EPZA: INVOLVEMENT OF THE PRIVATE SECTOR ALONE WOULD NOT SELL THE CONCEPT
By Syed M. Aslam
Dec 22 - 28, 1997
The Export Promotion Zones Authority (EPZA) was esatablished vide Ordinance IV of 1980 with the singular objective to encourage and promote export-oriented industries and to attract foreign investment in the country.
Seventeen years later, today the inability to promote and sell the concept has resulted not only in restricting the role of EPZA to its sole venture, the Karachi Export Processing Zone (KEPZ) dashing its plans to expand to other cities as initially planned, but also caused its dismal performance.
Out of the total allocated area of 500 acres only 200 acres was developed thus at the KEPZ while not much was known about the status of the development of an additional 100 acres on build, own and transfer (BOT) basis.
KEPZ statistics show that the developed area at the KEPZ houses 162 industrial units107 in production and 55 in various stages of implementationand 42 trading/warehousing units, of which 22 are in operation.
However, the investors at KEPZ told PAGE that the figures are highly exaggerated as no more than 60 industrial units are in operation at the Zone and the figure of the units in production never crossed 80 even during the better times. Many of the investors, discouraged by the inconsistent policies of the government and an indifferent bureaucratic attitude, have left KEPZ for other zones in the region, such as Jebel Ali, which offer far greater incentives, the sources said.
However, the same has not discouraged the successive governments in last few years from announcing plans to develop a number of export processing zones in the country to keep the concept of the export processing zones alive at least on paper.
Plans to develop Sialkot and Rawalpindi export processing zones, SEPZ and REPZ respectively, have been approved, and the one proposed for Peshawar is awaited while those for Lahore, Faisalabad, Multan, Quetta and Gwadar are in process.
SEPZ at Sumbrial is located 22 kilometres from Sialkot and 18 kilometres from Wazirabad. The Rawalpindi EPZ (REPZ) is located at Rawat, which is close to the exit point of Lahore-Islamabad Motorway and is a half-hour drive from the federal capital. In addition, there are plans to develop a 2000-acre Peshawar EPZ at Risalpur and 500-acre Lahore EPZ.
SEPZ is the second zone established by EPZA in association with Punjab Small Industries Corporation (PSIC, which has provided the land) with the active collabortion of the Sialkot Chamber of Commerce and Industry many of whose members have booked plot of land at 50 per cent deposit. Planned over 130 acres, the development work is in the final stages and the SEPZ is expected to become operational by the middle of next year. SEPZ has remained in the limelight for the last many years and it was supposed to be opened for operations in December 1996.
Rawalpindi Export Processing Zone is the third zone to be established by EPZA in association with Rawalpindi Chamber of Commerce and Industry, which has provided the land. Sources informed PAGE that of the total 200 acres allocated for REPZ, infrastucture facilities were already available for 70 acres.
While EPZA is not only working as a regulatory authority but also as a partner of upcoming zones at Sialkot and Rawalpindi as well as the 200-acre Peshaway EPZ at Risalpur in association with the Sarhad Development Authority, the LEPZ differs from these projects as it is the first EPZA project which will be established in collaboration with a foreign firm, a Malaysian company.
While work is under way to increase the number of export processing zones in the country, it is necessary not only to highlight the performance of the KEPZ but also the concerns expressed by the entrepreneurs with units there.
Page talked to the chairman of EPZA, representatives of the Chamber of Investors at KEPZ and the individual operators, to identify the issues affecting them all and helpthem move towards a mutually rewarding relationship to sell the EPZA concept.
Talking to PAGE at his office, Chairman, EPZA, Syed Muzaffar Ali Shah, said: the "performance of EPZA cant be seen in isolation from the prevailing economic realities in the country which has failed to develop the required human resources. While it is possible that an educated nation may not be developed, it is impossible for a deveoped country to be uneducated as land and capital are subservient to human resources."
He said, "investment, trade, economic, fiscal and taxation policies are directly linked to the performance of the EPZA and unless there is a continuity, consistency, uniformity, integrity and flexibility in the policies, the concept of the export processing zones would not gain momentum."
