22 - 28, 2010

The media reports suggest that the construction of the proposed $5 billion Japan Special Economic Zone (JSEZ) in Pakistan is in doldrums, as Japanese authorities are showing indifferent and apathetic attitude to invest in the project. Japan announced in September last year to commence construction of the JSEZ at village Dhabeji, near the southern port city of Karachi in Sindh province with an initial investment of $5 billion.

The analysts see security concerns in the country as major hurdle in the commencement of the project and argue that deterioration of law and order and frequent suicide bombings and bomb blasts in cities and towns have stopped the foreign investors to invest in the country. The officials however dispel security as only major reason for putting the project on ice, as the JSEZ had planned to have its security arrangements, shopping areas, Japanese restaurants, recreation spots, parks, health and sports activities so as to have self-sufficient Japanese village.

Even after lapse of seven months, the Japanese authority has not taken any positive measure causing its vague prospect. Although the Sindh government has started working on the proposal of providing all utilities except electricity at JSEZ, the Japanese authority has shown indifference in this regard.

Pakistan offered 100 percent equity, free flow of money with remittance of royalty and technical fee to attract Japanese investors.

The proposed JSEZ is in close vicinity of Pakistan steel mills and Port Qasim. Ideal location of the zone site, which is close to city centre and linked to national highways, main rail tracks, and major seaports would help minimize transportation costs. The proposed zone would transform into a Japanese village having its security arrangements and all the required facilities and utilities close to the choice of Japanese including Japanese restaurants, recreation spots, markets, housing and parks.

Major Japanese automakers, including Suzuki Motor Corp and Toyota Motor Corp already have manufacturing plants in Pakistan, and several of Japan's biggest trading companies also have outlets in the country. Present government has already directed the Board of Investment (BOI) to prepare a workable report suggesting remedial measures to remove all sorts of hindrances and bottlenecks to encourage the Japanese business sector to enhance operations and investment in the country.

By establishing a Japanese special economic zone, Pakistan would benefit from its technology, expertise, innovations, and best practices. The country has offered the best incentives for investment, including 100 percent equity, free flow of money with remittance of royalty and technical fee.

Officials in Islamabad claim that Pakistan is rated higher in business ratings around the world, as there is as such no restriction on the foreign investor to repatriate his capital, assets, profits, and royalty. The economic benefits hence accrued would be mutually shared by the two countries. A proposal for a joint Investment Company (JIC) is also under consideration between the two countries to boost investment activities by providing soft loans for setting up of industries in the south Asian country.

In 2007, Japan had reached basic agreement with Pakistan to revise a nearly 50-year-old tax treaty to promote investment and build closer economic ties. Under the current treaty, when a Japanese company has a branch in the country, Pakistani taxes are levied on all the income made within the country even if it is made through a direct business with its headquarters in Japan. The same applies to companies in Japan. The revised treaty will however impose taxes only on income made through operations of branches in the other country. Other revisions include rationalizing investment income tax levels for dividend, interest income, and other fees. In this regard, Japan and Pakistan are expected to sign the agreement this year.

Japan has been stepping up efforts to revise tax treaties in recent years. It revised its tax treaty with the United States in 2004 and since then, it has revised tax treaties with India, Britain and signed similar agreements with the Philippines and France. It has recently been in talks for similar deals with Australia, Kuwait, the United Arab Emirates (UAE), and the Netherlands.

Under FTA deal with Pakistan, the China is selling Pakistan more and more goods ranging from household items to textile plants and highly-sophisticated and latest technology items, besides getting cheap raw material and easy access to Pakistani ports for onwards export of its goods to world destinations at reduced freight rates. By introducing the modular-type manufacturing, Chinese manufacturers are producing labour-intensive products by mobilizing cheap labour force in Pakistan.

The Pakistani manufacturers would not be able to survive even in the domestic market if they continued to imitate the Chinese strategy and to import components from China, says a recent study conducted by the Japan International Cooperation Agency (JICA). Islamabad is yet to decide whether it would make the Pakistani industry a subcontractor of the Chinese industry or it would promote the integral-type manufacturing to avoid direct competition with the Chinese industry.

President Asif Ali Zardari during his visit to Japan in April to attend friends of Pakistan meeting in Tokyo, had told Japan's Trade Minister Toshihiro Nikai that JSEZ was aimed at encouraging entrepreneurs from the world's second-largest economy to invest in Pakistan. He reportedly said that Japanese investment would not only help in reviving the country's economy but would also enable the Japanese entrepreneurs to benefit from the liberal pro-investor policies adopted by his government.

Though Pakistan offered best incentives for investment for Japanese investors and several Japanese manufacturing units including Suzuki, Sony, Yamaha, and Marubeni have already shown interest in setting up their units in the proposed JSEZ, yet Pakistani government is still waiting for a positive response from Japan.

Pakistan has also offered Japan to set up exclusive economic zone in the emerging port city of Gwadar in its Balochistan province. Islamabad has already sought Japanese investment by presenting Gwadar port as an ideal location, where Japan can explore possibilities of investment in fields like petrochemicals, heavy engineering, food processing, metal works, steel products, and other export-oriented industries.