SEZs and independent jurisdictions
They provide an array of incentives ranging from tax incentives to regulatory incentive and often on-site residence
The writer is a practicing lawyer with expertise in international law
The government here is of the view that developed countries such as Britain, France and Germany would become a part of CPEC in the future, and with their participation, the scope of foreign direct investment will be further broadened and expanded. And there is no doubt over the potential vastness of CPEC, or its staggering ambition.
However, one should be mindful of the fact that international investors — apart from evaluating economic, political and sovereign risk — also focus on legal and quasi-legal factors before investing overseas. They desiderate to work in a holistic legal regime that ensures at least two idiosyncrasies of a legal system with regard to enforcement of legal rights of parties to a transaction in the event of a commercial or contractual dispute; certainty and result predictability under legal documents, and; conceptual sophistication of the legal system.
Unfortunately, the Pakistani legal system as a whole lacks in these facets. It is diffused in a complex structure of economic and policy directives, thus it is considered inconducive for ease of doing business.
Secondly, the investors expect that a system of law should be capable of accommodating sophisticated and complex concepts, transactions and structures within its framework. In Pakistan, legal regime lacks the depth and breadth to appreciate the needs of the commercial viability, as a result, billions of rupees of loans are stuck because of the protracted litigation, delays, adjournments and stay orders granted by the courts, making the entire commercial and financial activity precarious.
The question is to address investment paucity in the country and legal intricacies attached to it, it’s time to truly search for out of the box solutions.
Hence, to achieve maximum objectives in the minimum time possible, it is recommended that the government should invest all possible resources in upgrading the facilities at Special Economic Zones (SEZs). The SEZs are larger estates and could be considered cities on their own. They usually cover all industrial and service sectors and target both foreign and domestic markets. They provide an array of incentives ranging from tax incentives to regulatory incentive and often on-site residence.
However, for the SEZs to operate separately, efficiently and effectively, the government should tailor specialised legislation specific for their operation. The legislation should, among other aspects: declare SEZs as zones holding independent jurisdictions under the Constitution of Pakistan, with its own civil, commercial, corporate, and employment laws distinct from those of the wider Pakistan; create an independent financial regulatory authority to render one-window operational support to domestic and foreign investors; guarantee investment-friendly environment by offering lucrative financial models such as long-term mortgage, zero per cent tax on income and profits, one hundred per cent foreign ownership, no restrictions on foreign exchange or capital/profit repatriation; etc.
Alongside this, the legal structure should have an impartial and independent alternative dispute resolution (ADR) authority at each SEZ for expeditious adjudication of civil and commercial matters. The jurisdiction of an ADR authority should be extended to any legal dispute arising directly out of investment between contracting parties, while according legal protection to investors against the antagonism of state institutions in the garb of accountability.
Unless the aforementioned legal and commercial challenges are not addressed, the participation of domestic investors would remain doubtful, let alone foreign investors. Reason being, international investors tend to avoid a legal regime that exposes the contractual agreement between parties to the host country’s judicial interference.
Lastly, it would be encouraging for local and international investors investing in SEZs if they are offered an integrated platform with an independent regulatory and legal system and a specialised infrastructure, which should act as a single point of contact for end-to-end client servicing.
Published in The Express Tribune, April 14th, 2019.
However, one should be mindful of the fact that international investors — apart from evaluating economic, political and sovereign risk — also focus on legal and quasi-legal factors before investing overseas. They desiderate to work in a holistic legal regime that ensures at least two idiosyncrasies of a legal system with regard to enforcement of legal rights of parties to a transaction in the event of a commercial or contractual dispute; certainty and result predictability under legal documents, and; conceptual sophistication of the legal system.
Unfortunately, the Pakistani legal system as a whole lacks in these facets. It is diffused in a complex structure of economic and policy directives, thus it is considered inconducive for ease of doing business.
Secondly, the investors expect that a system of law should be capable of accommodating sophisticated and complex concepts, transactions and structures within its framework. In Pakistan, legal regime lacks the depth and breadth to appreciate the needs of the commercial viability, as a result, billions of rupees of loans are stuck because of the protracted litigation, delays, adjournments and stay orders granted by the courts, making the entire commercial and financial activity precarious.
The question is to address investment paucity in the country and legal intricacies attached to it, it’s time to truly search for out of the box solutions.
Hence, to achieve maximum objectives in the minimum time possible, it is recommended that the government should invest all possible resources in upgrading the facilities at Special Economic Zones (SEZs). The SEZs are larger estates and could be considered cities on their own. They usually cover all industrial and service sectors and target both foreign and domestic markets. They provide an array of incentives ranging from tax incentives to regulatory incentive and often on-site residence.
However, for the SEZs to operate separately, efficiently and effectively, the government should tailor specialised legislation specific for their operation. The legislation should, among other aspects: declare SEZs as zones holding independent jurisdictions under the Constitution of Pakistan, with its own civil, commercial, corporate, and employment laws distinct from those of the wider Pakistan; create an independent financial regulatory authority to render one-window operational support to domestic and foreign investors; guarantee investment-friendly environment by offering lucrative financial models such as long-term mortgage, zero per cent tax on income and profits, one hundred per cent foreign ownership, no restrictions on foreign exchange or capital/profit repatriation; etc.
Alongside this, the legal structure should have an impartial and independent alternative dispute resolution (ADR) authority at each SEZ for expeditious adjudication of civil and commercial matters. The jurisdiction of an ADR authority should be extended to any legal dispute arising directly out of investment between contracting parties, while according legal protection to investors against the antagonism of state institutions in the garb of accountability.
Unless the aforementioned legal and commercial challenges are not addressed, the participation of domestic investors would remain doubtful, let alone foreign investors. Reason being, international investors tend to avoid a legal regime that exposes the contractual agreement between parties to the host country’s judicial interference.
Lastly, it would be encouraging for local and international investors investing in SEZs if they are offered an integrated platform with an independent regulatory and legal system and a specialised infrastructure, which should act as a single point of contact for end-to-end client servicing.
Published in The Express Tribune, April 14th, 2019.