A Win-Win Proposal to Establish China-Pakistan Special Economic Zones

Published in Hilal English

Written By: Dr. Zafar Mehmood

In the midst of slow socio-economic growth, negative export growth and rising unemployment, Pakistan has signed China-Pakistan Economic Corridor (CPEC) with China as a part of its One Belt, One Road (OBOR) initiative. OBOR is not merely a trade connectivity route, it has a pro-development agenda and outlook for all its 68 participant countries having population of over 4.4 billion and 40% of the world GDP.


For CPEC to play its role in powering the intended socio-economic transformation, adequate and efficient production structures and infrastructures must be in place. In this context, one of the key components of CPEC is the establishment of special economic zones (SEZs) in Pakistan. SEZs are expected to provide an impetus to stimulate economic activity along the trade corridor. Thus, well-planned SEZs are considered hugely important in achieving sustained and inclusive socio-economic growth. China and Pakistan are planning to establish nine SEZs in Pakistan. It is worth noting that at present there are about 3000 SEZs in 135 countries, which have created 68 million direct jobs with more than $500 billion worth of trade-related production.

 

awinwinprop.jpgLearning from Foreign Experience
Global experience suggests that SEZs are an important source for diversification of the economy, reduction in regional disparities, clustering of economic activities for complementarity generation with local industries, skill development of local labor force, transfer of technology and dissemination of know-how, promotion of ancillary industrial activities, development of local entrepreneurship, creation of competition, attraction of local and foreign direct investment, especially towards under-privileged regions, generation of employment, promotion of exports, and last but not the least, ease of administration and management.


SEZs are generally self-contained in the procurement of raw materials (from local and international markets), power generation, mitigating pollution, sewage treatment and support services. They practically have everything from transportation to cultural and educational facilities. So, they are perceived to provide significant insulation from the uncertain external/outside environment.


Laws and regulations of SEZs are different from generally applicable laws and regulations in the rest of the country. SEZs are generally duty-free enclaves for both trade and manufacturing. Several fiscal and regulatory incentives are offered to investors within these zones by national, provincial and local governments. Nonetheless, international experience suggests that decision to invest in SEZs is rarely based on financial incentives alone; indeed such incentives are not the key to SEZs’ success that may attract weaker firms. Success factors for them include efficient and cost effective infrastructures, and governance (or absence of over-intrusive governance) that distinguish them from other parts of the country. Success of SEZ inspires rest of the economy, encouraging more effective provision of public services and infrastructure, and forcing the policy makers to introduce economic reforms to achieve what was not achieved before.


Thus, successful SEZs introduce structural change throughout the country relatively quickly through a combination of linkages and demonstration effects with local industries. As a result of leaping up value chains and triggering positive externalities, they create economic space for their entry into basic and intermediate manufacturing. Too often, SEZs generate and allocate resources for socio-economic uplift of the adjoining areas for their acceptability by the locals.


In the end, it is worth noting that despite gainful role played by SEZs worldwide, in some countries the zones have been criticized for being less legal and socially protective for workers, misusage of allotted land for real estate speculation and tax evasion. International experience suggests that the main reason as to why SEZs fail is “rent-seeking” by interest groups, exploitation of incentives and other benefits, weak governance, bilateral disputes, regulatory issues, lack of a dispute resolution mechanism, etc. To avoid such problems and to ensure effective management, countries assign decentralized decision-making roles to private-public partnership arrangements of SEZs with inclusiveness of local communities and institutions.


Existing SEZs and Industrial Estates in Pakistan
Virtually every district headquarters of Pakistan has an industrial estate or area having infrastructures and offers incentives of various natures: The Punjab has 26 industrial estates, whilst Sindh, Balochistan and KP, have 30, 7 and 12 industrial estates, respectively. Some of these are successful, while others are unsuccessful, because they are established in remote areas lacking necessary skilled workforce or basic amenities for workers.


Some big cities also have industrial clusters on the basis of their strength in skilled workforce, raw materials, support institutions and deep historical links with local and global supply chains. These clusters include: sports and surgical clusters in the city of Sialkot, textiles cluster in Faisalabad, fan cluster in Gujrat and engineering cluster in Gujranwala to name the major ones.


