Pakistan International Peace & Human Rights Organization
Nindo Shaher District Badin Sindh Pakistan
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INDUSTRIAL POLICY & ENVIRONMENT
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INTRODUCTION
While industrial growth is mainly a function of market forces, governments actively pursue
policies and activities to accelerate industrialization. These policies, directly and indirectly, affect the
natural environment. Sound industrial and environmental policies are not incompatible, even though it
is a difficult task either to set (and enforce) environmental standards that do not have some negative
impact on industrial development options, or to formulate industrial policies that take environmental
issues fully into account.
Optimizing welfare (i.e., development which attains economic, social and environmental
objectives) therefore requires studying the relationship between industrial policies and (potential)
industrial pollution. In this context, the extent to which environmental policies and management have
prevented or mitigated pollution resulting from the chosen industrial policies is an important question
to be addressed.
The objective of this study is to examine these issues in order to understand better the
relationship between the industrial and environmental policies of Pakistan, and to be able thereby to
recommend policy measures that could optimize economic benefits with reduced environmental
damage. Although there are other important areas of concern with respect to environmental goals, the
study focuses on those industrial policies and environmental policies that relate to industrial activities.
It is thus not intended to be a comprehensive study of environmental management and policy in
Pakistan.
Five documents were prepared as background material for this report. The first two provide a
review of Pakistan industrial and environmental policies as they have affected industrial activities
over the past twenty years, with the aim of assessing their net impacts on the environment. The next
three documents describe the industrialization process in three selected industrial areas: Faisalabad,
Karachi and Sheikhupura. The case studies document the changing nature and type of
industrialization that has occurred, the implementation of environmental regulations and related
changes in environmental quality.
The findings and observations are used to formulate recommendations for improving
environmental and industrial policies to mitigate the pollution potential of accelerated industrial
growth. This report summarizes and integrates the findings of the five background documents,
supplements those documents as needed, and adds conclusions and recommendations as appropriate.
SOURCES OF STRESS ON THE ENVIRONMENT
Pakistan�s north and south are connected through two major corridors, one on the right bank
of river Indus and the other on left bank. The right bank corridor, called Indus Super Highway,
mostly passes through hilly terrain and the left bank corridor is called Grand Trunk Road (GT-road)
or the National Highway. Most of the major urban centers are situated on GT-road, and almost 80 per
cent of industrial growth has occurred in these major cities, e.g., Karachi, Hyderabad, Multan, Lahore,
Gujranwala, Rawalpindi and Peshawar. Other cities, e.g., Faisalabad, Sialkot and Kasur, which are of
industrial importance, are connected to GT-road through link roads. The only significant industrial
complex that is of importance in Balochistan is the Hub area immediately adjacent to Karachi. All of
these major urban centers are located on riverbanks. Most of the industrial development that has taken
place does not have adequate controls for emissions. This contributes to urban air pollution problems.
At the same time untreated industrial effluents are discharged to the rivers and other streams. The
river network is such that all these highly toxic chemical discharges eventually reach the Arabian Sea
and all the coastal waters in close vicinity of the Indus Delta and Karachi are heavily polluted.
Pakistan is facing environmental problems of both green and brown nature. The green issues
mainly include environmental problems of irrigated agriculture, rain-fed agriculture, forests, and
rangelands. Each system is characterized by different resource management and conservation
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problems. In irrigated agriculture, water logging and salinity dominate the environmental agenda.
Although water logging has receded, salinity has become more acute, a result of increased tapping of
brackish groundwater for irrigation. Mining of soil nutrients also threatens the sustainability of
irrigated areas, and runoff from fields where agricultural fertilizers and pesticides are used
indiscriminately and inappropriately has contaminated ground water and surface water.
Pakistan�s brown environmental problems are categorized in five main groups � industrial
wastewater pollution, domestic wastewater pollution, motor vehicle emissions, urban and industrial
air pollution, and marine and coastal zone pollution. Although data are scarce, it is clear that
industrial pollution is not only increasing at a very rapid pace, but also that the health and productivity
impacts are significant and worsening.
Most Pakistani industries, located around major cities, are increasingly polluting streams,
rivers and the Arabian Sea through untreated toxic waste. Major industrial contributors to the
pollution are the pulp and paper, chemicals, petrochemicals, refining, metalworking, food processing,
and textile industries. Some of the waste is biodegradable, but much of it is in the form of chemical
compounds that do not degrade and cause damage to environment. The industrial pollution discharges
combined with mangrove destruction and over fishing have resulted in a sharp decrease in shrimp
production, which translates into lower foreign exchange earnings.
