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March 10, 2020

Production or real estate?

Opinion

March 10, 2020

One is caught by surprise when looking 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).

The 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 – these all ask for evidence and rigorous analyses. Similarly, we need to learn lessons from what we have done so far and assess whether the targets are achieved as envisioned. In a free float, we can either end up confirming the “Pollution haven hypothesis” or add evidence to studies discussing “failed SEZs around the world (including China, Russia and India)”.

With this background, the question that is most pressing is: Do we need real estate activities to attract investors? Or is investment needed so as to foster production, assemble, package via targeted technology transfer?

It is normal practice in Pakistan that Industrial Estates (IEs) announce sale of plots meant for production purposes and the plots are soon sold out. However, the failure on the part of the IEs is that they never let the piece of land deliver in time. With compromised promises, plot-owners are not asked to initiate production at under-serviced plots, while time passes bringing further value to plots and leaving owners happy for the dividend ultimately earned. Thus, there is a vicious circle at work where plots in the IEs are all sold out but no production activity takes place.

The deserted Industrial and Export Processing Zones offer best evidence in this context. Later on, when sufficient facilities are made, those willing to start businesses cannot find affordable plots to initiate business there. Even if they get plots, the prices (having accumulated premium) are so high it leaves startups uncompetitive if they purchase such land. Hence, the business prospects dry down without even starting for both the initial and the 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 timeline to initiate production, following which the allotment shall stand cancelled. Such a mechanism is already put in place by KPEZDMC.

Second, 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 solely convinced of the long run real benefits of investment to the economy (sustained FDI; employment generation; innovation, integration & technology transfer; becoming part of the global supply chain and regular stream of income in the form of taxes), it should provide commercially-viable land without cost to the businesses with a viable business plan. To cover part of expenses, the IEs’ 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 but only for clearly identified and worked out sectors (where Pakistan has comparative advantage or obvious potential), thus improving the probability of success. A special portion of the endowment fund can be kept for new IEs to facilitate experimentation in emerging fields. A well-researched, targeted and coordinated professional effort of industrialization is needed to bring Pakistan on to the desired path of feasible industrialization.

The writer is an assistant professor at the Pakistan Institute of Development Economics (PIDE), Islamabad.