FILE COPY. wrn~~~~w. O N E l ~ INTERNATIONAL DEVELOPMENT ASSOCIATION ~IN GENERAL FILES REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE

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1 RESTRICTED RETURN TO CIRCULATING COPY Report No. P-299 REPORTSi D6K ES TO BE RETURNED TO REPORTS DESK ~IN GENERAL FILES wrn~~~~w O N E l ~ This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION FILE COPY REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF PAKISTAN FOR THE INDUSTRIAL ESTATES PROJECT October 25, 1962

2 REPORT AND RECO!TaE!IDA'TIONS OF THE PRL- IE-,iT TO TiE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOP-tiENT CR,DIT TO THE REPUBLIC OF PAKISTAN FOR THE INDUSTRIAL ESTATES PROJECT 1. I submit the following report and recommendations on a proposed development credit to the Government of Pakistan in an amount in various currencies equivalent to $6.5 million to assist in financing a project for two industrial estates and associated technical assistance facilities for small and medium-scale enterprises in West Pakistan. I. BACKGROUND 2. At the time of Independence in 19h7 small industries contributed the major part of Pakistan's industrial production. Since then a remarkable growth of large and medium-scale enterprises and of their share in industrial production has taken place whereas the output of small industries has on the whole increased only modestly. It is estimated that large and medium-scale industries now contribute about 8% of the gross national product and small industries about 6%. In terms of employment the latter, which include cottage-type industries, are of first importance for the economy of Pakistan. They employ an estimated 2.5 million workers as against about 400,000 in large and medium-scale enterprises. 3. Major obstacles to more efficient and increased production by small industries are inadequate knowledge of modern industrial teciniques and business methods and lack of machinery and adequate working facilities. Consequently the Government has drawn up within the framework of the First and Second Five-Year Plan special programs to deal with the problems of small industries. Allocations of $108 million equivalent have been included in the Second Plan for these programs and the Provincial Industrial Development Corporations are responsible for their implementation. An important element in them is the establishment of industrial estates which the Bank Economic i.ission which visited Pakistan in 1961 regarded as most promising. 4. The Government of Pakistan requested the Association to assist in financing the development of two of the larger estates in West Pakistan situated at Gujranwala and Sialkot near Lahore. An IDA mission appraised the project in September/October 1961 but final consideration of the project was held up for some time by subsequent organizational changes in the small industries program. Negotiations with representatives of the Government of Pakistan and representatives of the West Pakistan Industrial Development Corporation (WPIDC) acting on behalf of the Province of West Pakistan took place in Washington in October 1962.

3 Under the new Constitution of the Republic of Pakistal, which came into effect on June 8, 1962, most responsibilities for economic development were transferred from the Central Government to the Provinces. The larger part of the funds for economic development are from now on allocated through the provincial budgets. The Central Government, however, remains primarily responsible for contracting foreign borrowing. The Government of Pakistan has therefore recluested that IDA credits should continue to be made to the Center but that in those cases in whic[i the execution of the particular project would fall under the responsibility of one of the Provinces, the proceeds of the credit should be passed on to the Provinces on the same terms on which they are received by the Center. For the relending from the Province to the executing agencies and for the recovery of the investment from the beneficiaries, terms appropriate to the individual case would be agreed upon. Consequently, the proposed credit would be made to the Center and relent to the Province of West Pakistan on IDA terms, and appropriate terms have been agreed during negotiations for the relending from the Province to WPIDC and for the recovery of funds from the estate occupants. 6. The proposed credit would be the Association's fourth operation in Pakistan and would increase the total amount of lending to $27.5 million. The following credits have previously been made: Amount Credit No. Purpose ($ Million) 11 PAK Dacca/Narayanganj/Demra 1.0 Irrigation 16 PAK Development of Inland Ports PAK Khairpur Ground Water and 18.0 Salinity Control Bank loans to Pakistan amount in the aggregate to $279.3 million. The status of these loans as of September 30, 1962 was as follows: $ I4illion Total* net of cancellations of which has been repaid kmount sold 9.1 of which has been repaid Net amount held by Bank Including $118.7 million not yet disbursed and $23.0 million not yet effective.

