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Special Report
Export Processing Zone Authority

Regional export processing zones flourishing while KEPZ struggling for survival

By AMANULLAH BASHAR
Mar 27 - Apr 02, 2000

The Export Processing Zones Authority (EPZA) was established in Pakistan through Ordinance IV of 1980 with the mandate to plan, develop and operate Export Processing Zones in Pakistan. EPZA is an organization under the Ministry of Industries run by a Board of Directors.

The Karachi Export Processing Zone (KEPZ) is the first project of EPZA, which was set up in 1981. The objective for the establishment of KEPZ was primarily to boost industrialization and augment country's export by creating facilities for investors to enable them to set up export oriented units which would, as a consequence, create job opportunities, bring in new technology and know-how and attract foreign investment.

What is EPZ ?

An Export processing zone is a specialized industrial bonded estate where special facilities and incentives are provided to produce goods under one window operation, mainly for export abroad. Thus EPZ is a district physical area where Customs Tariff is not applied and hence bonded to distinguish from the rest of Tariff area Controls by the Customs under especially drafted EPZ Customs Rules.

KEPZ

Currently, the foreign exchange earnings of the Karachi Export Processing Zone (KEPZ) are estimated at $75-80 million as compared to $1 billion per annum by Bangladesh Zone.

Despite the fact that KEPZ has an edge over Bangladesh due to availability of the basic raw material within the country i.e. cotton and cotton yarn the inconsistent economic policies and the poor management altogether have left KEPZ far behind of Bangladesh zones in exports. It may be mentioned that Bangladesh zones have to rely on imported raw material, which generally supplied from Pakistan.

Whatever the reasons may be, the huge difference of performance between the two zones established almost simultaneously in Bangladesh and Pakistan is an undeniable story of success and failure of the economic policies and management of the two countries respectively.

According to Pervaiz A. Sankhla, the General Manager for Investment Promotion, the KEPZ has been planned on 500 acres of land, out of which 200 acres have been developed. Additional 100 acres is being considered for development on BOT basis as phase-II programme. Rest of 200 acres have been earmarked by the Government of Sindh for KEPZ for future expansion programme. The 200 acres of land developed for industrialization has full infrastructure facilities providing all necessary utility services like electricity, gas, water and telephone etc.

The pace of development at KEPZ is reflected in the fact that out of 330 industrial plots, around 150 units were established, however discouraged due to frequent changes in policies, non availability of textile quota for KEPZ units most of the textile units wounded up their operations. At present only 60 units mostly in garment sector are in operation. It is unfortunate that the KEPZ not only failed to attract foreign investors but was also unable to retain those who had come to invest in the early stage. At present only one unit with pure foreign investment is working in the zone while remaining units are owned by non resident Pakistanis in collaboration with local participants. There are some 70 plots for Commercial Sector (Warehousing and Trading) and 33 plots for Financial Sector.

When his attention was drawn towards the reports that the federal government has recently asked the provincial government of Punjab to provide 200 acres of land to Faisalabad Chamber of Commerce for establishment of yet another zone at Faisalabad, Pervaiz Sankhla did not agree with the idea of establishing another zone in Pakistan unless the Karachi Zone was made fully operational.

It may be mentioned that the present government has approved establishment of an export-processing zone in Faisalabad recently.

The government has directed the Provincial Government of Punjab to provide a suitable place of land with in a month so that development work could be started.

The Export Processing Zone Authority has signed a memorandum of understanding with the Faisalabad Chamber of Commerce and Industry about one and half years ago. The proposed EPZ, a joint venture of the EPZA and the FCCI would be set up in the surroundings of Faisalabad, which would comprise 200 acres of land. The FCCI had already created a Trust to expedite the EPZ affairs. However it could not show any progress due to non-provision of suitable land for the project. To resolve the delayed issue of EPZ, the FCCI invited the Chief Executive Gen. Pervez Musharaf who during his recent visit to Faisalabad held a meeting with the FCCI executive body and approved the establishment of the zone.

The Punjab Government would only provide land for setting up of the zone while finance for the development works would be generated by the business community and the FCCI without involving the national exchequer.

Proposal for incentives

Pervaiz Sankhla, while spelling out the factors which proved counter productive and created hurdles in the growth of KEPZ regretted that the concept of export processing zone was never acknowledged as a project of national importance. The successive governments gave priorities to the issues and projects on political considerations. They gave priority even to a small bridge over the Zone because of political gains. Apart from a few exceptions, the appointments at the Chairman level were also made in a casual way without considering the technical, financial and managerial skill of the man. Now there is a trend of hiring people from the private sector. It is a good sign however people coming from the private sector have their own priorities. They have to lookafter their own priorities and have a little time to spare for the zone.