Existing SEZs in Pakistan include: (1) Karachi Export Processing Zone (Karachi); (2) Risalpur Export Processing Zone (Risalpur); (3) Sialkot Export Processing Zone (Sialkot); (4) Gujranwala Export Processing Zone (Gujranwala); (5) Khairpur Special Economic Zone (Khairpur); (6) Rashakai Economic Zone (Rashakai-Mardan, M1); (7) Gadoon Economic Zone (Gadoon-Amazai Swabi); and (8) Hathar Economic Zone (Hathar-Haripur). In addition, there are some Industrial Parks in Pakistan: Rachna Industrial Park (Lahore), Marble City (Lahore), and Textile City (Port Qasim).


Some of the newly established industrial estates are: Value Addition City (Sheikhupura-Faisalabad Expressway), M-3 Industrial City (Faisalabad), and Quaid-e-Azam Apparel Park (M-2 Lahore).
For peculiar reasons, Chinese companies are not interested in investing in the existing industrial estates of Pakistan. They are only interested in SEZs to be exclusively established for them along the trade corridor.


Chinese Interest in Pakistani SEZs
China, as one of the pioneering and successful countries in establishing SEZs, has been showing keen interest in investing in SEZs that Pakistan has committed to establish exclusively for Chinese companies. In fact, back in 2001, a joint-venture between a Pakistani company and a Chinese company has established a successful industrial park near Lahore. Since 2002, this company has been producing and assembling electrical and electronic products including refrigerators, deep freezers, washing machines, air conditioners, microwave ovens, televisions, and laptops.


Despite this successful venture, some interest groups in Pakistan are creating an impression that China intends to relocate its private industries that have lost their competitiveness, either because of rising labor costs or that the industrial technology has become obsolete in China. They claim that for this purpose, China is promoting the idea of establishing exclusive industrial zones in Pakistan, where its industries can be relocated and benefit from the policy incentives and business environment. Another perspective is that, given the new stage of development in China, it does not want to provide policy support to such industries anymore and that is why it intends to relocate its old industries. Still another viewpoint shows that with huge surplus Chinese companies in any way want to invest closer to their markets provided they get desired skills, infrastructures, as well as conducive work and business environment.


Private investors from Chinese SEZs are accustomed with special economic policies and flexible governmental measures, allowing them to utilize economic management system that is more attractive for foreign and domestic firms to do business than in the rest of mainland China. In SEZs, investment is conducted without any authorization of the Chinese central government. SEZs offer tax and business incentives to attract foreign investment and technology. So the challenge for Pakistani policy makers is to provide corresponding, if not better, incentives, infrastructure and business environment to Chinese investors than they are used to with at home. It is pertinent to note here that in May 2010, China designated the city of Kashgar in Xinjiang as a Special Economic Zone, which is going to compete with Pakistani SEZs, to be established exclusively for Chinese companies and also with existing industries in Pakistan. To attract Chinese investors to establish industries in Pakistani SEZs, some extra measures and effort is required to provide them with fiscal incentives, the most cost-effective and efficient infrastructures and support services as well as investor-friendly governance.


Pakistan, on its part, is anxiously looking for foreign investment and technologies to apprehend high and sustained export-oriented growth to generate employment. Pertinent questions arise, whether Pakistan is ready to welcome such industries? And, once Chinese companies establish themselves in SEZs, will there be any global market to sell goods produced by SEZs’ firms or will they penetrate Pakistani markets and displace local industry? Despite desperate need for foreign investment, my suggestion is to develop a well thought and focused scheme for SEZs to welcome Chinese companies that should create pro-inclusive sustained growth, subject to minimum socio-economic costs. This should ultimately achieve our long term goals of gaining access to new and modern technologies as well as penetrating international markets. So, a policy challenge is to prepare local workforce, infrastructures and institutional systems, and mechanisms in Pakistan to attract and welcome Chinese investors to reap maximum and sustained benefits.