In Karachi alone more than 6,000 industrial enterprises, some 60 per cent of the country�s
industry, are located along the coastal belt. With the exception of only a few units, most of the
industries discharge their untreated effluent containing heavy metals and their compounds, detergents,
lubricating oils, chlorine and various organic and inorganic toxic compounds into the sewers or
directly into the Lyari River, the Malir River, and adjacent creeks leading to the Arabian Sea.
In North West Frontier Province (NWFP), industrial units mainly cluster around Peshawar
such as Jamrud Industrial Estate and industrial clusters on Kohat road and Charsadda road. Out of 40
major units, only two have wastewater treatment facilities while others discharge their effluent into
lakes and tributaries of the Indus River, mainly the Kabul River.
In Punjab too, the industries located in Lahore and Kala-Shah-Kaku Industrial Estate,
including chemical industries, tanneries, textile plants, steel re-rolling mills and others, discharge
effluent containing hydrochloric acid and high levels of organic matter into drains and streams
discharging into the Ravi River. In addition, the small and medium-scale enterprise (SME) sector,
particularly industries in two triangles Lahore-Sheikhupura-Faisalabad and Lahore-Gujranwala-
Sialkot, generate a significant pollution load that also finds its way to the streams. More than 250
industrial units in Faisalabad discharge high levels of solids, heavy metals, aromatic dyes, inorganic
salts, and organic materials directly into the municipal sewers and open-surface drains, ultimately
leading to Ravi River. Discharge from the industries in Sialkot area generally reaches the Chenab
River, while from Kasur, where the major tanneries of Pakistan are located, it is disposed off through
the Pandoki drain into the Sutlej River. Ground water pollution is often permanent, in that it may take
hundreds or even thousands of years for pollutants such as toxic metals from tanneries to be flushed
out of a contaminated aquifer.
Unfortunately, systematic and comprehensive data on the discharge of water pollutants by
industrial sources do not exist. The best overview that was available for use in this study dates from
1988 and covers only a handful of industrial establishments in several areas in Pakistan (Table 2.1). If
the data are to be believed, most all of the units were discharging wastewater that would have been in
violation of the recently issued National Environmental Quality Standards (NEQS) for Suspended
Solids (SS) and Biological Oxygen Demand (BOD).
Water quality in Pakistan is generally poor and is believed to have worsened dramatically
because of pollution from industrial, municipal, and agricultural sources. A recent survey by the
Environmental Protection Division, Government of Punjab, revealed that, even under the WHO�s
relaxed guidelines, water from 10 of the 11 surface sample and 2 of the 4 ground water samples was
chemically unfit for human consumption.
The primary emission sources relating to both consumption and production of energy are
vehicles, industries and oil and coal fired power plants, brick kilns, household fuel consumption and
agriculture. The key factors contributing to increasing air pollution are lack of awareness about
potential health impacts, rapid population growth, the high rate of urbanization, an inefficient and
diesel based private transport system and institutional failure in implementing NEQS.
The discharge of air pollutants has increased significantly over the past 20 years as can be
seen in Table 2.3. Looking at the industrial sector alone, the emissions of CO2 increased by a factor of
four and emissions from the industrial sector now account for about one-third of total CO2 emissions
the country. Emissions of SO2 from the industrial sector increased by a factor of 500 over the same
period and now account for about one-half of the total SO2 emissions in the country.
Mobile sources alone contribute significantly to the degradation of ambient air quality. In this
category, diesel vehicles emit 2.8 times more SO2 and 5.8 times more suspended particulate matter
(SPM) over the same distance as gasoline engines. The vehicle fleet is increasing at the rate of 10 per
cent a year, the increase being concentrated in urban areas1. As a result, the emission loads per
kilometer traveled are high, reflecting high vehicle densities and low speeds. In Lahore city vehicles
are the dominant emissions source, contributing about 96 per cent of CO2, 76 per cent NO2 and 28 per
cent of SPM2.
Traditionally air pollution was considered to be an urban phenomenon. More recently, with
the expansion of industry in the rural areas, penetration of transport into rural areas, and the growth of
brick kilns, air pollution is fast becoming a rural problem as well. In addition, rural areas are turned
increasingly into peri-urban areas and it would be difficult to find an uninhabited stretch of more than
five miles along the GT-road between Lahore and Islamabad. To all intents and purposes, such areas
have become urbanized, with the attendant environmental problems.
INDUSTRIAL POLICY, INDUSTRIAL GROWTH AND THE ENVIRONMENT
Introduction
The various ways in which the public sector has an impact industrial development can be
categorized under three headings:
Laws, regulations and policies which have a direct or indirect impact on economic
exchanges;
Modification of the price system through taxes, tariffs and subsidies; and
Provision of goods and services, ranging from steel and electricity to investment promotion
and R&D.