PAGE endorses the views of Sankhla because not only the Export Processing Zone but other public sector organizations where the people hired by the government for high slot are hardly available even during the office hours because their preoccupations somewhere else. It is strongly suggested that only those people should bring in the higher places who gives an undertaking to take the responsibility as a full time job and not as a part time activity.

When PAGE invited his attention towards the reports appearing in the press regarding alleged misuse of the duty exemption facilities available in the zone by certain elements and certain other irregularities Sankhla shifted the responsibility on the Customs Authorities which he called as the custodians of the non-tariff area moreover he said that black sheep are everywhere.

Pervaiz Sankhla who is associated with EPZA from day one, narrating the story of success of other zones in the region especially in Bangladesh, Sri Lanka, Thailand, Malaysia and Indonesia said that the capital outflow first from Japan and Korea find a secure place in these countries because of their consistent policies and incentives provided by their respective governments. The multi-dimensional effects of the development of these Export Processing Zones not only enhanced the export earnings of these countries but gave stability to the per capita income of their people taking it from $300 to a level of $2000 within a couple of years.

When asked what steps are needed to make KEPZ a prosperous and successful venture, he categorically said that we have to be competitive with other zones, we would have to offer similar incentives offered by other zones. The availability of raw material in plenty and more skilled workers Pakistan still has an edge over other zones in the region especially in Bangladesh or Sri Lanka. He specially mentioned that we in Pakistan are charging cost of land while it is being given cost free in other zones. They are offering pre-built standard premises to house the units at competitive rental basis. We also need follow suit. Another important factor Pervaiz mentioned was the availability of textile quota to BD zone, which is 13 time higher than what it is available in Pakistan. The investors in KEPZ could get the textile quota for a long period of time due to internal conflicts and personal differences of the people responsible for distributing textile quota, which also hampered growth at KEPZ. We failed to negotiate with the US for proper availability of textile quota for our zone investors, he regretted.

Pervaiz recalled that EPZA had moved a working paper to the previous government. That paper which includes the required incentives for moving the wheel at a faster speed at the zone be considered by the relevant committee appointed by the previous government. He said that the committee was reviewing the proposals on Oct 12, 1999, which happened to be the last day of that government.

Pervaiz on the request of PAGE provided those proposals which he believes can push the affairs at KEPZ much effectively.

Following proposals were made to make incentive package of EPZs in Pakistan comparable with the facilities being offered by other zones in the region.

Proposals for income tax

The objective behind these proposals is to bring investors of EPZ in the net of Taxpayers in line with the requirements of international donor agencies. What we propose is to make it a presumptive income tax and ensure its collection under one window concept.

a) Income Tax exemption for 15 years from the date of production.

b) After expiry of 15 years exemption period Income Tax @0.5% of export as applicable in Tariff Area be applicable to EPZ units for 1 5 years.

c) Existing investors who have completed 15 years of production to immediately start paying Income-Tax @0.5% of Export value and those who have not yet completed 15 years would enjoy this exemption for remaining number of years, before starting payment of Income-Tax.

d) It be mandatory for exporters of EPZs to deposit income tax through 'challan' in the Zone Bank at the time of export as under one Window concept EPZA will itself supervise collection of the income tax on behalf of the Income Tax Department.

A success story of Bangladesh and Sri Lanka Export Processing Zones

BANGLADESH

Bangladesh which was over all regarded as a poor country in the back drop of low capital formation and limited technical know how, created Export Processing Zones Authority in the year 1980 to mitigate imbalance between industry and agriculture. The first Export Processing Zone was established in port city of Chittagong on an area of 453 acres. Dhaka Export Processing Zone was the next to come up over an area of 355 acres, which is now being expanded. Third zone at Mongla is being developed on Southern Port of Bangladesh. Two more Export Processing Zones, one at Comilla and the other at Ishurdi are in implementation stage.

The Board of Governors felt in the early 80's that the objective behind this concept is not being achieved therefore, an in-depth study was conducted on causes of failure of Export Processing Zones in Bangladesh. After identifying the areas of amendment, legal frame work was prepared by eminent lawyers who adopted legal frame work of successful Export Processing Zones of the region i.e. Singapore, Indonesia, South Korea, Malaysia, Philippine, Thailand, Hongkong, Taiwan and Sri Lanka.

