Pakistan Business Council publishes policy brief to make SEZs more functional

Pakistan Business Council (PBC), a business advocacy body, has put forward key recommendations for special economic zones based on a global practice and Pakistan’s needs.

In its policy brief, the PBC said that SEZs can be an important part of the strategy to industrialize the country. It said its document briefly compares the practices adopted by China, India, Bangladesh, Ethiopia and Cambodia, for their SEZs/EPZs and draws the following major recommendations for in the context of Pakistan’s urgent need to provide supportive environment for industry.

Like all the countries covered in the comparison, the need in Pakistan is to generate exports. However, with annual imports running at twice the rate of exports, it is equally important, if not more, to encourage import substitution. Therefore, our recommendations of a hybrid approach are also framed in light of the need to kick start the reindustrialization by providing affordable land, sound infrastructure and utilities at a competitive cost.

The existing industrial areas around cities are choked; lack of adequate facilities, land is unaffordable, all impacting productivity of industry.

Export / Import Substitution / Reindustrialization Hybrid Approach

Exports are the prime motive for SEZs globally. China and India set a minimum benchmark which varies between 50-100% of revenue. As mentioned above, the necessity in Pakistan is to drive both exports and import substitution. Pakistan has over 200 million population. This can provide the scale, which in time, could enable the import substitution industries to also become exporters. Properly endowed SEZs would facilitate industrial investment, offering a viable alternative to the crowded industrial areas around big cities that also lack adequate infrastructure. Hence a hybrid export/import substitution/ local industry approach, with varying fiscal incentives is recommended.

Foreign investment and technology

A route to exports and import substitution is to attract foreign investors with capital and know how. Most of the benchmarked countries allow 100% foreign ownership. Whilst attracting foreign investment through JV’s or sole ownership, PBC recommends that 100% locally owned entities also be permitted to establish in SEZs. Ownership should therefore not be a qualification for establishing units in the SEZs. Neither should it be a criteria for determining other incentives.

One-Stop, Single Window Facility

The most successful model adopted by China is to empower local administrations of SEZs to work within a national policy framework to simplify and offer “one-stop/single windows” for all approvals and government interfacing. This includes building permissions, visas and work permits, customs etc.

“Plug and Play” Model

Foreign and local investors are attracted by the ready availability of complete facilities, such as land, utilities, banking services, housing etc. It is suggested that private sector zone developers be deployed to achieve world class “plug and play” industrial facilities. Speed is of the essence both for the country and the investors. This kind of facility will fast forward industrial investment.

Cluster concentration

China and Bangladesh both benefited from concentrating on the supply chains of specific sectors. Bangladesh focused on aspects of garments, such as buttons, zips, thread, cutting, sewing. China chose high technology industries. Apparel is a sector that Pakistan could focus on, even if only in part of larger, multi-industry SEZs.

Proximity to markets, ports, source of materials and labour Shenzen, the most successful SEZ in China benefitted from proximity to ports. This facilitated the flow of raw materials in and finished goods out. Dhabeji near Port Qasim provides a similar, ideal location for a SEZ.

Fiscal incentives

All countries allow duty free import of machinery, some only at the inception of a project. We recommend that Pakistan allows this at the inception as well as for balancing, modernization, replacement and expansion. Income tax holidays ranging from 2-10 years are offered by the benchmarked countries. PBC recommends an income tax holiday of 10 years subject to 80% of the revenues being derived from exports.

For any year that exports amount to less than 80%, tax relief proportional to exports may be offered. For units creating a prescribed level of import substitution, specific relief may be agreed, which could vary with industry and products. The target relief would be in line with the import displacement and in that respect be at parity with exports in terms of impact on the external account. For units producing neither exports nor import substitution, the standard fiscal policy should apply. No minimum taxes should be levied during the tax holiday period and capital allowances and losses should be allowed to be carried forward for up to 2 years beyond the tax holiday period. Beyond the tax holiday period, a reduction in tax rate of 5% on the standard corporate tax rate be offered to those foreign controlled entities that reduce their interest to 51%. Raw materials be allowed duty free into the SEZs. Sales in Pakistan be levied import duty and Sales Tax on finished goods “exported” from the SEZ to the domestic market.

Expatriate management and work force

Expatriate management and work force be allowed as a percentage of total headcount in these categories at 25% and 10% respectively. Work permits be issued for periods of two years at a time.

The percentage of expatriate work force be reduced to less than 5% after the initial two years. Repatriation of profit, investment and capital gains Repatriation of profit, investment and capital gains should be permitted.