CPEC SEZs: gearing up

Although the initial round of CPEC investments focused on energy and connectivity, the real promise of this flagship BRI corridor is industrial cooperation. A number of special economic zones (SEZs) planned under CPEC are meant to attract Chinese investors, who would relocate their manufacturing establishments to Pakistan to move closer to the growing Pakistani middle-class urban consumer base and the thriving export markets of Middle East and North Africa. In return, Pakistan would get investments and jobs, ushering in a new era of industrialisation.

Yet the progress on this front had been minimal. But since the last few months, the SEZs are back in business, with significant developments.

Apart from Gwadar Free Zone, a total of nine SEZs are planned under CPEC, including the three priority SEZs in Sindh, Punjab and Khyber-Pakhtunkhwa: Dhabeji SEZ, Allama Iqbal Industrial City, and Rashakai Economic Zone.

Under the SEZ Act 2012, while the federal government is responsible for according approvals and providing utilities, the provincial governments are responsible for developing the zones. The three provincial governments have adopted different approaches for their respective SEZs.

Punjab is developing the 3,000-acre Allama Iqbal Industrial City through the government-owned Faisalabad Industrial Estate Development and Management Company. The government is also planning a 200-acre medical city within the zone, to target medical equipment manufacturing industries for import substitution. Earlier this year, the groundbreaking of the project took place. The biggest advantage for this SEZ is its proximity to the already functional M3 Industrial City, where a number of large enterprises are already operating.

K-P has partnered with a Chinese state-owned developer, China Road and Bridge Corporation, for developing the Rashakai Economic Zone. The concession was awarded last year, and the development agreement was signed last month, paving the way for construction. The groundbreaking was supposed to happen during the planned visit of the Chinese President, which has now been postponed. But this is not likely to delay the project. The 1000-acre SEZ is located right next to the M1 Motorway but despite its great location, it is expected to face some competition from other SEZs in Punjab and Sindh.

For Dhabeji, Sindh is undertaking a competitive procurement under its public-private partnership law. Reportedly, China Harbour Engineering Company has won the bid, but the contract is yet to be awarded. Notwithstanding the fact that Dhabeji is lagging behind the other two priority SEZs, its proximity to the port is expected to provide it a distinct advantage. The longstanding issue of electricity provision to Dhabeji SEZ was also resolved recently and the National Transmission & Despatch Company (NTDC) would be developing the 220KV grid station for the zone.

Interestingly, these CPEC SEZs are no different than other special economic zones. There are no special incentives, other than those provided in the SEZ law, and no exclusivity rights for Chinese investors. This provides a level playing field to Pakistani and international investors. The only benefit that CPEC brings to these SEZs is that these will be pitched to Chinese investors and are likely to get the spotlight. But this also means that there is no assured investment inflow by China and the ultimate success of these SEZs would hinge upon the commercial opportunities and overall business environment.

It’s no secret that Pakistan does not have a stellar track record when it comes to foreign direct investment (FDI). Historically, the annual FDI inflows have hovered around $1-2 billion, and this is not likely to change merely by building new SEZs. While the government should keep up the momentum for completing these SEZs as soon as possible, the real game changer would be to come up with an investor-friendly business environment for these zones, attracting high value investments, leading to technology transfer and broadening of our industrial base.

Published in The Express Tribune, October 6^th, 2020.

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