4 - 3 - II. DESCRIPTIOT\ OF TIE PRO-OSED CREDIT 8. Purpose: To provide funds equivalent to 50% of the expenditures for a part of the project costing $13 million equivalent and consistig of the development of two industrial estates at Gujranwala and Sialkot (West Pakistan), the construction of factory buildings and installation of machinery and equipment on the estates, the establishment of a service institute and three extension service centers and the provision of services of industrial consultants. Of the proposed credit about $4.8 million equivalent would be used to cover foreign exchange requirements. The balance would be applied to the local cost and disbursed on the basis of a percentage of local currency expenditures calculated to make total disbursements from the credit amount to 50% of all expenditures on the project up to $13 million equivalent. Borrower: Amount: Term and Amortization: Service Charge: Republic of Pakistan. The equivalent in various currencies of $6.5 million. The term of the credit would be 50 years with no asmortization for 10 years. From April 15, 1973, 2 of 1% of the principal amount woluld be repayable semi-annually for 10 years; and 1% semi-annually thereafter to October 15, /4 of 1% p.a. on the principal amount of the credit disbursed and outstanding. Payment Dates: April 15 and October 15. Project Agreement: The Association would enter into a Project Agreement with the Province of West Pakistan for the construction and operation of the project. III. APPRAISAL OF THE PROPOSED CREDIT The Project 9. A detailed appraisal of the project (TO (IDA) 311h is attached (No. 1).

5 10. The two industrial estates would be established at Gujranwala and Sialkot in north-eastern lwiest Pakistan. Both towns have traditionally a heavy concentration of skilled crafts which produce primarily light engineering goods, small tools, utensils, textiles and sports goods. In each town there are now several thousand small factories and workshops operating in overcrowded quarters which are not suitable for introducing efficient production methods. 11. The project includes the purchase of two estate sites of about 100 acres each and their development bt constructing roads and community buildings and installing utilities. On each estate plots would be provided for 3CO to 350 small and medium-scale enterprises for constructing factory buildings and installing machinery and equipment. The works, machinery and equipment neededwould consist of a large number of small items and in the circumstances it is to be expected thlat only local contractors would be involved in carrying out the works and that the machinery and equipment manufactured abroad would be purchased through local importers. Since effective technical assistance would be d-cisive in improving the production techniques and business methods of the prospective estate occupants, service centers would be set up which would specialize in the fields of industry most heavily represented on the estates. To co-ordinate the work of the estate service centers and of other small industries service centers in West Pakistan, there would be established at Lahore a small industries service institute which would also provide facilities and services commonly required by the extension service centers and conduct surveys and prepare programs for small industries in general. 12. The proposed credit would also provide funds for the employment of industrial consultants to assist I4PIDC and the management of the estates in the establishment and initial operation of the ser-ice institute and the estate service centers and in the appraisal of enterprises proposed for admission to the two estates. The consultants would furthermore assist prospective occupants in preparing their individual projects and wouild suosequently, through the service centers, advise on the operation of their enterprises. The Province of West Pakistan will continue to provide the necessary technical assistance after termination of the consultants' services financed from the proposed credit. WIPIDC has already employed an experienced local firm of civil engineering consultants to plan and supervise construction of the estates. 13. Total capital requirements for the project, which include the cost of estate development, factory buildings with machiinery and equipment and service facilities are estimnated at V21.6 million equivalent. This figure, however, caimot be accurately estimated now. In the first place it will take several years for the estates to be fully occupied. Secondly, the capital requirements for factory buildinfs, machiinery and equipment, which account for about 90O of the total, cannot be estimated firmly until more is known about the type and size of the enterprises involved. Because of the uncertainty of the cost estimates and of the period during which funds would be required, the proposed credit would assist in providing funds for only a portion of the presently estimated total project cost. It has been indicated during negotiations that a further credit would be requested from the Association at an appropriate time if additional funds are required.

