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CPEC and SEZs

The 7th Joint Coordination Committee (JCC) on China-Pakistan Economic Corridor (CPEC) agreed on the location of three special economic zone (SEZs). CPEC envisions that SEZs would attract around 40 billion dollars in investment however, the government has to work on creating more job opportunities for the locals to reap maximum benefits.

The Joint Coordination Committee (JCC) of the China Pakistan Economic Corridor (CPEC) envisaging projects in excess of 50 billion dollars met in Islamabad on Monday and Tuesday last and indicated that the time line for the completion of all proposed projects is sixteen years – 2014-2030.

The JCC, according to some reports, agreed on the location of three Special Economic Zones (SEZs) in three provinces in the first phase (with proposals from Balochistan still awaited); however while all reports maintain that there was considerable debate on the site selected by Khyber Pakhtunkhwa (KPK) yet some reports maintain that the JCC finally agreed to support the KPK government’s site selection with others maintain that further discussions on the selection of the site may take place in future.

The two SEZ sites agreed for the first phase were: (i) Faisalabad (Punjab) – an industrially mature city contributing more than 5 percent to Pakistan’s total Gross Domestic Product (GDP). It is a major textile manufacturing centre of the country and accounts for half of Pakistan’s total textile exports (estimated at 13.8 billion dollars in 2012) and employs 20 percent of the country’s entire workforce; and (ii) Dhabeji, located in the suburbs of Karachi, Sindh, and near Port Qasim industrial area, 50 kms from Karachi Airport, was regarded as an ideal site for establishment of new and existing businesses, and with the rather ambitious objective of attracting industrial units from developed countries subsequent to the provision of affordable and skilled labour force, and state-of-the-art infrastructure.

And finally, the bone of contention: the Khyber-Pakhtunkhwa government proposed Rashakai interchange with little existing infrastructure but which serves Nowshera and Mardan as well as northern parts of the province including Malakand, Swat, Buner, Dir and Chitral. Thus the KPK government conceptualizes Rashakai as having the capacity to becoming the trade hub of the entire province and assist in enhancing the pace of development. The Chinese side supported Hattar, in Haripur district, with existing 117 operational manufacturing units including food and beverage, textiles, crockery, paper printing, chemicals, cement, publishing, chemical, rubber, carpets and leather products and served by Hattar railway Station.

The choice of the first phase SEZ in KPK clearly indicates the different priorities of the Chinese supported by Punjab and Sindh governments reflected in their choice of location and the KPK government – a difference that accounts for opposition by KPK and Sindh governments as well as by opposition political parties to specific projects under the China Pakistan Economic Corridor (CPEC). The Chinese insist on utilizing existing infrastructure facilities in the first phase projects or, in other words, roads should be constructed that would link the existing network (which explains the charge of Punjab centric motorway under CPEC by opposition leaders); and by the same logic SEZs should be established in already developed areas which would reduce the time for their becoming operational rather than in setting up a SEZ in say Rashakai which would require considerable more time to provide the required infrastructure facilities. The Sindh government supports the Chinese stance with respect to the SEZ location in the first phase however PPP stalwarts have frequently expressed reservations with respect to the road network agreed by the federal government under the first phase of CPEC.

CPEC envisions that the SEZs would attract around 40 billion dollars in investment however if that investment is not translated into more jobs or productivity (GDP growth) that can contribute to either more revenue collection or higher export earnings for Pakistan instead of for China then its fallout on our economy may remain minimal. Paperwork available with Business Recorder notes that the government of Pakistan envisages SEZs to “allow economic corridors along major transport and communication networks to fully harness the physical and human resources of the country, contribute to the value chain of finished products in the region, enable relocation of industry to utilize abundant labour at lower costs and utilize the abundant savings in the region for a higher return on investment in a saving deficient developing country”. These are extremely desirable goals but their achievement would require appropriate fiscal, labour and export policies to be agreed with the Chinese in writing that are unfortunately not yet part of the signed agreements between China and Pakistan; or if they are they have not been shared with the general public.

The proposed incentives on offer for both SEZ developers as well as enterprises include: (i) ten-year exemption from all taxes on imported capital goods (Chinese investors are expected to bring in capital goods from China); and (ii) exemption from tax on income accruable from development and operations in SEZs for a period of ten years. These exemptions would imply that a Chinese concern setting up business in an SEZ would be able to manufacture without paying any taxes for ten years or feel the need to employ domestic/local labour (Chinese units normally use mainly Chinese labour even when setting up plants in other countries) and export the items through Gwadar port (also under Chinese control) – terms that may be more favourable to Chinese manufacturing units located in China. The Chinese units would of course pay for electricity used, which is taxed, and Gwadar port charges however more specific agreements need to be penned before the SEZs become operational.

Pakistan, a severely cash strapped country unable to attract foreign investment from other sources due to political uncertainty, economic constraints, law and order issues and poor governance reflected by a decline in its ranking in the World Bank sponsored ease of doing business index would, without doubt benefit from the numerous Chinese infrastructure projects under CPEC, however there is a need to ensure that appropriate policies are put in place to ensure that Chinese companies setting up in our SEZs benefit Pakistani investors and labour as well. That appears to be lacking.

Lack of transparency coupled with poor negotiating skills, as reflected in the LNG 15 year deal with Qatargas as well as CPEC, has been the hallmark of two PML-N administrations – Sharif and Abbasi. One can only hope that Ahsan Iqbal with multiple responsibilities reminiscent of Ishaq Dar would begin to ensure that competent and proactive lawyers are always on board when negotiating with other governments including China.

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