CPEC: how to manage our SEZs?

Although the first modern Special Economic Zone (SEZ) was developed far back in 1959 in Ireland, it was the ‘Chinese miracle’ in Shenzhen that sold the concept to the world. Once a small fishing village, Shenzhen now is as populous as Lahore but with GDP as high as that of Pakistan, depicting remarkable productivity. Are we positioning our SEZs to become the next Shenzhen? In order to have that ambition, we have to get our approach right.

Within CPEC, we are planning to have nine SEZs to attract new investment. Pakistan has already undertaken feasibility studies for five and pre-feasibility for two sites. However, most of these studies focus only on infrastructure. In an earlier article, I highlighted that SEZs are not a sure route to success. The world is fraught with many failed examples with well-built yet unutilised infrastructure.

If that is the case, then are we doing it right in Pakistan? A few weeks ago, I was invited to speak at a conference on SEZs organised by the Central Asia Regional Economic Cooperation Institute, where I tried to answer this question.

Within the universe of 5,000+ SEZs present in the world, there are many successful examples. A closer look at these examples reveals a few glaring gaps in our SEZ approach.

Firstly, SEZs offer an easy way to provide a micro investment climate within limited confines, promising to remove investment constraints that a country is otherwise facing. That is precisely the reason why SEZs are more suitable for developing countries with poor investment climates. This is also why countries should aim to remove their own specific challenges within such zones. Merely replicating incentives offered in China or elsewhere wouldn’t work in Pakistan, if these don’t relate to our own investment constraints.

Data from various sources indicate that major obstacles to investment in Pakistan include poor security, absence of reliable access to infrastructure and electricity, excessive compliance regimes, rent-seeking regulators, cumbersome tax administration, etc. This list in fact indicates precisely what our SEZs should offer.

While CPEC is going to address the infrastructure and connectivity part, the government will still need to focus on security of these zones. But that is the easier part. Simplification of compliance and tax regimes is the hard part and involvement of both the federal and provincial governments makes it even harder.

Other countries, however, have managed to work their way through this labyrinth. They have made laws to empower their zone authorities to issue approvals by themselves, without any back and forth communication with line ministries. The UAE has introduced pre-approvals in many zones and investors don’t have to put in a single penny until they get the approvals. Furthermore, many SEZs have introduced the concept of negative lists, which means that the government only notifies forbidden activities. All else have a presumptive approval.

More advanced economies have embraced the concept of charter cities — the next generation SEZs, empowering the local governments to set a broad range of independent economic policies. Hong Kong and San Jose (home to Silicon Valley) are prime examples but there are many others around the world. We, however, still believe in highly centralised approval structures.

Another gap in Pakistan’s SEZ regime pertains to investment incentives. Although the tax holiday is granted for limited time, most incentives are blanket and not linked with any performance targets such as investment mobilisation, employment generation or technology transfer. The Chinese, on the other hand, have used SEZs to promote advanced technology. For instance, Tianjin, a large industrial zone in China, explicitly bans the use of backward technology or outdated equipment and gives an outright priority to new industries and technologically advanced companies.

This is the right time to think through such issues and accordingly adopt an SEZ strategy to take full benefit of CPEC and other FDI opportunities.

Published in The Express Tribune, January 3^rd, 2018.

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