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What more industrial zone can do for Pakistan’s economy

Pakistan has a huge advantage of its geographical location yet it could not avail the full advantage of its resources. Low foreign direct investment, the high cost of doing business, poor infrastructure, and political instability have impeded the economic growth of Pakistan. In these circumstances, the establishment of special industrial zones is a must to attract foreign direct investment (FDI) and generate economic activities in the country. We have seen that worldwide special economic zones have played a vital role in the creation of jobs, enhancement of exports, and development of the economy. Various governments in the past have established various industrial zones across Pakistan, which brought numerous benefits to the country.

Successive Pakistani governments have created SEZs with the objective of fuelling economic activity by providing infrastructure and offering fiscal incentives. During the 1970s, Pakistan established over 100 industrial estates to revive the sick industries but those initiatives couldn’t succeed mainly because of nationalization of industry in early 70s. Subsequently, with great efforts Pakistan was able to generate some interest of local investor to invest in the country and established surgical goods zone in Sialkot, readymade garments manufacturing zone in Faisalabad, ceramic and pottery industrial area in Gujarat, marble cluster and tannery/leather industrial cluster in Khyber Pakhtunkhwa. Every district headquarter of Pakistan has an industrial estate, some of these are successful while most of these are unsuccessful because they were established in remote areas lacking necessary skilled work force and basic infrastructure.

Industrial zones commonly also known as Special Economic Zones (SEZs) in Pakistan can be set up by the federal and provincial governments under SEZ Act 2012 as Amended in 2016 and SEZ Rules as notified by the federal government. SEZ Act 2012 provides the governing structure for these zones where it allows both federal and provincial governments to set them up under various administrative frameworks. As per the law, the federal government is giving a one-time exemption from custom duties and taxes to all imported capital goods for the development, operations, and maintenance of a unit in SEZ whereas industry to be set up in a SEZ would be exempted from all taxes on its income for a period of ten years. However, all SEZ is to be approved by the Federal Board of Investment, which acts as the secretariat to the Board of Approvals and the Approval Committee. The Board of Approvals (BOA) is the highest approving forum headed by the Prime Minister with membership from Economic Ministries, Provincial Governments, Public and Private Sectors. Approvals Committee is headed by the Chairman Board of Investment (BoI) and membership from Economic Ministries, Provincial Governments, Public and Private Sectors, and SEZ Authorities (at provincial level including Gilgit-Baltistan) work under the leadership of the Chief Ministers.

The impact of CPEC

When West and the Middle East were not investing in Pakistan, China came forward and offered its financial support by starting China-Pakistan Economic Corridor (CPEC) in 2014-15. CEPC has broadly two phases, the first phase is related to the development of infrastructural, energy and industrial projects whereas the second is related to the establishment of industrial zones across Pakistan. Different sources quote a different number of SEZs to be established under CPEC, it varies from nine to twelve to twenty-nine to thirty-seven. Anyways, Government of Pakistan (GoP) would at least set up 9 SEZs across four provinces, AJK, and Gilgit-Baltistan under the framework of CPEC to boost the industrial production in the country. In order to include the participation of the provinces, the sites for these SEZs have been identified by the respective province itself. GoP has also agreed to provide gas, water, electricity, and other facilities to factories in these industrial parks. Generally, the success of any SEZ is gauged by its ability to attract investment from both local and foreign business community and its overall net impact on the economy. It is expected that CPEC industrial zones would have a huge positive impact on the economy and will bring in economic stability in the country.

 

It is interesting to note that Pakistan’s economy has benefited from establishing industrial zones in various areas. Pakistan has two successful industrial models as well, namely Hattar Industrial Zone and Bin Qasim Industrial Park; both the zones have generated millions of jobs and contributing billions of rupees in the national exchequer. As a matter of fact, it is not the prime reasonability of any government to provide jobs to its people but it is solely responsible to form and implement policies, rules and procedures which thus provide an environment to investors and resultantly jobs are created. Almost all the state-owned entities in Pakistan are suffering mainly because various governments have stuffed their people in those organizations and those are now massively overstaffed. Therefore, government should try to create an environment through SEZ, as it could be one of the best tools to reduce unemployment by creating employment opportunities.

Over the period, it is observed that infrastructure within the SEZ is generally better than available outside of the zone. In order to make SEZ a success, Pakistan offers various incentives and has made exclusive arrangements for power, water or telecommunications. In recent past, we have seen severe load-shedding in Pakistan which also affected industries in the SEZs. Consequently, industrial zones started working on their own backup arrangements for power supply. Now, with CPEC industrial zones, the government is ensuring to supply uninterrupted power supply and also connected it with good quality roads. Physical infrastructure is improving gradually since the CPEC’s initiative and it is expected that new SEZs will be developed as per the world-class standards.

Since the initiative of CPEC, a lot has been said about the western and eastern routes and creation of industrial zones alongside these routes. One particular issue which was discussed extensively and created a lot of speculations and caused political disputes was related to the exact locations of CPEC industrial zones. The core issues with CPEC zones are mainly related to the land acquisition for those zones. In order to establish zones in different parts of the country, a large amount of land sometimes agricultural has to be arranged for the industrial purposes which can have severe implications on the food securities as well. We have seen that local people opposed creating an industrial zone in their area because government procures land after imposing section 4 of Land Act 1894, which most of the times is considered as procuring land at less than the market price. Hence, local residents are neither adequately compensated nor properly rehabilitated.

The SEZ is offering various fiscal and non-fiscal incentives and facilities for attracting investment (including FDI) into the SEZs. Therefore, it is pertinent to establish industrial zones carefully across Pakistan so that all the provinces and areas could get the benefit of economic activities. It is very important to employ local labor force in these units, procure locally produced construction material, import technology in Pakistan and these SEZs should focus on export oriented industries. It is important to consider that sometimes, costs of establishment of an industrial zone are more than the benefits from that zones. In case a zone doesn’t get the required level of investment where a zone is established on the public funds and employment generation is below the projections then it would be a loss of government revenue. Needless to say that one of the most important objectives of planning is to make a balanced growth of the different regions of the country and reducing disparities. Therefore, it is the job of the government to plan in such a way where it could provide equal opportunities to its people and no area should feel neglected. Pakistan desperately needs foreign direct investment (FDI) where offering industrial zones to international investors can help to achieve this target.

Writer is an Infrastructure consultant based out of Islamabad and can be followed on twitter @aroojasghar

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