A lucrative and liberal incentive package for Export Processing Zones was approved by the Government explaining that foreign investors bringing capital to the country need full guarantees in all respect. The modest approach was adopted by the concerned departments for vigorous implementation of the policy, which included promotional efforts at the highest level, by the person with sufficient state Authority, knowledge and legal backup support.

As a result Chittagong Export Processing Zone become the Hub of industrial activity. After 16 years of its establishment i.e. 1999, it had 87 industries in operation, which employed 51,000 Bangladesh workers. In the Dhaka EPZ which started in the year 1994 there are 37 industries in operation employing 26000 workers. In the year ended June 1998 exports from Chiattgong and Dhaka Export Processing Zones were to the tune of US$450 million and $ 185 million respectively.

Cumulative exports from these two zones amount to US$2153.41 million. Capital investment in Chittagong EPZs is US$244.610 million and in Dhaka EPZ is $988.193 million. Bangladesh Export Processing Zones Authority has also signed agreement with South Korea to setup the South Korean country zone on 1000 hectares of land in the city of Chittagong.

SRI LANKA

Faced with unemployment of 1.2 million in early 70's Sri Lanka shifted emphasize from subsidizing consumption to promote production. The Government as per other Asian countries recognized foreign investment as important element in development process. The Greater Colombo Economic Commission (GCEC) was set up in 1978 to encourage and promote foreign investment, increase employment opportunities, increase export earnings and diversify industrial base. GCEC's first project was setting up of an EPZ at Katunayke whose development was carried out with the assistance of team of consultants from Shannon Free Airport Development Company. Ireland and UNIDO. 2nd Zone was planned at Biyangama. GCEC sanctioned first project in 1978; however, first company to enter the Zone was multinational US company Motorola.

During earlier phases of development of Sri Lanka EPZs, Katunayake made significant contribution towards relieving the unemployment problem and 32,500 persons got employed in that phase. Number of foreign multinationals considered Sri Lanka as conducive place for investment thus encouraged with the experience Sri Lanka Government extended application of tax exemptions to all over the country. Now foreign investment inside EPZs and domestic industries is administered by one Authority and is in 3rd Phase of expansion. Among other facilities it has bus terminal, dry port, port cargo handling. The 2nd Zone at Biyagama is over 180 hectares adjacent to a river, the 3rd Zone at Koggala is over 91 hectares. The latest figures of 3 Sri Lankan EPZs are as follows:

EPZ Year founded Area in hectares Workers Employment of

Katunayake

1978

190

56,000

Biyagama

1986

180

22,485

Kogala

1991

80

5,000

The 15-year history of export earnings of EPZs (1978-93) shows that EPZs earned $3.3 billion or 62% of Srilanka's total $5.3 billion.

Srilanka implemented a policy to emphasize on garment, agriculture infrastructure and recreation projects assisting not only foreign but local investors in promoting export oriented industries with the result that entire country is now Investment Promotion Zone providing development and employment at the same time.

Proposals of income tax

a) incometax exemption for 15 years from the date of production.

b) after expiry of 15 years exemption period income tax @0.5% of export as applicable in tariff area shall be applicable to EPZ units for 15 years.

c) exising investors who have completed 15 years of production shall immediately start paying income tax @0.5% of export value and those who have not yet completed 15 years would enjoy exemption for remaining number of years before starting payment of income tax.

d) it would be mandatory for exporters of epzs to deposit income tax through challan in the zone bank at the time of export. Under one window concept EPZA will itself supervise collection of income tax on behalf of income tax department.

The original proposal of EPZA for a Tax Holiday of 15 years from the date of production is adopted in the amended version. But it is further proposed that on expiry of this tax holiday the rate of Income Tax applicable to the exporters of tariff area i e. 0.5% of the export will be deposited with the relevant Tax Authorities in order to provide one window service to the investors.

Central Board of Revenue did not agree with our original proposal of 15 years tax holiday quoting the commitments of Pakistan with the international agencies under which such tax exemptions were allowed to laps. They observed that proposed concession would result in substantial revenue loss. They have also quoted the investment policy of 1997 by which NIZs, Free Industrial Zones, Free Trade Zone, EPUs and estates for Small and Medium Industries will enjoy identical and liberal concession.

Sankhla pointed out that scheme of National Industrial Zones which is reflection of EPZs scheme is still at its inception stage and not a single National Industrial Zone has come on the ground so far, whereas Karachi Export Processing Zone (KEPZ) is operational since 1983-84. Three (03) more zones stand notified where development work is in progress. The matter regarding setting up of more zones in the country is under process. Withdraw of Tax holiday from EPZ scheme at this point of time has resulted in creating credibility gap and has given a serious set back to the investment in EPZs of Pakistan.