Government-Proposed Pak-China SEZs
Keeping at front the Memorandum of Understandings signed by the governments of China and Pakistan, Pakistani government has proposed following nine SEZs to be established in all five provinces along with industries:


1. Rashakai Economic Zone: (M-1, Nowshera): Fruit/food/packaging/textile stitching/knitting.
2. China Special Economic Zone Dhabeji: Type of industry will be determined at feasibility stage.
3. Bostan Industrial Zone (near Quetta): Fruit processing, agriculture machinery, pharmaceutical, motor bikes assembly, chromite, cooking oil, ceramic industries, ice and cold storage, electric appliance, and halal food industries.
4. Punjab-China Economic Zone, (M-2, Sheikhupura): Mix industry.
5. ICT Model Industrial Zone (Islamabad): Feasibility studies yet to be carried out.
6. Development of Industrial Park on Pakistan Steel Mills Land (Port Qasim): Feasibility studies yet to be carried out.
7. Bhimber Industrial Zone: Feasibility studies yet to be carried out.
8. Mohmand Marble City: Feasibility studies yet to be carried out.
9. Moqpondass SEZ (Gilgit-Baltistan): Marble/granite, iron ore processing, fruit processing, steel industry, mineral processing unit, and leather industry.


Under the CPEC project, the government has proposed mineral economic processing zones besides above nine SEZs in four provinces. In Punjab, proposed Minerals Economic Processing Zones include Salt Range (antimony) and Chiniot (iron ore). In Sindh, Thar (coal) and Lakra (coal). In KP Dargai (chromite), North Waziristan (chromite), Kurram (antimony), Waziristan, (copper), Chitral (antimony), Besham (iron ore, lead), Nizampur (iron ore) and Mohmand (marble). In Balochistan, Khuzdar (chromite, antimony), Chaghi (chromite), Qila Saifullah (antimony, chromite), Saindak (gold, silver), Reko Diq (gold), Kalat (iron ore), Lasbela (manganese), Gwadar (oil refinery) and Muslim Bagh (chromite).


Strategic Directions for SEZs
Tenets of SEZs
Economic characteristics of SEZs in Pakistan should be represented by the following tenets:
1. Investment, in general, in SEZs should be by the Chinese companies, but they should be encouraged to have joint partnerships from Pakistani investors. This will ensure sustainability of SEZs.
2. Target value added activities and link them with the existing industry clusters in Pakistan.
3. Target niche industries, where production concentration in minute parts of a long international value added chain would yield high export returns.
4. Goods produced in SEZs will be principally for foreign export markets but up to a certain percentage can be exported to the Pakistan territory.
5. All services to SEZs may be provided by the government on cost-recovery basis but preferably government should engage a private company for the purpose.
6. Role of government should be limited to making legal and infrastructure arrangements.
Additional Proposals for SEZs’ Structure
Earlier, I reported a list of the government proposed SEZs along with industrial activities. In addition to these, I suggest some industrial activities that are more practical and hopefully will enable to reap more benefits. Keeping in view the interests and absorption capacity in provinces, I propose the following specific industries to be incorporated in SEZs:


• Balochistan: Fish and marine, dry fruit processing and packaging industries, water resource management technologies.
• KP: Focus on small turbines producer industries and their allied industries.
• The Punjab: Solar power plant producing industries and allied industries, engineering-based small and medium industries, technology producing industries, and food products producing industries. Establish Agricultural Technology Park near Faisalabad and link it with agricultural technology producing companies in a SEZ near Faisalabad.
• Sindh: Windmills producing industries and allied industries, packaging industry, plastic and petrochemical industries.


For the above SEZs and industries, each provincial government must ensure: skills, infrastructures, and institutions to be required by SEZs. Furthermore, link all SEZs with NUST Industrial Technology Park being established with assistance from China. This will not only fulfill research and development needs of the guest industries but will become a source of attraction for high-end production industries.


Proposed Policy Stance and Measures

Given their importance, development of SEZs should be made part of the overall growth strategy of Pakistan. Only in this way shall we be able to achieve the goal of pro-inclusive and sustained growth. If Pakistan has to offer virtually everything to attract foreign investors in SEZs, it should reciprocally secure benefits for the country. To begin with, Pakistan should make a careful choice of industries to be invited in SEZs, develop a system where targets with a timeline are effectively monitored to meet agreed export and local employment targets; encourage Chinese firms to produce intermediate inputs to be exported internationally or to non-SEZ companies in Pakistan. If firms produce finished products, they should be primarily for the export market. Besides, ensure that exports from SEZs should also aim at Chinese markets and not just the markets of the third world countries and negotiate with China to secure duty free status to all exports originating from SEZs. Pakistan should promptly conclude special trade agreement for SEZs in addition to the existing bilateral free trade agreement and create a synergy/complementarity between Pakistani and Chinese SEZs for mutual advantage.