The trend in recent decades has been for the government to move out of the last category,
especially the involvement in the production of goods and services which can be profitably
undertaken by the private sector, to limit the role of fiscal and financial instruments which may distort
competition and to liberalize economic policies while at the same time taking better account of the
environmental consequences of economic development. This trend is reflected in Pakistan. Public
sector intervention has an impact on different aspects of industrial development. The most important
of these are:
Overall growth;
Sectoral composition;
Technological change;
Industrial location; and
Enterprise scale.
These in turn have impacts on the environment. Pakistan�s policy makers are increasingly
aware of the direct or indirect environmental consequences of policies, measures affecting the price
system and the provision of public goods.
Since the 1980s a number of policy statements and regulations have been adopted to tackle
the issue. But the creation of a coherent set of policies and regulations that are properly targeted to
ensure both industrial growth and environmental sustainability, supported by all relevant ministries
and backed up by an effective monitoring and enforcement system, remains a great challenge. In
addition, international cooperation should ideally be an element in policies that have an environmental
impact beyond a country�s political borders. In this respect, policy making in Pakistan still has a long
way to go.
Policies, measures affecting the pricing system and the provision of public goods will be
discussed in more detail in the sections that follow. A brief summary of the impact of government
intervention is given in Table 3.1. The actual causal link between government action and the different
aspects of industrial development has not been studied empirically in all cases and periods, and the
values assigned are therefore sometimes tentative.
The analysis that follows will primarily attempt to identify the environmental consequences.
In addition, trends in manufacturing and their environmental consequences will be compared to other
countries in South and Southeast Asia.
Earlier Industrial Policies and the Environment
Pakistan�s industrial development has been characterized by repeated shifts of emphasis
between private sector initiative and public sector intervention. Import substitution and export
promotion policies were used in early years to develop an industrial base in the country. The private
sector took the lead in industrial development. Instruments supporting industry included exchange rate
policy, financial incentives, tariffs, quantitative and non-quantitative controls. The sector grew at an
annual average of 9 per cent, the industries that produced capital and intermediate goods exhibiting
strong growth from the mid-1950s onwards. By 1965 Pakistan�s manufacturing exports were greater
than those of S. Korea, Turkey, Thailand and Indonesia combined. However, this growth led to a
concentration of industrial power and an inequitable distribution of resources, both among population
groups and spatially.
Changes in government resulted in an emphasis on public-sector led development in the
1970s, during which industrial growth decreased to 3 per cent. In the 1980s, the government
embarked on a programme of partial de-regulation and economic liberalization, resulting in an annual
average growth rate of over 7.6 per cent. A number of agro-based industries were de-nationalized and
institutional reforms were initiated to attempt to make the industrial sector more efficient as well as to
stimulate exports of higher value added products. In the 6th Five Year Plan (1983-88), export-led
industrialization was for the first time an explicit policy goal for which various incentives were
provided. At the same time the government continued with its policy of selective import substitution
and employed quotas and tariffs to shore up the balance of payments, generate revenues and maintain
some degree of influence on the pace and pattern of industrial development. There was also an
attempt to move to the higher stages of import substitution, with devaluation to support the process �
higher import prices were expected to stimulate backward linkages with producers of inputs and
factory equipment.
Until the 1980s development policies were formulated irrespective of environmental
considerations. A variety of environment-related acts and ordinances existed, but the Pakistan
Environmental Protection Ordinance 1983 (PEPO) was the first attempt to tackle environmental
problems systematically (see Chapter 4). It created a legal basis for comprehensive environmental
policy making, the establishment and enforcement of standards, environmental impact assessments
and the inclusion of environmental considerations in development policies. But the monitoring and
enforcement capacity foreseen by the Ordinance was inadequate, and the emphasis on penalizing
entrepreneurs rather than supporting them in adopting less polluting processes and technologies made
the Ordinance unpopular. Similarly, the instrument of environmental impact assessments does not
appear to have been effective, as capacities for making the assessments were limited and there was
strong opposition from business to the long drawn-out process.
Industrial policy and environmental policy not only remained unrelated � they were also
unsuccessful. In spite of the efforts, industrial growth in Pakistan fell behind the countries mentioned
above. Protectionism had resulted in an inefficient manufacturing sector. A 1991 study stated that, on
average, it takes more that three times as much to produce final output domestically as to produce it
abroad3. Looking back, the 1992 National Conservation Strategy points to energy prices (which) have
not reflected the scarcity of resources, leading to wasteful habits and detrimental technologies and the
lack of policies to encourage sound natural resource use and to penalize polluters. The setting for the
policy initiatives of the 1990s was therefore not a promising one.