EPZs/FTZs of neighbouring countries who are in direct competition with EPZs of Pakistan are offering this incentive e.g. Sri Lanka and U.A E offer 15 years Tax Holiday from the date of production, Bangladesh 10 years and Turkey offer NO TAX FOR EVER.

In this era of cutthroat competition we have to be atleast comparable to attract foreign investment if not better. The apprehended revenue losses could be set aside by inflow of increased foreign investment, employment generation, foreign exchange earnings, transfer of Technology/ Managerial skills and increased quantum of exports.

It is therefore proposed to allow 15 years Tax Holiday from the date of coming into production. After expiry of tax holiday the rate applicable to exporters in Tariff Area i.e. 0.5% of export may be deposited with relevant Income Tax Authorities.

As a result of above arrangements, the new investors would avail this exemption for 15 years from the date of production, the existing investors of KEPZ who have completed 15 years of their production would start paying Income Tax and who have not completed 15 years would enjoy exemption for number of years in balance In EPZs all goods meant for export can leave the zone only if they are supported with a No Objection Certificate (NOC) issued by EPZA Payment of Income Tax can be made mandatory before issuance of any NOC for export to be supervised by EPZA on behalf of Income-Tax Department. Such collection of Income Tax will be against a challan to deposit in the relevant head of income Tax Department

Such exemption would logically be available to all kinds of Enterprises established in EPZs regardless of the fact whether they are Factories, Mills, Off Shore Banks, Insurance Companies, Clearing and Forwarding Agencies, Trading Firms or Warehouses etc.

Income tax exemption allowed to foreign nationals withdrawn from 30-06 1997 may be restored for a period of 5 years from the date of joining a unit in EPZ.

Central Board of Revenue did not agree with the proposal on the ground that it would result in substantial revenue loss.

It may be mentioned that Pakistan has entered into bilateral agreements with number of countries by virtue of which employees from those countries would automatically stand exempted from payment of Income Tax if they pay the tax in their own country. The only class of employee who will benefit from this incentives are those who come from a country with which we do not have bilateral agreement. Withdrawal of this incentives would result in stoppage of transfer of managerial skills, which was one of the very objectives of establishing EPZs. Moreover this would cast a positive impact on the prospective investors while comparing the incentive package of other zones in the region. Therefore the apprehensions of CBR that such concession would result in substantial revenue loss is not true. The proposal to keep this incentive alive may be reconsidered against transfer of Managerial skills. It may be termed as cost of Human Resource Development.

The facility of export of goods through land route may be extended to EPZ.

Central Board of Revenue and Ministry of Commerce did not support the proposal considering it prone to misuse land route is the major incentive for potential investors in the proposed zones at Risalpur, Quetta, Rawalpindi etc. and establishment of these zones shall not be feasible if the land route is denied to export from EPZs. Attention of CBR and Ministry of Commerce is drawn to the recently signed agreement by Customs syndicate with NATCO for transit Trade through K.K Highway to Central Asia and China. If the goods from other foreign countries are allowed transit facilities through Pakistan the same treatment should be given to the goods from EPZ. Similar agreement can be signed with N.L.C to transport goods from EPZ to neighbouring countries and Central Asian States to overcome apprehension of pilferage if any. We strongly suggest that investors of EPZ should use the same protocol as is available to other EPZs of the region by using our land routes. Once the goods reach inside the port area the chances of smuggling would recede substantially. Moreover adequate arrangements be made by Customs to counter act chances of smuggling.

The entire world is looking towards Pakistan which has the shortest land route to Central Asia. But we are denying this route to Export Processing Zones only due to anticipatory chances of pilferage. Now such apprehensions are loosing their momentum as a result of World Trade Order (WTO) of which Pakistan is a signatory and which calls for reduction in import duties to curb smuggling. Therefore this facility may not be denied on illusionary assumptions.

Let EPZs of Pakistan work as "Cargo Village" for manufacturers of other countries who are looking for the market of Central Asia. It would open new vistas of investment in EPZs of Pakistan. We may not over look India who has allowed its EPZs inbond export to Nepal and Bhutan via land route. Moreover the completion of Motorway in Pakistan is going to play a major role in promoting Warehousing / Trading in EPZs. We therefore insist that land route is also allowed to EPZs at par with others in Tariff Area. CBR could not envisage that EPZ investors could send their goods to Dubai enroute to Central Asia via land route in Pakistan. They have to pay the additional cost of freight. Let them directly use the land route to become competitive.

