Special Economic Zones (SEZ) are promoted around the globe, mainly in less developed countries, as a strategy to industrialize, accelerate economic growth and fast track development. It is defined as a separately demarcated territory with its own fiscal regime different from the one prevailing in the country, backed by quality infrastructure, regional connectivity, uninterrupted power supply and facilitation services to fuel the economy.
Under SEZs Act, 2012 which was amended in 2016 by PMLN government, there are nine proposed priority SEZs under CPEC aiming to achieve direct benefits; such as foreign exchange earnings, foreign direct investment, government revenue and export growth, and indirect benefits.
Which include skills up-gradation, technology transfer, export diversification, enhancing trade efficiency of domestic firms through establishing viable industries in SEZs. These nine SEZs included one in each province, two under the federal government and one each in GB, AJK, and FATA.
The launch of SEZs under CPEC has ushered a new age of fast-tracked industrial development.
The launch of SEZs under CPEC has ushered a new age of fast-tracked industrial development. In this context, Pakistan aims to establish resilient and potentially productive industries to initiate a new era of industrialization; jointly or side-by-side with Chinese companies to be based in SEZs.
While embarking on this phase of industrialization, Pakistan will get a number of opportunities to capitalize on; and of course, will face challenges that it will have to effectively manage for the success of SEZs.
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These include low investment, dispersal of industries across the country, weak institutions, low-quality human resources, shallow tooling skills due to lack of depth in vocational expertise, high business cost, and poor infrastructure. As far as a mechanism for SEZs is concerned, according to the SEZs (Amended) Act 2016, SEZs can be established by the private parties exclusively, or by Federal or Provincial Governments or in partnership with private parties through Public-Private Partnership (PPP).
Moreover, as per rules, Board of Approval (BOA) is chaired by the Prime Minister, who would approve the zone application submitted by each provincial SEZ authority through the Board of Investment (BOI). Approval Committee headed by Chairman of BOI works under BOA which is responsible to measure the economic impact of SEZs.
Other relevant and responsible agencies are also identified and mentioned in the Act with complete governing structure and responsibilities. The BOI has established “CPEC-SEZ” Cell for facilitating stakeholders on the matters related to CPEC and Special Economic Zones.
BOI has been assigned the lead role under CPEC, for industrial cooperation. Chairman BOI has been designated as the convener of the Pakistan-side Joint Working Group (JWG) on industrial cooperation under CPEC.
Islamabad based CPEC Centre of Excellence (CoE) has conducted very comprehensive research on various dimensions of CPEC related programs in Pakistan and produced series of working papers on Belt and Road Initiative and economic corridors mechanism and their research work has frequently been consulted for this article. According to their research, the current status of these nine prioritized SEZs are summarized as under:
Salient Features for Proposed SEZs
For Developers: one-time exemption from all custom-duties and taxes on importing plant and machinery along with exemption from all taxes on income accruable in relation to the development of the SEZ project will be given for five years.
Pakistan will get a number of opportunities to capitalize on; and of course, will face challenges that it will have to effectively manage for the success of SEZs.
For Enterprises: one-time exemption from all custom-duties and taxes on importing plant and machinery along with exemption from all taxes on income of enterprises commencing production by June 2020 for the next ten years and five years for production commencing after the aforesaid date.
Provision of plots instalments (50% down payment and the remaining 50% in four biannual instalments basis). Likewise, Markup support at 50 % of the markup (to a maximum of 5%) to be provided by respective governments, on the loans taken in Pakistani currency for financing the project.
Freight subsidy at 50% on the inland transportation of plant and machinery for installation in development of any of the priority SEZ. With the start of one window operation by SEZA – The provincial government will either delegate authority for implementing labour and environment-related laws, and collection of local/ provincial taxes to SEZA or depute representatives of the departments in SEZA office.
Federal government departments (FBR, SECP etc) to depute representatives to perform similar functions in zones. The developer shall also be allowed to purchase Gas, Electricity and other utilities from utility providers in bulk and supply the same to the enterprises at rates that are duly notified by SEZA in consultation with stakeholders.
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Issues & Challenges
Infrastructural & Institutional Challenges
Although the nine SEZs sites have been designated in the meeting of 6th Pak-China Joint Coordination Committee in November 2016, the development of SEZs has so far been carried out at a snail’s pace and no headway has been made except acquisition of land at few places. On seven sites, the development work has not yet started.
