SEZs 2.0

In Pakistan and beyond, governments and investors continue to show enthusiasm for SEZs. The UNCTAD World Investment Report of 2019 focuses on SEZs. It suggests that SEZs remain the policy instrument of choice for attracting investment. Globally, around 1000 new SEZs have emerged in the last five years and another 500 are in the pipeline. Are SEZs all they are made out to be? Yes, but.

The attractions of SEZs are numerous. Between Deng Xiaoping’s first designating Shenzhen an SEZ and now, we’ve seen Shenzhen grow from a fishing village to a global commercial hub. Dubai, with around 30 free zones, looks very different from its pre-Jebel Ali Port zone days. Government circles remain committed to SEZs mainly because of the relative ease of piloting reforms in designated zones, clustering effects, ease of attracting much needed capital investment and the potential for technology transfer.

But Pakistani policymakers must note that many, if not most, SEZs fail. The reasons for their failure are numerous, but failure cases tend to be linked in part to law, policy and governance problems. SEZs are creatures of law and policy. With poor governance institutions, in conditions where the regulatory environment remains inflexible, linkages to the local economy are poor, incentives remain misaligned, and market failures or opportunities remain unaddressed, SEZs fail or underdeliver.

According to UNCTAD’s World Investment Report 2019, among SEZ latecomer countries, there are many more cases of zones that remain dysfunctional or underutilized even after being legally established. Several Pakistani SEZs – those in Karachi, Khairpur and others – face land title problems, utility access issues, regulatory hurdles and remain largely underutilized.

For regulatory practitioners, many challenges facing Pakistani SEZs stem from their regulatory environment. As I wrote last year, if Pakistan were to update its current SEZ law, afford greater autonomy to SEZs, reduce SEZ enterprises’ regulatory burden, truly offer one-stop shop solutions at the SEZ level, and generally follow governance best practices, it could significantly improve its SEZs.

Successful SEZ models from China and UAE generally have this in common: good governance institutions and relative autonomy. They afford considerable policy freedom in designated areas to local agencies – public or private – responsible for administering zones. In China, revenue incentives were aligned to ensure that local authorities stood to gain from rising zone revenues.

Dubai International Financial Center (DIFC) and Abu Dhabi Global Markets (ADGM) built upon the success of past zones to extend zone benefits beyond traditional trade and customs incentives. They offered seamless administration, provided access to corporate-style governance institutions, introduced the common law legal system with separate courts and alternative dispute resolution bodies, and regularly updated corporate and commercial laws based on best practices in global financial centers.

Globally, zonal thinking is evolving more broadly. Instead of merely focusing on trade and fiscal incentives, new zones are embracing wider purposes. We are now seeing zones focused on addressing sustainable development goals, climate change, promoting tourism, affording smart governance and greater rights, addressing housing gaps, and accommodating refugees or climate migrants.

For Pakistani policymakers, take home points: wielded correctly, SEZs can be an effective tool for addressing Pakistan’s current productivity crisis. From attracting much needed capital to providing areas of efficient administration, SEZs can help. But their success depends on the laws and policies feeding their design and continuous improvement.

With flexible design, regulatory breathing room, relative autonomy, revenue incentive alignment, purpose-built governance and dispute resolution systems, Pakistani SEZs can deliver and excel.

The writer is a consultant for Politas Consulting LLC and teaches law at IBA Karachi.

Twitter: @MoruShah