Why special economic zones are underperforming?

313ghazi · Dec 6, 2021

Pakistan has an edge over some other countries — or it equals them — when we look at the facilities available to foreigners in starting and doing business in Special Economic Zones (SEZs).

The State Bank of Pakistan (SBP) has highlighted Pakistan’s strength in this regard in a special section of its annual economic review of 2021 that ended in June. Citing a 2017 World Bank report on SEZs, the SBP has enumerated all the plus points of our SEZs compared to those of Vietnam, India, Indonesia and Bangladesh. A cursory look at SEZ facilities in Pakistan and in the above-listed countries reveal that Pakistan should not be lagging behind them in generating enough forex earnings from its seven operational SEZs.

For example, import duty on SEZ-specific imports in Pakistan is zero whereas in the case of Indian and Bangladeshi SEZs it is 100 per cent. Similarly, in Pakistan’s SEZs, exemption from corporate tax is available for 10 years against five years in the case of India, four years in the case of Vietnam — and just two years in the case of Bangladesh.

Why then it is so that cumulative gross earnings from our seven SEZs — right from the year they began operations till June 2021 stood below $10 billion? And when we talk about net exports (exports minus imports meant for SEZs) the total forex earnings comes to just $4bn.

Cumulative gross earnings from our seven SEZs — right from the year they began operations till June 2021 stood below $10 billion whereas net exports were just $4bn

One of our seven SEZs ie Karachi Export Processing Zone (KEPZ) has been operating for the past 40 years. All others are younger in age but even the youngest one — Duddar EPZ — is 12 years old.

Isn’t then $4bn net exports and $10bn gross exports in these long years from seven SEZs — four meant for multiple sectors and three for specific sectors — quite shocking? What is equally shocking is that as of June 2021, only 34,100 workers were employed in 310 companies of all seven SEZs — 30,000 of them in 266 companies of KEPZ.

One basic reason for the low level of net export earnings and low level of employment generation in SEZs lies in the small number of SEZs. (Several countries boast of much greater numbers of SEZs — Philippines 528, India 373, Thailand 74, Malaysia 45 and Bangladesh 39, according to a 2019 United Nations Conference on Trade and Development report).

But poor physical infrastructure facilities in SEZs including in KEPZ, inconsistencies in industrial and trade policies, uncertainties in supply of gas, electricity and water — and above all bureaucratic red-tape and corruption also impede faster exploitation of SEZs’ economic potential. The Overseas Investors Chamber of Commerce & Industry and Pakistan Business Council have repeatedly sought redressal of these issues from every successive government. But little improvement has taken place so far. After the 18th Constitutional Amendment that took effect from 2010-11, addressing SEZs issues has become even more challenging because of the overlapping role of the federal and provincial authorities in providing and maintaining infrastructure facilities and utilities to SEZ-based companies.

The SBP report on SEZs boasts of the fact that in the first five months of this year a record 70 enterprises have been enlisted as active units of SEZs — after the launching of the Special Economic Zone Management Information System in January. In the absence of this system, only 200 enterprises have got this status in the past eight years.

While this is a very healthy development, just granting the companies active status in SEZs is not enough to ensure a greater and faster contribution of SEZ-based companies to Pakistan’s economy. To ensure that the state will have to take full ownership of SEZs.

And, federal, provincial and city governments and all state institutions and government departments will have to make joint efforts to help SEZs deliver. That is a tall order, keeping in view the ground realities of our geopolitics and geo-economics.

Pakistan now seems eager to shift its diplomatic focus from geopolitics to geo-economics. Though this shift in focus may take years to materialise even partly, the development of country-specific SEZs can be one of the baby steps. Rashakai SEZ (in Khyber Pakhtunkhwa), launched at the end of May this year under the China-Pakistan Economic Corridor (CPEC) offers one good example of country-specific SEZs. Three other SEZs under CPEC are also at various stages of development each one in Punjab, Sindh and Balochistan — all under CPEC. Given Pakistan’s wide and deep economic ties with the US, UK, GCC and some European Union countries, many more country-specific or regional bloc SEZs can — and should — be developed.

Apart from some genuine geopolitical limitations, Pakistan continues to suffer from developing SEZs in specific sectors or for specific countries. The lack of focus on obtaining real results from SEZs also continue to mar the entire SEZ management regime.

Whereas SEZs currently being developed under CPEC can be expected to operate (after becoming functional) under a closer watch of CPEC Authority, what about already operational old SEZs?

The Export Processing Zone Authority (EPZA) came into being forty years ago. “Its main objectives,” according to EPZA’s own admission, “are accelerating the pace of industrialisation” and “enhancing the volume of exports by creating an enabling environment for investors to initiate ambitious export-oriented projects” in EPZs.

Buried under this grandiloquence, however, remain unpleasant facts about the poor state of industrialisation, exports and investment in the country. The government will do well to require EPZA to begin issuing periodical public reports on how it has been managing the affairs of EPZs and why things stand where they stand now.