SEZs Can Play Major Role in Economic Growth: SBP Study

As Pakistan enters the second phase of the China-Pakistan Economic Corridor (CPEC), the Special Economic Zones (SEZs) can play a pivotal role in attracting investment and promoting industrialization, increased market accessibility, and regional connectivity, leading to robust economic growth.

A study by the State Bank of Pakistan (SBP) reveals that 22 SEZs have been approved, of which 21 have been notified. Thirteen of the approved SEZs previously existed as Industrial Estates and Industrial Parks, whereas nine SEZs have been approved under CPEC, of which four have been given priority status.

The latest available data suggests that the 22 approved SEZs cover more than 15,000 acres. The plot demarcation for 11 SEZs has been completed and more than 3,000 plots have been demarcated so far.

The per-acre price of industrial plots varies from Rs. 3.0 million (in Khairpur) to Rs. 65 million (in Korangi Creek IP). The per-acre price depends on the costs of land acquisition and development.

All the plots have been sold in three SEZs (Korangi Creek IP, M3-IC, and Value Addition City) and nearly 90 percent of the plots in Hattar and Khairpur SEZs have also been sold. Plots in other SEZs are at different stages of their sale.

Shedding light on the incentives for SEZs in Pakistan, the study reveals that SEZ Act 2012 spells out different incentives for developers and zone enterprises. The zone developers, co-developers, and zone enterprises have been exempted from paying income tax for 10 years from the date of signing their development agreement.

Developers and zone enterprises also have a one-time exemption from all customs duties and taxes on the import of capital goods. Compared to regional countries, the fiscal incentives for SEZs in Pakistan appear better on some parameters, such as the duration of corporate tax exemption. However, on other parameters, other countries offer better incentives, such as the duration of exemption on capital expenditures (CAPEX).

The zone enterprises applying for Sole SEZ Enterprise have to provide a host of undertakings. These include investing at least US$50 million in the project, of which at least 30 percent should be equity-financed, exporting at least US$75 million in the first five years of operations, ensuring net foreign exchange earnings after the third year of commencement, giving 50 percent jobs to those residing in the district in which the SEZ is located, registering at least 200 employees with the EOBI and providing entrepreneurship development training to locals under its vendor development plan.

These conditions are relaxed for Sole SEZ Enterprises that invest in underdeveloped areas of the country or invest in  the top five importing sectors, the lists of which are identified in the regulation

Challenges to SEZ Growth in Pakistan

According to the SBP study, Pakistan had a slow start to SEZs as most regulatory developments and notifications of SEZs happened six years after the passage of the SEZ Act 2012. Even to date, there is no fully operational, completely-colonized SEZ in the country, albeit the number of SEZs has started to grow since the amendment in the law and the rolling out of new regulations. It takes about two years from the conceptualization of an SEZ by a developer — public or private — to the preparation of its application documents (which includes market feasibility studies, master plans, development plans, and other documents etcetera) to its approval and official notification as an SEZ by the government.

It then takes about another two years for the developer to develop the zone as per the development agreement before it can admit zone enterprises. This entails both civil works (such as land leveling and provision of sewerage, roads) as well as supply of the utilities infrastructure. Once a zone enterprise is admitted, it may take another two and a half years for setting up an industrial unit, before the enterprise can commence operations. In total, it can take about six and a half years from the time an SEZ is conceptualized till it becomes fully colonized with operational zone enterprises.

The regulatory structure for SEZs involves several organizational layers. The SEZ regulatory framework is evolving, and the government continues to issue new regulations to deal with the emerging concerns and opportunities.

Reforms in SEZs

Regarding reforms in SEZs, the study explains that the two main rationales and conceptions of SEZs around the world are the islands of excellence and the laboratories for policy reforms. In both these conceptions, the SEZs in Pakistan have room for improvement. The current SEZ framework and the ensuing government decisions have envisioned SEZs as designated areas that offer a business-friendly environment, as per international best practices. There have recently been some positive developments, such as the passing of the SEZ MIS regulations, which prevent real estate speculation. However, that vision is yet to be fully implemented; the one-stop-shop has not been set up, whereas overlapping coordination functions have led to delays in the provision of infrastructure and utilities.

In addition, policy frameworks to ensure a business-friendly climate in SEZs with respect to skilled labor and a facilitative legal environment have not been announced. As far as policy reforms are concerned, the current SEZ framework does not envision SEZs in Pakistan as areas that offer a special policy and regulatory environment to businesses. Under the current SEZ framework, all the SEZ authorities, organizations, and persons engaged in the creation, development, operations, and management of an SEZ are required to follow respective applicable laws and standards of Pakistan including vis-à-vis environment, employment, procurement, and building code, unless specifically exempted, relaxed or otherwise provided in the SEZ Act.

However, as per the study, the current SEZ framework does not offer exemptions, with the exception of building codes. Here, Bangladesh’s SEZ Act offers some useful insights. Not only does it exempt the SEZs in Bangladesh from various national and local government laws, but it also allows the government to modify any other Act or do any other thing necessary to remove difficulties for the growth and development of SEZs.

In some countries, the role of the SEZ regulatory authority is performed by existing ministries, for example, in Kosovo, the Ministry for Trade and Industry acts as the regulator for all its free economic zones. In other countries, such as Uganda and Sri Lanka, the Investment Promotion Agencies control the SEZs.

The SBP asserts that a concerted effort is required to address the challenges to the growth of SEZs in Pakistan, by graduating the SEZ framework from one that focuses on first-time colonization to the one that also provides direction on operation and maintenance, financing, sustainability, monitoring and operation, and so forth.

This necessitates deliberations over the creation of a separate centralized autonomous SEZ authority that would perform several functions. In addition to approving zones and developers, these functions include providing and updating regulatory guidelines, coordinating with relevant government departments across different levels on SEZ related matters, continuously monitoring zone performance aimed at providing the best infrastructure and facilities within the SEZs and assessing the impact of various policy reforms on the business climate within the SEZs.

Instead, autonomous or separate bodies are established as an institutional structure, with the mandate to regulate and manage SEZs and act as principal interface with developers and zone enterprises, as is the case in Bangladesh, Jamaica, Kenya, and the Philippines.