He stressed the need for diversification of the concept of export processing zones, and proposed that, apart from the traditional zones which house industrial as well as warehousing units, national and multinational coporations should be permitted to develop industrial zones anywhere in the country to attract a minimum investment of $ on billion each plus value addition of 100 million and exports of half a billion each year. This would provide a unique opportunity to the foreign countries, multinationals and industrial giants to invest in an exclusive export processing zone in Pakistan which could have its very own corporate and social culture, he added.
Attributing the limelight the EPZA is receiving at present to the fact that it was finally spreading its activities outside Karachi, the chairman said that though many of the new zones are still on paper, the plans provided the much needed direction to the EPZA.
He expressed the hope that the recently announced facilities such as export of goods through land route to the CIS countries, export of raw materials to tariff areas outside the zones, export of goods to bonded warehouses in the tariff area and sub-contracting by factories in KEPZ from tariff areas would boost the activity in the Zone.
During the 10 years years between 1987-88 to 1996-97, total exports from KEPZ totalled $413.6 million compared to total imports of $342.3 million, which translates into an average value-addition of 20 per cent. Please See Table 1.
During 1996-97 exports from KEPZs industrial units totalled $66.2 million which accounted for less than 0.8 per cent of the total $8.5 billion. Analysis shows that in spite of increase in the industrial units at KEPZ, from 12 in 1987-88 to 65 in 1996-97, the export per production unit has declined by one-third from $1.5 million during the same period.
In addition, the trading and warehousing sector exported goods worth $3.448 million during 1996-97.
Total investment in the industrial sector at KEPZ by investors representing 22 countries was $166.5 million as on November 30 the biggest of which, $34 million, came from Pakistani investors followed by $33 million from the US, $27.7 million from the UK and $21.2 million from the UAE. The overall investment, export and value addition performance of the sole export processing zone of the country over 17 years clearly shows that the very objective of the creation of the EPZA has yet to be materialised.
PAGE detected an acute sense of unease on the part of industrial entrepreneurs at KEPZ who chose to talk with it on the condition of anonymity. A garment manufacturer said "the lesser bureacratic hassle" allows him to concentrate on work instead of wasting time in non-productive activities.
However, he added, now elements of corruption have crept not only within the Zone but in the customs as well. Customs officials have become agressively technical to make it almost impossible for an operator to import even samples.
"Another disturbing factor," he added, "is the entrance of militant politicisation of the labour force within the zone. Though unionised labour activities are not allowed in the KEPZ, the operators are receiving an ever increasing number of calls from the political backers on behalf of certain workers on matters pertaining to the administration to create an extreme sense of insecurity."
Initially, PAGE was informed, the producers in the export processing zones were allowed to send their goods for the home consumption without any levy of customs duty on the value added aspect of the cost, but the facility was withdrawn in 1984. This discouraged a number of potential investors from investing in the KEPZ.
Though the domestic market was available to the industrial sector of the KEPZ at full rate of duty the trading sector is not allowed to export to the tariff area. This has caused much concern among the local importers who have been critical to point out that if they can import from duty-free zone of Jebel Ali why they are not allowed to import from the trading companies within the KEPZ.
However, things may change, as EPZA has proposed to the government to declare the domestic market open for both manufacutured as well as trading items. It has also made a number of other proposals to make the export processing zones more attractive to the potential investors such as the Prime Minister chairman of the EPZAs Board of Governors; extension of income tax exemption ending in the year 2000 for either another 10 years or five years from the date of production both to the investors and the units; and permitting trading through land route other countries. Sources said that the exemption from corporate taxes till year 2000 no more offers any real incentive to the investors planning to invest in the Zone.
Entrepruneurs also expressed concern that they are not allowed to dispose of, in the tariff area, their used machinery, cars, and waste, and are deprived of a natural source of revenue. Official of an industrial unit told PAGE that the absence of a clear-cut policy about the disposal of these items is resulting in environmental pollution around the Zone as rejected products and waste is collected and burnt in the supervision of the customs. "As for cars, since we are not allowed to sell them we keep on using them instead of replacing them," he added.
