Rs 15 per square foot. These estimates were of course depreciated values; the cost of new ecquipment would be nigner. Although establishments on thrie estate would be expected to be more mechanized than establishments of existing enterprises, tnis would probabiy be offset by the fact that the former would be less crowded. Overall, therefore, an estimate of the cost (new) of machinery and equipment as Rs 22 per square foot of factory space seems adequate. If all the machinery and equipment used on the estates were pur- chased new, the cost would thus be about Rs 28.6 million at Gujranwala and Rs 2c7.5 million at Sialkot. However, part of the machinery and equipMent would be brought to the estates. VWPIDC estimates that 70% of the enter- prises on the estates would be already in operation and would bring half of their equipment with them. For our estimates, it has been assumed, more generously, that only half of the enterprises would bring machinery or equipment ;with them and that such machinery would constitute about 30% of their total requirements. On that assumption, the cost of newly pur- chased equipment would amount to Rs 24.3 million at Gujranwala and Rs 23.4 million at Sialkot. A number of firms in Pakistan. notably the Batala Engineering Corporation, Lahore, produce relatively hiigh quality machinery. It does not seem unreasonable to assume that as much as 506/v of the new machinery to be installed on the estates could be purchased from domestic producers. WEST PASTAN. INDUJSIRiAL ESTA ES FOR SMALL INDUSTRIES --- : N Peshawoc __ (TO EIE ESTABLISHED DURING SECOND *. * . : . FIVE YEAR PLAN) I RAWALPINDI® ;K :- ~~~OBANNU /}) jwvE Gur ato5 Sizkot ¢ Ouett * I IV ULT N Sj ~ ,1 -. Sukkur.. - f '. ~~~~~~~~~~~~~~~~~Locations ( excluding Karac hi)| t "t ---~~~~~....... and planned sizes oflIndustb ial , ~~~~~~~~~~Estates to be established by the . ~~~~~~~~~~opnient C or poration 0- _1 Under consideration for N %J, IDA credit __ , , ~~~~~~~~~~~~~~~~~~~~ ~ ~ ~~~50 loo Areas in acres 20HYDERABAD 3_KARACHI .| ,7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I L OCTOBER 1962 18RD-948R