Value added portion of goods manufactured in the zone may not be taxed when sent to tariff area.

Central Board of Revenue did not favour the proposal on the ground that it will introduce distortion in the tariff regime.

We would like to draw the attention of CBR to the recently announced "No duty no draw back" rules for exporters in tariff area notified vide SRO844 (1/98) dated 24-07-1998 which clearly envisage that value added portion in finished goods cleared for home consumption shall not be taxed. Availability of this incentive to the exporters outside EPZs (who may not be the manufacturers) has put the manufacturers/exporters of EPZs at a disadvantageous position and calls for a concurrent policy for bonding manufacturing at par with the EPZ otherwise no body will be interested for investment in EPZ when this facility is available in Tariff Area.

It may not be out of place to mention that according to the KYOTO Convention of the Customs Co-operation Council (of which Pakistan is a signatory) this facility needs to be extended to manufacturers in EPZs. It says.

"Amount of the import duties/taxes chargeable on goods taken

Into home use after processing in a Free Zone may be limited to the amount of any exemption from or repayment of internal duties or import duties and taxes granted when those goods were introduced into the Free Zone".

This facility is available to the units in EPZs of India, Phillipine, Malaysia and Taiwan. This facility is also available to the goods manufactured in manufacturing bonds. The unit in the zone deserves better treatment than the manufacturers abroad because these units provide employment opportunities in the domestic labour market besides adding to the industrial growth in the country. They also deserve better treatment vis-a-vis the manufacturing in bond in Tariff area because the foreign exchange invested in these units is not a liability on the State Bank of Pakistan and does not effect our borrowing limits and credit ceilings. They also need an equal treatment with manufacturers in Tariff Area who sell their products in local Market.

It has to be well understood that any product manufactured in EPZs consume local labour and utilities of Pakistan. It is the case with any product manufactured in Tariff Area. The only difference being that in case of EPZ raw material has been imported Duty Free whereas in Tariff Area it is Duty Paid and the end user has to pay the duty to the extent of imported items. Used. The discrimination in case of EPZ manufacturers may therefore be removed.

Export Processing Zones exporters/manufacturers may be exempted from payment of general sale tax and excise duty levied on utilities.

The concept of enclave manufacturing is based on duty and tax-free availability of inputs in order to make the manufacturers competitive in the international market. The Government has recently levied General Sales Tax and Excise duty on the bills of utilities in the country. This would not only make the exports incompetitive but would also negate the basic scheme of Export Processing Zone. Moreover General Sales Tax and Excise duties are refundable to the exporter of Tariff Area when the goods are exported; whereas no such scheme of refund is available to the investors of EPZs. It is therefore necessary to exempt investors of Export Processing Zones from payment of General Sales Tax and Excise duty.

EPZ investors' council

Sheikh Javaid, Chairman of EPZ Investorsí Council while giving his views for making the export processing zone a success in Pakistan said that instead of diverting its attention towards establishment of other zones in Pakistan, the government should focus its attention to bring KEPZ a blooming project. He said that the government had earmarked 500 acres of land for KEPZ some 20 years ago. Unfortunately our economic managers failed to deliver the goods and even today after two decades there are hardly 60 units are operating in the zone. The primary objective to promote exports provide jobs to our people and transfer of technology is still a dream. Sheikh Javaid said that instead of going for new zones in the up country, we should cash on the strategic situation available in Guwadur where the most beautiful location is available near the blue waters of Guwadur port. Sheikh Javaid, who has visited the Guwadur port many times, is the great advocate of developing an export-processing zone at Guwadur, which is attractive to the investors due to its close affinity to the Middle East as well as to the Central Asian States. Surrounded by sea from two sides and guarded by huge mountains, the Guwadur zone would be a unique place due to its natural beauty, he observed.

He agreed that similar incentives in other zones in the region should also be given at KEPZ to make it attractive for foreign investment. Sheikh Javaid said that besides providing incentives there is an acute need for face lifting in and around the zone. The dilapidated conditions of the road approaching to the KEPZ are highly repulsive to the sight. The road leading to zone should be constructed, bushes on both sides of the road which present a haunted look needed trimming. The uncompleted and neglected structures of gymkhana and mosques for many years also need early completion. While appreciating the government steps to bring professionals from the private sector into public sector organizations, he suggested that by making amendments in the rules, the board of directors of KEPZ be expanded by including people from the private sector with an assignment to monitor pace of growth at the zone, he observed.