SEZs in Pakistan have room for improvement, SBP report for FY21

By Fatima Javed | Gwadar Pro Nov 27, 2021

ISLAMABAD, Nov.27(Gwadar Pro) - The two main rationales and conceptions of Special Economic Zones (SEZs) around the world are islands of excellence and laboratories for policy reforms. In both these conceptions, the SEZs in Pakistan have room for improvement, said the State Bank of Pakistan(SBP)’s  report on SEZs in Pakistan.

The report states that the current SEZ framework and the ensuing government decisions have envisioned SEZs as designated areas that offer a business-friendly environment, as per international best practices.

The SBP annual report on the State of Pakistan's Economy for FY21 was submitted to the Parliament. It finds that there have been positive developments recently, such as the passing of the SEZ MIS regulations, which prevents real estate speculation.

However, that vision is yet to be fully implemented. The one-stop-shop has not been set up, whereas overlapping coordination functions have led to delays in the provision of infrastructure and utilities.

In addition, policy frameworks to ensure a business-friendly climate in SEZs concerning skilled labor and a facilitative legal environment have not been announced.

The SBP study also states that as far as policy reforms are concerned, the current SEZ framework does not envision SEZs in Pakistan as areas that offer special policy and regulatory environments to businesses.

Under the current SEZ framework, all the SEZ authorities, organizations, and persons engaged in the creation, development, operations, and management of an SEZ are required to follow respective applicable laws and standards of Pakistan.

This includes vis-à-vis environment, employment, procurement, and building code unless specifically exempted, relaxed, or otherwise provided in the SEZ Act.

However, the current SEZ framework does not offer exemptions, except building codes. Here, Bangladesh's SEZ Act offers some useful insights.

Not only does it exempt the SEZs in Bangladesh from various national and local government laws, but it also allows the government to modify any other Act or does any other thing necessary to remove difficulties for the growth and development of SEZs.

The report, therefore, suggests that a concerted effort is required to address the challenges to the growth of SEZs in Pakistan, by graduating the SEZ framework from one that focuses on first-time colonization to one that also provides direction on operation and maintenance, financing, sustainability, monitoring and operation, and so forth.

This necessitates deliberations over the creation of a separate centralized autonomous SEZ authority that would perform several functions, the report added.

In addition to approving zones and developers, these functions include providing and updating regulatory guidelines; coordinating with relevant government departments across different levels on SEZ-related matters; continuously monitoring zone performance aimed at providing the best infrastructure and facilities within SEZs; and assessing the impact of various policy reforms on the business climate within SEZs.

The report gave examples that in some countries, the role of the SEZ authority is performed by existing ministries; for example, in Kosovo, the Ministry for Trade and Industry acts as the regulator for all its free economic zones.

In others, such as Uganda and Sri Lanka, the Investment Promotion Agencies control SEZs. However, United Nations Conference on Trade and Development (UNCTAD)’s World Investment Prospects Survey 2019, which includes 120 IPAs from 110 countries, notes that only 7.5 percent of IPAs were performing the role of the SEZ authority in their country.

However, the current SEZ framework does not offer exemptions, and the findings of UNCTAD’s survey resonate with international best practices, which suggest not to delegate regulatory powers to an IPA.

Generally, the mandate of IPAs is to facilitate investment, and regulatory responsibility may lead to a conflict of interest and affect the performance of its core functions.

Instead, autonomous or separate bodies are established as an institutional structure, with the mandate to regulate and manage SEZs and act as principal interface with developers and zone enterprises, as is the case in Bangladesh, Jamaica, Kenya, and the Philippines, the report concluded.

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