Special Report
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.
