Special Economic Zones (SEZs) constitute an important segment of the second phase of CPEC. SEZs have been approved in all four provinces of Pakistan to improve and encourage: industrialisation, technology transfer, using local raw materials, employment creation and revenue generation. As part of early harvest, nine SEZs have been prioritized and four out of nine agreed SEZs under CPEC are being developed as the priority. Further, SEZs are entitled to special facilities and tax incentives to encourage businesses to establish clusters of commercial activities. However, Pakistan’s experiment with SEZs has not been rosy, as most of the planned SEZs have run into obstacles of various sorts, and recently have become the focus of attention of international lenders.

For instance, other than Hattar Economic Zone, which was already established as an industrial estate in the 1990s, not much of SEZs in KPK have been populated. Rashakai SEZ was a flagship project to be developed in collaboration with China, but its development and industrialisation have stalled for one reason or the other. Similarly, the Baluchistan Economic Zones Authority has been set up to establish and promote industrial activity in Baluchistan. Bostan, Gidani and Hub Economic Zones have the potential to attract local and foreign investors. However, among other factors, law and order proved to be the Achilles heel for Baluchistan economic zones. Similarly, Allama Iqbal Industrial City is the flagship SEZ in Punjab and efforts are being made to populate it. Also, Dhabeji SEZ is the flagship SEZ project of the government of Sindh, and efforts are underway to operationalise it. Thus, instead of populating and reinvigorating existing industrial parks and economic zones, both federal and provincial governments prioritized creating new SEZs, thus burdening the exchequer and wasting people’s taxes.

Further disapproval of SEZs has also come from international lenders. International Monetary Fund (IMF) has put conditions on setting up new SEZs and granting tax breaks to existing SEZs, insisting such tax breaks do not provide a level playing field to all investors. Moreover, it is ironic that while the Government of Pakistan is offering tax breaks to investors, but has imposed more than Rs 1.8 billion in taxes and continuously hiked utilities rates to make up for the revenue shortfall, which is fueling inflation in the country. Pakistan has accepted the IMF condition that it will not establish any new special economic or export processing zone, and tax incentives already availed by the existing zones will not be extended after expiry. But the twist is that the KPK government has refused to endorse the federal government’s decision, saying that it needs SEZs to develop economically. Thus, at the macro-level, industrial policies are held hostage by international lending bodies such as the IMF, while at a lower level, federal-provincial preferences are not being aligned for varying economic reasons.

More recently, the government has decided to hand over Karachi Industrial Park (KIP) to China, which is being developed on the land of non-functional Pakistan Steel Mills. It is being claimed by the government that the transition to Chinese hands will set a precedent for making Pakistan’s SEZs more appealing to investors by integrating international standards and practices. However, the terms and conditions of handover still need to be made public: how many local engineers and workforce will be employed? Will the local industry be part of the value chain of the Chinese firms in KIP? Will Chinese firms be using local raw materials and resources? These are the questions which need to be answered to quantify the real benefit of KIP to regional, provincial and federal economies. Further, handing over lucrative KIP to China is an indirect admission that despite all the fanfare and roadshows, and offering lucrative tax breaks and incentives, the government has failed to attract foreign investment in SEZs. Thus, a thorough rethink of industrial policies is required to avoid further failures in the future, instead of building new facilities and industrial parks, existing economic zones and industrial parks should be reinvigorated.

Ahsan Munir
The writer is a freelance columnist.