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SEZs – investments for future

My experience with the Board of Investment (BoI) allowed me a deeper insight into not only the workings of the economy but the necessity of a consolidated long-term vision that can determine its rise, nationally, regionally, and globally. The significance of a vision supported by a framework of policies is instrumental in a country’s growth. Here I will be discussing the importance of Special Economic Zones or as we know them SEZs. Created especially for developing economies, SEZs are identified as suitable areas where fiscal resources can be directed to stimulate the economic growth of the country.

SEZs are normally established to achieve various policy objectives: to attract foreign direct investment (FDI), to generate employment, and to be experimental with economic reforms via zone-exclusive trade policies. They can be considered testing grounds for the implementation of principles relating to the liberal market to expedite economic growth at all levels.

SEZs are expected to promote exports, substitute imports and create jobs. SEZs of Pakistan are presently unable to attract investors or provide them with a reason to invest in them. The withdrawal of exemption from minimum turnover tax vide Finance Act 2022, investor confidence in the policy framework (or the lack of it), is also fading.

“In Pakistan, few studies have been carried out to analyze the potential benefits of SEZs in the context of CPEC. The study by Khan and Anwar (2016) has carried out a comparative analysis of Pakistan and China in terms of SEZs. They identify political rent-seeking, information, and incentives problems as the reasons for the failure of Pakistan’s SEZs. Similarly, Hussain and Mehmood (2018) assess the opportunities and challenges that Pakistan faces for the effective implementation of SEZs.” Naeem, et al. (2020), while studying the factors for successful implementation of SEZs conclude that “it is important to remove political influence and the government must ensure the development of each zone according to its locational advantage.”

Pakistan has yet to take off when it comes to using SEZs in direct link with the economic growth of the country. We have seen impressive growth/expansion in schemes like BISP (Benazir Income support Programme). The question is if we are encouraging complacency and gratification instead of self-sufficiency. Not denying the importance of welfare support but an equal focus on the development of human resources is integral and needed to support a growing economy. I would like to use the case study of Bangladesh here to support my contention. In FY 2021-22 alone, 9.11 million Pakistani women were given PKR 163.9 billion in unconditional cash support through BISP, whereas on the other hand, more than 45.1 million Bangladeshi women are contributing to its economy by being part of its labour force. In the past decade alone, Bangladesh added more than 11 million women to its labour force and Pakistan could only add 5 million women. The need is to realize that cash transfers cannot be a substitute for economic opportunities.

The countries in our region as well and initially in the same income bracket as Pakistan, like Bangladesh, Indonesia, Cambodia, and China, used their industrial policies to gain sufficiency, encourage growth and exports and alleviate poverty. While Pakistan despite having many industrial regimes at play like Industrial Estates, Industrial Parks, EPZs, SEZs, Gwadar Free Zone, etc., never rolled out a strong vision for the development of the masses. Industrialization is the spine for growth. A strong policy framework that refrains a shift is incumbent. We saw a major portion of development funds consumed by aesthetically wonderful but rather non-productive projects. Those funds that could have been used in the provision of infrastructure and utilities to these notified zones, were spent on the so-called ‘development projects that can only provide the citizens with certain public goods like low-cost transport or social programs like Ehsaas/BISP’, with very little economic spillovers. With special reference to CPEC, we spent billions of public money on ‘luxurious rapid transit projects in a few select cities, when we could have launched all 9 CPEC SEZs, with 100% plug & play facilities. The focus on Industrial development for self-sufficiency, in my opinion, can neither be compromised nor compensated for. All initiatives need to support industrial development and not take away from it.

Bangladesh, as I mentioned earlier, has emerged as a strong contender for FDI and relocation into SEZs owing to its proactive approach toward them. BEZA (Bangladesh Economic Zones Authority) ventured on to establish 100 SEZs, aiming to add 10 million jobs with an export addition of $40 billion by 2030, to encourage rapid economic development through diversification of industries and augmentation of employment, production, and export. With that target in sight, it has now approved 97 SEZs countrywide, supported by detailed feasibility studies, swift acquisition of land through public funds, and location-based social and environmental initiatives. To mitigate land crisis for industrial use and create fully serviced industrial land, BEZA, headed by the Prime Minister, invests in the development of infrastructure, and opens its SEZs for investors with all necessary facilities, on fixed land rates. I have highlighted fixed land rates as I will be expanding on their benefits later in the article.

Similarly in India — realizing the role of subsidized and well-located land, in reducing the cost of doing business, India has started developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China. A total industrial-use land measuring 560,000 hectares is being readied across the country for this purpose. SEZs in Pakistan together span 14,000 acres of which only 9,800 acres are for industrial usage.

To use SEZ regime for its true purpose, BoI has been advocating the creation of the National Industrial Land Bank, supported by a national SEZ development framework. This institution can align with industrial needs at a national level and provide developed land at cheaper rates with plug & play facilities.

To my disillusionment, as per certain sources, a 100% increase in land prices has been proposed in certain CPEC SEZs, while in some, it is being left to be decided by market forces. My question is: What then is the point of a special ‘Economic Zone’ when market forces are to decide even the land price? This is an important question and connects to my earlier highlighting of ‘fixed prices’ as the lack of it converts the land into real estate rather than an SEZ.

Today there are 18 public sector SEZs, however, none of these has been given the required public funds for undertaking infrastructure development. Land acquired under section 4 of the Land Acquisition Act 1894 at nominal rates is being sold at millions per acre to meet the development costs. SEZs’ plot prices and unregulated escalations are not providing any space to small and medium enterprises, which act as a strong foundation for industrialization in any economy.

Considering the current inflation rate, economic concerns, and financial constraints, investors are shying away from undertaking industrial projects. The developers, owing to their cost escalations, are looking to increase plot prices. The land selling model is even more pronounced! The impact is becoming visible with some investors pulling out of SEZs. Many more can follow suit. On the other hand, Provincial Project Development Working Parties are approving uplift projects worth billions of rupees. In a country that is desperately trying hard to get rid of a massive trade deficit, there is no better use of public money than to use it for the uplift of industrial infrastructure.

Looking at the four factors of production in Pakistan: The land is expensive, capital is hit by inflation and devaluation, and labour is costly – entrepreneurship being the fourth and the last in the chain stays in hibernation with the above three not performing.

Why would the investor not use fixed deposits or invest in the lucrative real estate sector to keep the capital safe instead of risking in the industry?

A growing economy is a rotating economy with a vision for national and regional growth. The need is to recognize that inadequate infrastructure and a severe shortage of accessible land discourage Greenfield Investments and Industrial Development. Factors affecting the success of SEZs need to be replaced with controlled financial policies and a strong long-term policy framework. The government, through national coordination, needs to address the public sector maneuvering of land prices. PDPs have sanctioning powers of approving projects worth up to PKR 10 billion, which are to be funded through the Federal public sector development program PSDP. This forum can easily be used to provide development funding to provincial public sector SEZs.

With all being said, my recommendation to the current government would be to discourage irrational increases in land prices and require respective governments to provide development funds to their public and SEZs, without placing an undue burden on the investors. Land price ceilings should be placed to avoid exploitation. Or we would be dismantling our engines of growth with our own hands to sell them for parts. The decision is for today’s financial stability, to ensure the stronger regional and global standing of Pakistan for tomorrow.

Muhammad Azfar Ahsan, "SEZs – investments for future," Business recorder. 2022-09-01.
Keywords: Economics , Economic zones , Encourage growth , Financial Policies , Economy , Hussain , Mehmood , Pakistan , China , Bangladesh , Indonesia , Cambodia , CPEC , SEZ , PDM , PSDP

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