Though one window operation is intended to create ease of business, entrepreneurs still have to deal with a number of local authorities resulting in higher costs of doing business and lower ranking of Pakistan on the index of ease of doing business. Thus, the goal of the establishment of SEZs has not yet materialized due to the multifarious obstacles and challenges as mentioned below.
Freight subsidy at 50% on the inland transportation of plant and machinery for installation in development of any of the priority SEZ.
The government has not attended to the crucial issue of lacking viable infrastructure; which includes cost-effective and uninterrupted water, electricity, gas, working shelters, manufacturing zones, logistics hubs, warehouses, display centers, and security. This is a fundamental obstacle in the establishment of SEZs; as basic needs of international and domestic manufacturers and business firms are not being fulfilled.
The development and management of SEZs is a specialized task for which key federal agency (BOI) and most of the provincial agencies are not equipped to deliver the desire results. Their weak institutional capacity can be gauged from the fact that there has been no substantial work on the ground, despite the passing of SEZA legislation in 2012 and the inception of CPEC for several years.
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Furthermore, previous PML-N led federal government devised additional incentive package for establishment/relocation of the industry from abroad for these SEZs. These incentive packages included markup support and freight subsidy which are to be borne by the provinces. Punjab and Sindh authorities have shown strong reservations on these incentives and the matter is yet to be resolved.
This shows a serious lack of coordination between the federal government and the provinces as well as lack of ownership. SEZ projects are marred by lack of coordination between ministries/divisions and provinces; imperfect follow-up with existing and prospective investors. This coordination issue is also causing a delay in establishing the designated prioritized SEZs which could derail the overall productivity of CPEC.
Likewise, cost of land is a major start-up cost towards the establishment of new businesses or relocation at the SEZ sites. The higher the cost of land, lower is business motivation for the new entrants to these zones. Further, we still do not have a clear provincial land lease policy which poses a major challenge.
Issues Concerning Relocation of Industries
One of the major concerns is about the type of industries that Chinese are going to relocate in Pakistan. There are genuine fears in some quarters that Chinese may relocate industries which may rely on heavy imports, have poor environmental standards, and obsolete technology.
China prefers to start with petrochemical, steel and textile manufacturing units in Pakistan’s prioritized SEZs, whereas Pakistan has suggested mining and agriculture to also be the part of the ‘relocation’ plan.
SEZ projects are marred by lack of coordination between ministries/divisions and provinces; imperfect follow-up with existing and prospective investors.
In the link to the above concern, there is also a widespread perception that the Chinese investors may resort to importing input and intermediate products, instead of acquiring from local Pakistani vendors, implying that the backward linkages with domestic firms may not be developed.
International SEZ experience from Thailand and People Republic of China (PRC) shows that they ensured robust backward supply sources to be utilized from the domestic country. It is essential that the comparative advantage of the proposed sites is not ignored in order to reap full economic and industrial benefits of the zones.
Read more: CPEC: A Chinese Vision Since 2005
Furthermore, an absence of clarity about the local versus foreign workforce composition in the SEZs is concerning, as ample international evidence shows that foreign workers tend to crowd out the locals.
Learning from international experience from China, Egypt, Nigeria, Bangladesh, and Mauritius; it is imperative that Pakistan develops a consensus-based labor policy to address such critical issues as, the ratio of the local and international workforce, the nature of the corporate structure, and the remuneration patterns.
Poor Access to Finance
Access to finance is also an important impediment to the growth of industries. Pakistan has not yet attended to this area, and needs to learn from international SEZ experience about the viability of such innovative finance options as diaspora financing, a public-private partnership, SEZ Funds, Infrastructure Funds, and financing through ‘consortium of firms.
The financial shortage is likely to increase as the SEZs begin to enter an operational stage. It is therefore imperative that innovative finance options are indigenously developed to ensure uninterrupted access to financial resources to SEZ industries.
Best International Practices
Over 5000 SEZs are operating in 135 countries, employing almost 68 million workers and steering $500 Billion worth of trade-related activities. Comparative analyses establish that African-Chinese FDI ventures in SEZs have not yielded the same results as attained by the Asian SEZs which adopted similar funding models and framework for increasing the host country’s manufacturing output.