6 The proposed credit of $6.5 million would cover 50, of all expenditures on the project up to $13 million equivalent. The balance of the expenditures would be provided by funds from the estate occupants and from the Province of West Pakistan. The credit would be relent by the Government of Pakistan to the Provincial Government on IDA terms. The Provincial Government in turn would make the proceeds of the credit available to UPIDC, which would be responsible for the execution and operation of the project. An estimated $5.3 million, which would be repaid by VPIDC over a period of 25 years, including 5 years of grace, with interest at 4% p.a., would be used partly to provide foreign exchange for the purchase of machinery and equipment by the estate occupants and partly,together with the rupee proceeds from the sale of foreign exchange, to cover capital requirements of the project. The balance of about $1.2 million would be given by the Province as a grant and would be used by VIPIDC to finance the major portion of the cost for technical assistance facilities and industrial consultants' services. All funds invested in the project, with the exception of funds for technical assistance, ivould be recovered from the estate occupants over appropriate periods together with interest of at least 7% p.a. 15. The basic justification for the project is that it would provide several hundred small enterprises with a suitable basis for improvinlg their productive efficiency and increasing their output. Since the definition of small industries used in West Pakistan is restrictive and would exclude from the estates many promising enterprises which would normally be considered as small industries, it has been agreed during negotiations that the estates would also be open to enterprises which according to the present definition are medium-scale units. If enterprises for the estates are carefully selected, it is reasonable to expect that the investment in the project will be repaid by the beneficiaries and will also result in a satisfactory return to them. Since many of the enterprises settling on the estates would produce export goods or substitutes for irnports, an increase in their output would tend to have a favorable effect on the balance of payments. Furthermore the estates should serve as a training ground for entrepreneurial and technical skills and would thus help to accelerate industrialization in the country as a whole. The Economy 16. A summary of Pakistan's current economic position was included in myr Report and Recommendations (R62-77) of September 5, 1962, on two proposed loans to Pakistan for the Railways. There have been no important changes in the general situation since then. East Pakistan has recently been subjected to severe floods but the effects are not yet precisely known. An Economic 'iission is presently in Pakistan and its report will be made available in due course.

7 - 6 - IV. LEGAL INSTRUIMETITS IDM LEGAL AUTHORITY 17. Attached are a draft Development Credit Agreement between the Republic of Pakistan and the Association (No. 2) and a draft Project Agreement between the Province of West Pakistan and the Association (No. 3). These agreements conform to the pattern of IDA credits which include a project agreement. 18. Attention is drawn to the following provisions. Section 2.03 of the draft Credit Agreement sets out the arrangements for withdrawals from the Credit Azcount. The draft Project Agreement provides for the employment of consultants to assist in the carrying out and initial operation of the project (Section 2.01(b)), for the relending of the proceeds of the credit from the Province of West Pakistan to WPIDC (Section 2.02(a)) and for the ro-covery from the beneficiaries of the monies invested in the project and the setting of charges to cover operation and maintenance cost (Section 2.05). Section 6.01 of the draft Credit Agreement specifies as additional conditions to the effectiveness of the Agreement that the arrangements pursuant to Sections 2.01(b), 2.02(a) and 2.05 of the draft Project Agreem.ent shall have been made and that all necessary acts, consents and approvals to authorize the construction and operation of the project by WPIDC shall have been performed or given. 19. The recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement of the Association is attached (No. Lh). V. COMPLIANCE A ITH ARTICLES OF AGRE]iENT 20. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. VI. RECOThLI]IATIONS 21. I recommend that the Association make available a development credit to Pakistan in an amount in various currencies equivalent to $6.5 million for a total term of 50 years with service charge of 3/4 of 1% p.a. and on such other terms as are specified in the draft Development Credit Agreement and draft Project Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D.C. October 25, 1962