To attract Chinese investment to meet our cherished national objectives, provide competitive fiscal incentives, efficient infrastructure and conducive business environment, of course, subject to performance committed in the contract. In addition, following specific measures need to be provided:


1. Start organizing SEZ workshops with potential industrial leaders in China and Pakistan to develop an agreed-upon set of rules of engagement with respect to how these zones should operate to ensure greater success.

2. SEZ planners should then organize roadshows to mobilize potential investors to promote SEZs.
3. Promote SEZs as incubators of good practice and self-containment, supported by good infrastructure and service provider firms. Preferably government should use a private firm to develop and manage the SEZ, while the government should be an active player in improving transport, electricity, water, telecommunications, waste disposal, and other infrastructure to link SEZs with global and local markets.
4. Ensure, as far as possible, that firms are established in SEZs complements and not substitute local industries. This is because SEZ companies producing similar goods and benefiting from privileged incentives will displace Pakistani firms in the international market.
5. Streamline storage, transportation and packaging industries for export of fruits, vegetables and fresh flowers.
6. Link SEZs with well-known skill and technology development institutions of the country.
7. Accord complete and secured property rights protection to ensure sustainability as well as attraction of Chinese firms who would then like to transfer technology and produce innovative goods.
8. SEZs should establish such activities as day care center, school facility, clinic, housing colonies, shopping center, restaurants, etc.
9. Do not allow the lessee of the land in SEZs to use land other than the pre-specified purpose.
10. Prepare and modernize domestic small and medium enterprises (SMEs) involved in the provision of ancillary businesses and locate them near to SEZs.
11. Allow duty-free import of new machinery and equipment to establish Chinese enterprises in the SEZs. Provide 100% tax holidays only to export and innovative products producing firms for first ten years, followed by 50% for next ten years provided the companies show the set performance and modernize their technologies.
12. Chinese investors, who wish to relocate their industry out of Pakistan, should pay some pre-defined service charge. This is to discourage the footloose investment, where investors enjoy the benefits and soon after leave the country.
13. Provide a mechanism for single-window clearance for SEZ companies.
14. Provide a mechanism for resolving matters concerned with labor, pollution authority, etc.
15. Provide full rights of hiring and firing any employee in SEZs. Investors will be free to set their pay packages and terms of work. Government should not intervene in such decisions. Investors should be, however, required to observe all the employment and social protection conventions and laws set by the International Labor Organization and other global organizations. A Committee comprised of SEZs administration and local authorities should be set-up to oversee observation of internationally accepted rules and laws. The Committee will try to resolve all disputes amicably. Alternatively, a time-bound dispute resolution mechanism should be established for the satisfaction of parties involved in the disputes.
16. Preference will be given to Pakistani and in particular local labor, but in case expertise is not available in Pakistan, Chinese workers can be hired.
17. Ensure that (dry or sea) port and market access through efficient transportation system is available. This will guarantee just-in-time availability of raw materials as well as delivery of produced goods.
18. Local transportation may be handled exclusively by Pakistani transport companies or joint Pak-China companies who need to be bounded by certain regulations for the provision of cost effective and smooth flow of cargoes coming in and going out of SEZs.
19. Create a special cadre of customs officials and staff who can facilitate SEZs’ trade on efficient basis, especially minimizing time involved in various procedures. By cutting delays, bureaucratic hurdles and corruption trade costs will be cut down for export-oriented industries.
20. Every zone should have its own power generation facility and provisions be made that WAPDA supplies are available on immediate basis in case of a breakdown of SEZ’s electric plant. Also make full provision of gas, petroleum and other utilities at internationally competitive rates.
21. Skills' gap often frustrates SEZ firms because then they have to devote an unproductive amount of time to micro-managing staff. So Pakistan urgently needs to prepare its workforce to bridge any potential skills' gap.
22. All ministries must work harder, better, and smarter to ensure speedy implementation of SEZs’ projects to seize the upcoming opportunities.
23. All the provincial and federal governments should work together as ‘one team’ for the success of the SEZs.
24. Last but not the least, foolproof security should be guaranteed by all provincial and local administrations for the safety of SEZs and their workforce.

 

The writer is a Professor of Economics at School of Social Sciences and Humanities at NUST, Islamabad.
 
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