The Special Economic Zones (SEZ) Act was passed in 2012 with the objective of industrialisation, investment and exports. More than a decade after its promulgation, it is important to take stock of the country’s SEZ framework, its success or lack thereof.

To begin with, an SEZ offers policymakers the opportunity to extend an enabling environment in a concentrated space, as opposed to reforming the overall economy. It also allows for agglomeration economies and cluster development and is a proven method not only of ushering investments and exports but for skill development, technology transfer and productivity as well.

Unfortunately, Pakistan’s SEZ scorecard is nothing to write home about yet. Despite 27 notified zones, there is no success story of either investment or exports directly attributable to SEZs in the country.

In fact, neither SEZs nor the 30-year-old Export Processing Zones have managed to even scratch the surface of our $88 billion export potential. The reason is simple: import substitution. Both economic theory and experience point to the hard reality that import substitution, by way of cascading import duties, is the equivalent of taxing your exports.

The framework should regulate technology transfer, export diversification, productivity enhancement and skill development beyond the immediate targets of investment and exports

Pakistan has the second highest cascading import tariffs in the world, which translates to a four per cent increase in profit for every 1pc increase in tariffs for firms selling locally, as calculated by economist Gonzalo Varela. This is the single greatest deterrent to exports.

Much like us, Dominican Republic pursued a notional policy of import substitution which stunted the impact of SEZ on exports despite improving employment and productivity. We are so obsessed with import substitution that we actually wrote it into law.

Another significant issue with SEZ development is the lack of infrastructure and planning. Investors consider road access and utilities as basic elements for a viable SEZ investment. As per section 27 (i) of the SEZ Act, it is the responsibility of the provincial and federal government to ensure the provision of utilities to each SEZ.

Recently, however, the Board of Approvals — an apex body that approves SEZs and decides policy issues — has asked developers to foot the bill for utility infrastructure till zero point. This is on top of our regionally uncompetitive energy prices and widespread unavailability of utilities, especially gas. That brings us to the planning part.

One would think that given our history of failed industrial estates, our policymakers will take their time and carefully develop a few model SEZs and then think of scaling up. After all, starting with a few SEZs and replicating them once successful is a widely accepted best practice.

However, in our case, fifteen public SEZs have been launched and two in public-private partnership mode around the same time. If not done carefully, it will be near impossible to ensure all of these are a success.

One key factor of SEZ’s success is the regulatory environment extended to the investors. Despite recent attempts to ease the regulatory burden, there is abundant room for improvement. A One Stop Shop (OSS) is a crucial policy tool that allows investors and enterprises to access regulatory services seamlessly through a single window.

As of today, much of the red tape investors are subjected to outside SEZs is also applicable within them. The SEZ law offers some regulatory freedom, especially regarding building codes enforced through a SEZ committee; however, this issue is under litigation in some parts of the country. The One Stop Service Bill, currently under development, is a welcome initiative and it should be extended to integrate provincial and local agencies for successful SEZ development.

Reading our SEZ framework leads to the conclusion that it is heavily geared towards investment and exports only. Around the world, these are considered early-stage benefits of SEZ development. Conversely, outputs such as productivity, technology transfer and skill development are viewed as intangible but more valuable. It is not for nothing the Chinese refer to SEZs as their ‘eyes and ears into the world’.

To that end, I think our framework missed the boat entirely. The framework should be revised to emphasise these externalities to reap comprehensive benefits from our zones. Our legislation is also silent on benchmarks for successful SEZs. It rightly

builds safeguards against real estate activity and emphasises colonisation, investment and exports, but that is all.

The framework should regulate technology transfer, export diversification, productivity enhancement and skill development beyond the immediate targets of investment and exports. Otherwise, a zone with 100 towel-making enterprises can theoretically qualify as a successful SEZ. Surely, that is not the kind of industrialisation we should aim for.

In conclusion, the SEZ Act, along with its rules and regulations, are important tools not only for the economy but even for urban development and green growth.

There is a lot of interest from both local and foreign investors in our SEZs framework, especially in Sole Enterprise SEZs — a single enterprise of a certain size and investment notified as an SEZ.

Ten years after its promulgation, it is important to revisit the law with the objective of devolving power, overhauling regulation and benchmarking SEZs. If we are to reverse the tide of deindustrialisation, every effort should be made to ensure that SEZs do not add to our existing industrial cemeteries.

The writer is the director of Sindh Government’s Doing Business Reforms Unit. Twitter @abdullahz88

Published in Dawn, The Business and Finance Weekly, June 26th, 2023