Recent Industry-related Policies and the Environment
General Industrial Policy Trends in the 1990s
Industrial policy objectives of the early 1990s were employment generation, dispersal of
industries, SME development and promotion of key industries (biotechnology, fibre optics, solar
energy equipment, computers and software, electronic equipment and fertilizers). A more liberal
business climate prevailed, but � in spite of repeated policy statements on these issues in earlier yearsthere
was no serious, systematic attempt at export orientation or regional development yet; and with
the possible exception of fertilizer, the country had no clear comparative advantage in the major
industries targeted. It has also been argued that the incentives were biased toward new firms. Apart
from stimulating unviable activities, this has had a negative impact on the modernization and
acquisition of new environmentally friendly technology in existing firms. This bias is now
disappearing.
The objective of the 8th Five Year Plan (1993-1998) for the industrial sector was to increase
its competitiveness by adopting an outward looking strategy, liberalizing the economy, privatising
industries and promoting technological innovation and productivity growth. Its text incorporates all
salient features of the National Conservation Strategy (NCS � see below) and it stated that:
"environmental problems that have arisen due to unintended side effects of development
would be addressed through proper environmental planning. The emphasis would be on
controlling and correcting industrial discharge of residues and wastes, handling of toxic
chemicals, etc... Environmental protection will be one of the key criteria in the selection and
development of technology"
The Plan expressed strong concern about the heavy concentration of industries and commits
itself to improving the spatial balance of industrial location through, among others, estates and EPAs
� which in principle would also increase the possibilities to tackle industrial pollution in an organized
way.
The 1997 statement on Industrial Policy and its Objectives was intended to give a boost to
liberalization and the outward-looking strategy and to provide a set of incentives for the sector,
suffering from a downturn after the sustained growth of the 1980s. But new incentives offered no
solution to the underlying structural problems of an industrial sector where many enterprises are not
internationally competitive; and the continued tension between Pakistan and India has led to a decline
in investor confidence which the policy measures have not been able to revert so far.
Investment and Privatisation Policies
The promotion of domestic and foreign private investment is a core element of Pakistan�s
industrial policy. The Deletion Programme, which drastically reduced the number of industries
controlled by the public sector, has resulted in some investment in pollution reduction and energy
saving products by the private sector, such as an increase in the construction of water treatment plants
and the production of energy saving lamps.
The Investment Policy of 1997 provides fiscal incentives such as accelerated capital
depreciation for value added and export industries, electronics, priority sectors including engineering,
edible oils, hybrid seeds, chemicals and petro-chemicals, and agro-based industries, and other tax
concessions. Further incentives provided to attract foreign direct investment include permission for
full foreign ownership and repatriation of profits, and removal of sanctioning requirements except for
arms and ammunitions, high explosives, radioactive substances and currency printing. The Policy has
had limited success. This is partly due to factors mentioned in Section 3.3.1. In addition, one should
mention the perception of foreign investors that declared policies do not reflect actual practice and
shortcomings in the field of physical infrastructure, labour skills and governance.
Table 3.2 shows foreign direct investment by economic and industrial subgroupsa. After
peaking in 1995-96, with US$ 1.1 billion, investment has decreased and most of the recent investment
has been in power and financial services rather than manufacturing. Within industry, the potentially
highly polluting cement, (petro-) chemical and fertilizer industries have attracted much of the foreign
investment, although investor interest in cement decreased after 1997.
The process of privatisation began in the 1990 with the establishment of the Disinvestment
and Deregulation Committee, later replaced by the Privatisation Commission. A total of 103 stateowned
units have been privatised since then and by the late 1990s, the share of the public sector in
total industrial investment had fallen below 10 per cent. At the time of writing, 43 industrial
enterprises remained in the public sector. Among these are a number of major machinery, automobile,
cement, steel and food processing industries in addition to some joint ventures with foreign firms.
The early process was marked by scandals resulting from a lack of transparency in the
privatisation procedure, favouritism and �capital cronyism�. Many of these allegations are credible
especially in the light of the many instances of asset stripping by the new management or wilful
defaults on counter-guarantee conditions with public sector financial institutions. Over recent years,
there have been concerted efforts to improve transparency.
