Rashkai SEZ pitfalls

Updated September 09, 2019

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The Khyber Pakhtunkhwa government is working towards the launching of the Rashkai Special Economic Zone (SEZ) by the end of October this year. The KP Economic Zones Development and Management Company (EZDMC) and the China Roads and Bridges Corporation (CRBC) signed a joint venture agreement for the development of the Rashkai SEZ in November last year.

However, a company official told Dawn that still there were some issues to be settled between the company and the CRBC. “On some issues, we are not on some page,” he said. But he refused to elaborate, referring the matter to the EZDMC chief executive who is currently abroad. Secretary industries KP also did not respond to questions in this regard.

Sources told Dawn that the provincial government was likely to spend over Rs3 billion on land procurement and Rs2bn on infrastructure and provision of gas and electricity to the SEZ. The source pointed out that at this cost, the price of a plot in the SEZ would be over Rs20 million. He questioned why industrialists would not go to Punjab or somewhere else, where plots could be had for Rs8m.

The Rashkai Financial Model Analysis conducted by the AF Ferguson & Company earlier in January this year also pointed out the same factor. The report said that the project cost does not include the cost of the land as it has been assumed that it will be provided by EZDMC.

‘A plot that costs over Rs20m here can be purchased for Rs8m in Punjab and other places’

It is said that the land has already been acquired and paid for by the defunct Sarhad Development Authority and is now under the possession of EZDMC. However, some original landowners approached the lower courts and referred their cases for enhancement of compensation amount.

Subsequently, the additional district judge-1 Nowshera ruled in 2017 that the compensation should be enhanced from Rs919 per marla to Rs20,000 per marla.

While the EZDMC has appealed the decision, the current applicable enhancement may cause the total cost of land to increase substantially from Rs147m to Rs3.2bn, significantly increasing the KP government’s financial obligation.

“We have been informed by the KP EZDMC that the land cost of Rs147m is intended to be recovered from the developer as a one-time concession fee but this is yet to be agreed with the CRBC. We recommend that either the land issue is resolved through court/private negotiation or a suitable pass-through mechanism be built into the business plan and concession agreement to cover the financial exposure of the EZDMC. Outstanding claim over the land title may also result in stoppage of construction work through court orders resulting in a business loss claim by the CRBC from the provincial government,” the report added.

The federal government informed the National Assembly on August 9 that the work on the off-site infrastructure facilities was likely to commence from October 31, 2019. The federal government said that the EZDMC has to submit a PC-1 for the provision of electricity by August 30, 2019, to the power division, which will evaluate the company’s proposal for the Public Support Development Programme.

At the same time, the petroleum division is making the necessary arrangements for the provision of gas while the provincial government will ensure the provision of an adequate supply of water.

The compensation enhancement claim could increase the cost of land from Rs147m to Rs3.2bn

The Rashkai SEZ is one of the nine economic zones which are being set up across the country under the China Pakistan Economic Corridor (CPEC) and is located in Nowshera district about 97 kilometres from Islamabad. The proposed industrial estate is located along the Peshawar-Islamabad Motorway M1 and is close to the under-construction Swat Motorway.

The SEZ is being set up over an area of 778 acres and will be developed in three phases over six years.

The electricity provision plan shows phase-I’s power requirements will be met from the Mardan grid station while the requirements of phase-II-III will be met from the Jalozai or the Swabi grid stations.

Similarly, the provision of gas to the SEZ will also be ensured in three phases. The water requirement of 4m gallons per day will be met by pumping underground water.

To connect the SEZ with road networks, the KP government will construct 120 feet wide roads from both the Karnal Sher Khan Interchange in the east and Wali interchange towards the west.

Incentives for investors include a one-time exemption from custom duties and taxes on import of plant and machinery into the estate accept those listed under chapter 87 of Pakistan Customs tariff. Furthermore, exemptions from all taxes on income will be offered for enterprises commencing production by 30th June 2020.

The SEZ’s development will be carried out a by a special purpose vehicle to be incorporated for this purpose. The CRBC will be the majority shareholder with 91 per cent share and the EZDCM will be the minority shareholder with 9pc share.

Published in Dawn, The Business and Finance Weekly, September 9th, 2019