Following the global trend, Pakistan had started establishing a number of Special Economic Zones (SEZ) to attract foreign direct investment and foster industrialisation. More recently, nine SEZs are proposed to be developed as part of the China Pakistan Economic Corridor (CPEC) initiative to modernise its economy, boost exports, create jobs, and attract investment. Three of these — one each in Punjab, Sindh and Khyber Pakhtunkhwa — have been prioritised to help Chinese firms relocate their business to Pakistan. The success of SEZs, according to a report by the Asian Development Bank (ADB), will be pivotal for the future economic growth of Pakistan as the development of SEZs has historically translated into the revitalisation of regional economies.

However, a flawed legal framework implemented through the SEZ Act of 2012 and the SEZ Rules of 2013 is hampering early development of the zones instead of facilitating their establishment. The Board of Investment (BoI), a federal agency, has been given excessive powers contrary to best international practices, which leaves the provincial governments, and the zone developers and their management, virtually powerless even in day-to-day matters. The micromanagement of the zones by the BoI, from the selection of developers and consultants to the selection of contractors to the allotment of plots, has resulted not only in delays in the establishment of the zones but also in their early colonisation.

The ban on the sale of plots in SEZs has resulted in a shortage of funds, delayed development, increase in cost and affected the process of industrialisation besides hindering ease of doing business aspirations

For example, the BoI in October stopped the zone developers from selling the plots at SEZs till it formulated a policy and regulations in this regard. It is not the first time that the board has placed the ban on the sale of plots. It had issued the same order around a year back as well, stopping the sales in SEZs until a policy was chalked out to discourage speculative real estate activities for their early population.

As a consequence of the board’s incompetence to develop such a policy, the work on the establishment of the zones in Punjab has significantly decelerated because it blocked the flow of funds to the zone developer, the Punjab Industrial Estate Development and Management Company (PIEDMC), raised through the sale of plots to potential investors for undertaking estate development.

“How can we carry out the development of a zone unless we have money to pay for it?” asks Syed Nabeel Hashmi, the chairman of the PIDMC, which is developing nine large modern industrial estates across Punjab with four of them already given the status of SEZ. “I wonder why the SEZ Act was implemented in the first place if it was defective. They want us to fast-track SEZ development. How is it even possible if we are not allowed to sell plots to raise funds?”

In response to the restriction imposed on the sale of the plots, the PIEDMC has pointed out that the ban on the sale of the plots has resulted in a shortage of funds, delayed development, increased the cost, and affected the process of industrialisation besides hindering ease of doing business aspirations. “… the company (PIEDMC) is losing money with every passing day (owing to the ban on the sale of plots). The PIEDMC works on a self-sustaining model and requires funds for the development of its industrial estates. We follow a comprehensive policy for allotment of plots in our industrial estates, covering all aspects needed to help swift industrialisation and discourage investors from speculative activities,” says the letter it sent to the Punjab government for taking up the matter with the federal government for its early reversal.

Excessive federal control over the SEZ policy and management of their affairs is just one issue. Global experience shows that such geographically defined and delimited zones can be successful if an attractive mix of policy and fiscal incentives is offered to potential investors, and if these areas are completely insulated from the uncertain external business environment and exempted from the country’s normal commercial and civil laws. “In other countries where SEZs have been successful in attracting investment, the zone developers and management have complete authority virtually over everything from formulating traffic control rules within the SEZs to putting in place a swift and cost-effective dispute resolution mechanism for the investors,” says Mr Hashmi. “We also need to implement a similar model and create fully autonomous zones if we want to attract potential investors and industrialise swiftly.”

Published in Dawn, The Business and Finance Weekly, November 2nd, 2020