Production Or Real Estate Activities: What do we want from SEZs and IEs

by Dr. Iftikhar Ahmad

One is caught by surprise when we look at the government’s rush for all kinds of SEZs (including the federal and provincial level SEZs as well as simple and priority SEZs-under CPEC, along with certain voices for specialized SEZs for SMEs). Government is ready to accept all available modes of financing including public, public-private and solely private sector financed SEZs, though without any economic assessment of what we need and more importantly, what we can offer. Business plans, commercial viability, human capital needs, our capacity to timely deliver infrastructure and skills set, are the points asking for evidence and rigorous analyses. Similarly, learning lessons from what we have done so far and assessing whether the targets are achieved as envisioned; are the missing links in the whole discussion. In a free float, we can either end up confirming the “Pollution heaven hypotheses” or be adding evidence to studies discussing “failed SEZs around the world (including China, Russia and India)”.

With this background, the questions that are most pressing are “Do we need real estate activities to attract investors?” Or “Is investment is needed for fostering production, assembling, packaging via facilitating targeted technology transfer?”. It is normal practice in Pakistan that the Industrial Estates (IEs) announce sale of plots meant for production purposes and the plots are soon sold out. However, failure on the part of the IEs is that they never let the piece of land delivered in time. With compromised promises, the plot-owners are not asked to initiate production at under-serviced plots, while time passes bringing further value to plots and leaving the owners happy for the dividend ultimately earned. Thus, there is a vicious cycle at work where plots in the IEs are all sold out but no production activity takes place. The deserted Industrial and Export Processing Zones offers best evidence in this context. Later on, when sufficient facilities are made available at IEs, those willing to start businesses cannot find affordable plots to initiate business there. Even if they get plots, the prices (having accumulated premium added to it due to long waiting time) are so high it leaves the startups noncompetitive if they purchase such land. Hence, the business prospects dry down without even starting for both the initial as well as later potential investors.

In this context, the government needs to come up with ingenious ways to stop real estate activities at IEs, SEZs and PSEZs. One possible way would be the provision of conditional allotment of fully serviced industrial plots for production purposes with a definite time line to initiate production, following which the allotment shall stand cancelled. Such a mechanism is already put in place by KPEZDMC. Secondly, the government can come up with policies where plots in the IEs are provided on instalments, where each payment is tied to a pre-announced stage of development, thus eliminating real estate activities on the part of providers. Once the first option is inbuilt at a well-connected IE with great business viability, there would be minimum lag from planning to production, ultimately translating in greater investor’s confidence.    

Lastly, if the government is serious enough and convinced of the long run real benefits of investment to the economy (sustained FDI; employment generation; innovation, integration & technology transfer; becoming part of global supply chain and finally achieving a regular stream of income in the form of taxes), it should provide commercially-viable land without cost to businesses with a viable business plan. To cover part of expenses, the Industrial estates’ commercial centers and other attached commercial activities can be auctioned or given on lease. Thus, an initial endowment fund should be allocated and business spaces should be provided. Keeping in mind resource constraints and Pakistan’s comparative advantage and potential, this will have higher probability of success if offered for specific sectors (IT, minerals & gems processing, agri-value added etc.). A special portion of the endowment fund can be kept for new IEs to facilitate experimentation in emerging fields. Thus, a well-researched, targeted and coordinated professional effort of industrialization is needed to bring Pakistan at the desired path of feasible industrialization.

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