The Chamber of Investors of KEPZ has made a number of proposals to the collector of customs (exports) for the disposal of the above items. It has suggested that its members may be allowed to dispose of in the tariff are the defective products (seconds) with upto a maximum of five per cent duty and be allowed to dispose of the "rags and materials" without any duties to the tariff area.
Similarly, it is proposed that as units in the Zone are growing older, machinery is also becoming obsolete. As there is no law for its disposal, the members should be allowed to the tariff area after payment of duties and taxes, if any.
The Chamber also wants a clarification about the "definition of imported raw material for exports to the tariff area" as the new trade policy allows the import of the same to the tariff area. As the definition of the imported raw material is liable to be misinterpreted, clear guidelines should be provided.
Similarly, the Trade Policy 1997-98 allows the export processing zones to sell raw material in the tariff area after payment of duty and taxes. The Chamber has suggested that the investors in the KEPZ may also be allowed to purchase raw material from the bonded warehouses in the tariff area.
The Chamber is advocating for the restoration of the facility to the investors to import duty-free car with their own foreign exchange resources without any restriction to engine capacity. However, if that cannot be done, the decision be applicable with prospective effect for all new investors, as many of the large investors have not availed the facility in anticipation of importing a car at later stage. In addition, it is time the rules for sale and disposal of cars already imported be notified as 14 years and 50 reminders to the CBR hare yet to produce a result. As many of the vehicles are not in working condition, the lack of clarification for the disposal of the same is causing an undue problem to the investors.
The Chamber expressed concerns that EPZAs inability to computerise the import/export records of the investors to ensure regulation of all inputs and outputs was causing friction over issues arising from manual record keeping.
The concerns raised by the individual investors and the Chamber, necessitate the streamlining of existing rules and regulations governing various production and trading activities at the KEPZ which reamins the test case for the whole of EPZA. It has become necessary to make amendments in the existing rules and regulations and to introduce new ones, as much has changed during last 17 years.
Any undue friction between the investors, EPZA and the CBR would be further detrimental to the propagation of the concept of export processing zones.
As is, on 30th of last month, out of the total 162 industrial units: only 87 were in operation (this contradicts other data provided by KEPZ and quoted elsewhere in this article) while 20 units were closed after coming into operation.
Without consistent policies and their effective implementation, proper solution of the problems of the investors, amendments in the existing rules and introduction of the new ones at the only export processing zone in operation, KEPZ which remains the sole role model for the new ones, the concept would be hard to promote and sell.
While the participation of the private sector is a good beginning this alone would not result in reviving the EPZA which has turned into a "kind of sick unit" as a former chairman, Maqsood Ismail, had said.
KARACHI EXPORT PROCESSING ZONE
Export During Last 10 Years
(Amount in million dollars)
No. of units in production
Source: Facilities Division KEPZ
Existing Incentives And Facilities At The Kepz
Exemption from customs duty or any other tax on import of machinery and raw material.
Duty free import of upto three motor vehicles, proportionate to the capital investment.
Complete exemption from federal, provincial and local taxes.
Complete exemption from corporate taxes upto the year 2000 and thereafter 25 per cent in perpetuity.
Full repatriation of capital, dividends and profits guaranteed.
Tax exemption on capital gains.
Any income chargeable under the head of capital gains is exempt from tax.
Exemption from labour laws upto year 2000.
One-window service and simplified procedures for import permit and export authorisation by EPZA.
Sub-contracting allowed within the zone as well as in the tariff area.
Income accruing outside Pakistan exempt from taxation.
Proposals by the chamber of investors of the kepz for additional facilities
Local DFIs/banks be allowed to provide project financing in the zone.
Sale of upto 20 per cent of exports be allowed to the tariff area subject to payment of duties and taxes.
Export of waste and defective goods be allowed to the tariff area and also to bonded manufacturing units.
Exporters should be treated at par with their counterparts in the tariff area with regard to freight subsidy on certain items.
Sub-contracting by units of the zone in the tariff area is permitted. It should also be allowed the other way to utilise idle capacity.
Inter-unit transfer of finished goods may be allowed.
Deemed export benefits be allowed on supplies from the tariff area.