A lack of coherent trade policy along with deficient incentives given to the investors hampered the African SEZs, while Vietnam, Malaysia, and Indonesia showed noticeable success in the development of SEZs.
International SEZ experience from Thailand and PRC shows that they ensured robust backward supply sources to be utilized from the domestic country.
The reasons identified for the failure of African SEZs which were not the case in Asia, generally included; outdated and weak legal framework, poor business environment, inadequate infrastructure, poor know-how of zone management, lack of government’s ownership and policy inconsistencies.
Poor backward linkages lead to less than optimum benefits of the investment, and lack of patience to realize that SEZs take five to ten years to start giving benefits.
Whereas in China, factors that led to the success of SEZs generally includes progressive laws pertaining to property rights, land use policy and labor laws, attracting and utilizing foreign capital, focus on export-oriented products, economic activities driven by market forces, conducive institutional environment, and SEZ-specific incentives.
It is evident that Pakistan has not reached the stage where CPEC-SEZ could be operationalized as there are glaring gaps between the developmental goals of CPEC, industrial expansion, foreign investment, and improved value-added export; and the current status of these zones.
Poor backward linkages lead to less than optimum benefits of the investment, and lack of patience to realize that SEZs take five to ten years to start giving benefits.
However, these challenges can still be attended and resolved through appropriate policy interventions by both the new PTI federal government and provincial authorities through specialized agencies. Accordingly, it is recommended that the SEZs are developed on top priority, which will include the completion of the land acquisition, master planning and infrastructure development.
Instead of developing these SEZs by a government agency or Authority, they must be contracted out to international professional zone developers who have the requisite know-how and experience of developing SEZs. As the lead organization of the CPEC-SEZs, it is essential that the current capacity of the BOI and provincial SEZ agencies be enhanced in all aspects: institutional, human resources, financial, and technical expertise.
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A consensus-based labour policy may be developed to address the critical issues of the ratio of the local and international workforce, corporate structure and the remuneration. The ratio of local labour should be such that the maximum benefit may reach to the local workforce.
As Punjab and Sindh have refused to own up the special incentives offered by the previous Federal Government for these nine SEZs. It is important that the matter may be taken up at the CCI level to resolve the contentious issues. Access to finance is the single most important facilitator to the growth of industries, and in the case of CPEC-SEZs, this is of utmost importance.
Poor backward linkages lead to less than optimum benefits of the investment, and lack of patience to realize that SEZs take five to ten years to start giving benefits.
Pakistan should immediately attend to creating robust and innovative finance options, as other successful SEZ experiences have shown. There is a need to constitute a group of investment bankers, chartered accountants, actuarial experts, and cost accountants to devise a varied set of financial credit sources.
These innovations may comprise of diaspora financing by overseas Pakistanis, a public-private partnership, SEZ Funds, Infrastructure Funds, and financing through a consortium of firms. The financial shortage is likely to rise as the SEZs begin to enter the establishment stage, and therefore, it is imperative that multiple credit options; domestically and internationally are developed to ensure uninterrupted access to financial resources to SEZ countries.
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Since the formation of new PTI led government in August 2018, multiple meetings have been held between Chinese and Pakistani officials on different issues pertaining to CPEC projects. With a particular focus on SEZs, a delegation led by Mr. Dong Futang, Chief Financial Officer, China Road and Bridge Corporation (CRBC) called on Makhdum Khusro Bakhtyar, Minister for Planning, Development & Reform (PD&R) in Islamabad on October 23, 2018.
While highlighting the focus of the present government, Minister PD&R highlighted economic initiatives of nascent PTI government and expressed that PTI has prioritized to jump-start SEZs and particularly Rashakai Zone will be the first one.
On the other hand, Chinese authorities also ensured that all out efforts and experiences would be applied to develop Rashakai SEZ at par with Chinese developed zones. And added that locals will be preferred for employment in development and operational stages and showed optimism that Pakistan’s natural resource potential would be fully utilized to make this project win-win for all.
Saud Bin Ahsen is associated with a Public Policy Think Tank Institute and has done MPA (Master of Public Administration) from the Institute of Administrative Sciences (IAS) Punjab University, Lahore. He is interested in Comparative Public Administration, Post-Colonial Literature, and South Asian Politics. He can be reached at saudzafar5@ gmail.com.
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.