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Special Economic Zones (SEZs) - a long way to go
BR Research
06 Dec 2021
A lot of the times when worsening foreign direct investment in the country is criticized, especially as flows from China under CPEC are also slowing down, all hopes are pinned to what the authorities call the second phase of CPEC: the development of SEZs. The State Bank of Pakistan describes Special Economic Zones (SEZs) as an important investment policy tool to address the problems of low investments, exports, and industrialization by addressing these issues by ensuring a business-friendly environment within a designated boundary, with institutional, legal, and infrastructural architecture.
Special Economic Zones are the test ground for reforms,policies, industrialisation and investment. Where many countries have adopted the SEZ model, Chinese progress is unmatched. Highlights of China’s experience with SEZs has been about experimentation and testing as well as the ability to reform, drive national development and boost research and development.
While some form of the same such as Industrial Estates (IEs) and Export Processing Zones (EPZs) have existed in the country since the 1970s, the SEZ concept is a recent phenomenon in Pakistan. So, while China’s success has been a key factor for optimism for Pakistan when SEZs were announced under CPEC, SEZs are still in the stage of infancy, and the progress has been slow and the results and hopes attached to them remain unfulfilled.
Special Economic Zones usually have a primary goal, which can vary from one zone to another. The success of SEZs too is partially dependent on their ability to achieve that goal. From what it seems, the primary objective of SEZs in Pakistan is to attract FDI, exports, foreign exchange. SBP’s annual report for FY21 highlights the same with further analysis on the progress as well as the challenges and the opportunities they hold for the country.
The central bank’s findings show that it can take about six and a half years from the time an SEZ is conceptualized till it becomes fully colonized with operational zone enterprises. Whereas the success or failure of an SEZ can be assessed after a decade of it becoming fully operational and sufficiently colonized, which means it is difficult to give a final ruling on the country’s SEZ progress.
However, key challenges to SEZ growth have ironically been the typical bureaucratic, processing, and regulatory issues that businesses and the macro-economy face otherwise. These completely go against the true essence of setting up and colonizing an SEZ i.e., insulating SEZs from complex processes and procedures for approvals, registrations, and licenses; legal challenges.
Other challenges include the lack of skilled labour; hurdles to one-stop shops; overlapping coordination between functions; a weak framework for long-term operational sustainability of the zones; technical hurdles in the financing of zone enterprises; and weak monitoring mechanisms.
The effects of such hurdles can be seen from investors pulling out of Punjab SEZs due to unnecessary documentation requirements by the authorities; or the Dhabeji Industrial Zone project that has been halted as the award of a contract is challenged in Sindh High Court.
Key recommendations include transitioning the SEZ framework from one that focuses on first-time colonization to the one that also provides operation and maintenance, financing, and monitoring. The SEZs need a stated goal and a clear policy framework. There is a need to create a separate centralized autonomous SEZ authority. The one-stop shop concept must implement in true spirit the simplification of procedures, limited human interaction, and shorter timelines for applications concerned with SEZs.
BR Research
06 Dec 2021
A lot of the times when worsening foreign direct investment in the country is criticized, especially as flows from China under CPEC are also slowing down, all hopes are pinned to what the authorities call the second phase of CPEC: the development of SEZs. The State Bank of Pakistan describes Special Economic Zones (SEZs) as an important investment policy tool to address the problems of low investments, exports, and industrialization by addressing these issues by ensuring a business-friendly environment within a designated boundary, with institutional, legal, and infrastructural architecture.
Special Economic Zones are the test ground for reforms,policies, industrialisation and investment. Where many countries have adopted the SEZ model, Chinese progress is unmatched. Highlights of China’s experience with SEZs has been about experimentation and testing as well as the ability to reform, drive national development and boost research and development.
While some form of the same such as Industrial Estates (IEs) and Export Processing Zones (EPZs) have existed in the country since the 1970s, the SEZ concept is a recent phenomenon in Pakistan. So, while China’s success has been a key factor for optimism for Pakistan when SEZs were announced under CPEC, SEZs are still in the stage of infancy, and the progress has been slow and the results and hopes attached to them remain unfulfilled.
Special Economic Zones usually have a primary goal, which can vary from one zone to another. The success of SEZs too is partially dependent on their ability to achieve that goal. From what it seems, the primary objective of SEZs in Pakistan is to attract FDI, exports, foreign exchange. SBP’s annual report for FY21 highlights the same with further analysis on the progress as well as the challenges and the opportunities they hold for the country.
The central bank’s findings show that it can take about six and a half years from the time an SEZ is conceptualized till it becomes fully colonized with operational zone enterprises. Whereas the success or failure of an SEZ can be assessed after a decade of it becoming fully operational and sufficiently colonized, which means it is difficult to give a final ruling on the country’s SEZ progress.
However, key challenges to SEZ growth have ironically been the typical bureaucratic, processing, and regulatory issues that businesses and the macro-economy face otherwise. These completely go against the true essence of setting up and colonizing an SEZ i.e., insulating SEZs from complex processes and procedures for approvals, registrations, and licenses; legal challenges.
Other challenges include the lack of skilled labour; hurdles to one-stop shops; overlapping coordination between functions; a weak framework for long-term operational sustainability of the zones; technical hurdles in the financing of zone enterprises; and weak monitoring mechanisms.
The effects of such hurdles can be seen from investors pulling out of Punjab SEZs due to unnecessary documentation requirements by the authorities; or the Dhabeji Industrial Zone project that has been halted as the award of a contract is challenged in Sindh High Court.
Key recommendations include transitioning the SEZ framework from one that focuses on first-time colonization to the one that also provides operation and maintenance, financing, and monitoring. The SEZs need a stated goal and a clear policy framework. There is a need to create a separate centralized autonomous SEZ authority. The one-stop shop concept must implement in true spirit the simplification of procedures, limited human interaction, and shorter timelines for applications concerned with SEZs.