It has been observed that an efficiency levels across industries are independent of the locus of
ownership4. Some economists have pointed to the absence of a systematic approach to the timing,
privatisation, sequencing, classification of unit valuation and modes of privatisation. Naqvi and
Kemal in their assessment of the degree to which privatisation yielded economic benefits found that in
most cases a decrease in the productivity of the privatisation concerns was accompanied by a price
rise. Efficiency had not necessarily improved. The cement plants are now operating below full
capacity and have hiked up prices. One positive point, in the fertilizer sector, is the higher
environmental consciousness of the private enterprises relative to their public sector counterparts
(information confirmed by ETPI, see text box 1). But the efficiency benefits of privatisation which
should in principle also be environmental benefits can only be achieved through transparent, judicious
investment and appropriate regulation.
Trade Policy and Tariffs
The earlier protectionist industrial policy, it is argued, resulted in high effective rates of
protection and also afforded the industries in question breathing space necessary to grow without the
threat of international competition. Furthermore the overvalued exchange rate resulted in cheap inputs
and intermediate goods for industries which were heavily dependent upon imported inputs. But this
very protection, according to some economists, that led to an inefficient, wasteful and hence
inherently problematic industrial structure characterized by high domestic resource costs and
environmental costs, overcapitalisation and industrial concentration. The pattern is now reversing as
trade is liberalized.
Trade liberalization under the successive structural adjustment programs involved the gradual
replacement of Non Tariff Barriers (NTBs) with tariffs, phasing out of all tariff exemptions and
concessions including statutory regulatory orders and cascading the tariff structure. The maximum
tariff rate was reduced from 125 per cent in 1988 to 35 per cent in 1998 and the number of slabs
(steps) was reduced to four. This included the internalisation of para-tariffs such as the import fee,
�iqra� (education) surcharge and flood relief fund. Simultaneously, greater export incentives such as
duty free input status for exporters, soft export credit, export houses and export-processing zones were
provided in order to encourage export led growth.
The Trade Policy 2000, introduced in June 2000, is intended to dismantle many trade
restrictions and simplify remaining regulations, both on formal sector import-export activities and on
�suitcase trade�; the latter is of considerable importance for the small-scale sector and in trade
relations with Afghanistan and Central Asia. The new policy emphasizes textiles and non-traditional
exports, some of which, such as software, have a low pollution potential (but chemicals are also
included and procedures for imports of ozone-depleting substances have been simplified). It foresees
increased support to the introduction of quality standards and skills development to help boost export
industries. The textile sector will receive special attention to be able to face the challenges of
international competition in a quota-free world by 2005.
Trade policies should be brought in line with international environmental standards. In the
context of the Uruguay Round agreements, the Agreement on Technical Barriers to Trade (the TBT
Agreement) provides for the preparation, adaptation and international harmonization of process and
production methods, especially under the standards and regulations specified by ISO 9000 and ISO
14000. Though these standards are voluntary, non-compliance may result in lost markets. Customers
in the first world � and OECD countries account for about 60 per cent of Pakistan�s exports � are
becoming increasingly sensitive to the environmental consequences of production. In 1994, for
example, the US banned imports of surgical goods from Pakistan because of inadequate product
quality assurances and certification. The issue of eco-labelling must therefore be addressed as well.
Environmentally discerning customers of Pakistani export will force Pakistan to adopt cleaner
production techniques if it is to maintain its market share.
Export promotion could, in short, have significant positive impacts on environmentally
friendly manufacturing. This is already noticeable within industry branches. For instance, export
oriented textile firms in Pakistan are mostly ISO 9000 certified and use relatively more
environmentally friendly production techniques than their counterparts who focus only on the
domestic market (information confirmed by ETPI environmental auditors). The importance of this
sector is underlined by the fact that, in 1998, textiles and clothing accounted for more than 60 per cent
of Pakistan�s manufactured exports and about two-thirds of all exports.
Although it has contributed little to technological progress, Pakistan�s tariff structure has
always provided incentives for the import of machinery. Because of low environmental awareness,
most imported technologies caused environmental damage; at best, they did not incorporate modern
environmental standards. Capital import schemes, for example, were used to import second hand
machinery � though even without such schemes, the price incentive is often enough to lure
industrialists. Controls have now been placed on the import of most second hand machinery due to its
inherent technological lag, but exemptions are often made. It would probably make economic sense
not to ban import of second hand machinery completely but to strengthen the monitoring institutions
which ascertain the machinery�s working capacity and life.
|  PAKISTAN INTERNATIONAL PEACE & HUMAN RIGHTS ORGANIZATION
P.O NINDO SHAHER DISTRICT BADIN SINDH PAKISTAN
POSTAL CODE NO:72250
PHONE NO:092-227-720227
Email:
[email protected] /[email protected] |
