Lies, damned lies and SEZs

November 25, 2019

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LESS than 10 kilometres from Shahrah-e-Faisal, the Korangi Creek Industrial Park is an uncharacteristically quiet place for a special economic zone (SEZ).

The comings and goings of workers are barely noticeable. The sight of trucks loaded with raw material or merchandise is rare. Asphalt roads are still black and shiny for lack of use.

In short, the 250-acre industrial park wears the depressing look of a desolate factory town even though it was launched in 2010 and declared an SEZ in 2015.

Poor enthusiasm on the part of industrialists seems puzzling. After all, manufacturing units in the SEZ are promised major incentives like no income tax for 10 years and one-time exemption from duties and taxes on machinery imports besides affordable and nonstop supplies of electricity, gas and water through one-window operation.

Yet the industrial area appears more fraught with hazard than ripe with opportunity. More than half of the 100 buyers that purchased land here in the last nine years have yet to move in. Only a quarter of the planned factories are operational while 20-odd units are still under construction. Piles of unused bricks collect along the roads like silt in a river.

“I regret the decision of moving my factory here. I’m paying up to Rs7.50 extra for every unit of electricity over and above the K-Electric rate. Where’s the captive power plant they promised? Where’re my sublease documents? Where’s the effluent treatment plant? There’s no one-window operation. They lied to us at every stage of the process,” says Bader Munir, CEO of Mediplas Innovations, a producer of plastic packaging and medical device components.

The Korangi Creek Industrial Park has skidded into a ditch and the tow truck is taking too long to arrive

National Industrial Parks (NIP), a subsidiary of Pakistan Industrial Development Corporation (PIDC), is the developer of the Korangi Creek SEZ. The company is developing a total of seven industrial parks on PIDC-owned land.

Mr Munir says he lost two export contracts worth more than Rs80 million because of “lying NIP”. The team of a UK-based multinational wanted to visit the factory before giving its final go-ahead for the export order of Harpic and Dettol plastic bottles. But electricity wasn’t available by June 2017 despite NIP’s written assurances, he says.

Factories still can’t run on electricity purchased at standard rates from K-Electric. Thanks to a concession agreement, the SEZ developer has bound factories to purchase electricity from a gas-based captive power plant — a 48-megawatt electricity producer that continues to exist only on paper.

According to an NIP spokesperson, running a 48MW captive power plant makes little financial sense as the current level of demand is only 2.25MW. The only scenario in which the proposed power plant can run optimally is that it should operate on maximum capacity, supply inexpensive electricity to SEZ units and sell the rest to K-Electric.

“K-Electric has informally told NIP that it may consider buying the entire 48MW from the captive power plant and then sell the required units back to the SEZ-based factories,” the spokesperson says.

But that arrangement isn’t acceptable to the government-owned gas provider, which says its MoU with NIP promised fuel only for the use of SEZ-based companies, not K-Electric, he says.

To pre-empt any move by NIP to bring a K-Electric grid inside the SEZ, the captive power producer recently went to court and got a stay order.

In the meantime, it has rented small power generators of 3MW capacity to cater to the needs of the area factories. The per-unit cost of this electricity is up to Rs19 as opposed to the K-Electric standard tariff of Rs11-12 for industrial units of this particular category.

Sublease, taxes

Companies operating in the SEZ have yet to receive their sublease documents despite making full payment to the zone developer.

“I have to pledge my house to get a letter of credit (L/C) from the bank. NIP promised us in writing that we’d get the sublease upon full payment. That’s another lie NIP told us,” says Mr Munir.

The country CEO of an international lubricants company, one of the first ones to buy land in the industrial park, says he initially planned to set up a full-fledged manufacturing plant as well as the national head office in Korangi Creek.

In the absence of affordable electricity, the company is using that piece of land only as a warehouse now. The estimated value of the forgone investment is Rs900m, the CEO says, requesting that the company’s name be withheld because his foreign sponsor is sensitive to the media spotlight.

He says it’s unlikely the original plan will be revived in the foreseeable future. “Today’s growth and interest rates are totally different from those of five years ago.”

According to Mashood Khan, export director of Mehran Commercial Enterprises, a medium-sized auto-part maker operating in the SEZ, a major issue facing his company is the tax of 1.5 per cent on annual turnover.

“We were given to understand that setting up a plant in the SEZ would exempt us from this tax. But that’s not the case.” He adds that the cantonment board is separately charging property taxes that are 15 times higher than those being charged in the nearby industrial areas.

Speaking to Dawn, newly appointed PIDC CEO Rizwan Ahmed Bhatti admitted that the turnover tax is indeed classified as an income tax. “Most people believe it runs counter to the spirit of the SEZ law, which guarantees exemption from income tax for 10 years if you start production before June 2020.”

Referring to a meeting that he and representatives of the businesses from the industrial area recently held with FBR Chairman Shabbar Zaidi and commerce adviser Razak Dawood, the PIDC CEO says Mr Zaidi has agreed to ‘review’ the turnover tax in the next budget.

“It’s unfair to deny the (importance of) one-window service that NIP is providing,” Mr Bhatti insists. NIP is in constant touch with relevant authorities on the issues of turnover and property taxes although neither of those falls within its purview, he adds.

As for electricity, he says PIDC expects the high court will pass its decision in December. “My top priority is to bring K-Electric to the SEZ as quickly as possible. Investors shouldn’t be held hostage because of some MoU between NIP and the captive power producer.”

Instead of having a dedicated K-Electric grid inside the area, which would violate the court order, the PIDC CEO is thinking about installing a ‘feeder line’. K-Electric can supply up to 5MW of electricity to businesses operating within the zone through the feeder line without having to set up a separate grid station on the zone premises.

With regard to the sublease issue, Mr Bhatti says the original MoU that PIDC signed with the Sindh government back in 2009 for revenue sharing on a fifty-fifty basis expired in 2014. “We’ve got the legal opinion now. The issue will be taken up in the next board meeting. We expect an early resolution of this issue.”

The Korangi Creek Industrial Park has skidded into a ditch and the tow truck is taking too long to arrive. The country is setting up nine SEZs under the China-Pakistan Economic Corridor. Separately, as many as 39 additional SEZs are being established across the country. These will turn into usual make-work government schemes if the existing SEZs aren’t resuscitated.

“My friends in foreign countries often ask me if they should invest here. I advise them against it,” says Mr Munir of Mediplas Innovations.

Published in Dawn, The Business and Finance Weekly, November 25th, 2019