Tuesday, February 23, 2021

Can SEZ Industrial Parks Help Pakistan Become an Export Powerhouse?

Asian Tigers built their strong economies by becoming export powerhouses. China has done so in more recent decades.  How can Pakistan do the same? An answer to this question came this week from Karen Chen of China's Challenge Apparel. Here's what she said as reported by Dawn News:

“Chinese want to shift their business to a place where they can set up their operations in 3-6 months. You know when you go overseas to invest even in Africa they have industrial parks ready. You just go there and enjoy the ‘plug-and-play’ facility. No firm wants to waste two years in acquiring land and another couple of years in securing utilities to start operations. By the time you get utilities the opportunity is gone and you are already out of business. This is the biggest problem in Pakistan.”


Pakistan Industrial Development Corporation Building in Karachi



Pakistan was the original "Asian Tiger" back in the 1960s when other developing Asian economies sought to emulate Pakistan. It became an export powerhouse in the 1960s when the country's manufactured exports exceeded those of Thailand, Malaysia and Indonesia combined.  The creation of major industrial estates in Karachi under President Ayub Khan's industrial policy incentivized industrial production and exports of value added manufactured products such as textiles. Now the country's industrial output lags its neighbors'. 

History of Pakistan's Manufactured Exports


With Chinese looking to relocate some of their industrial production to low-cost countries, Pakistan has a golden opportunity to grow its industrial output and exports again. Here's Karen Chen explaining why:

“Vietnam is too crowded already and moved into automobiles and electronics. There is no space for investment in Vietnam. Myanmar doesn’t have infrastructure. India is terrible. In Bangladesh you don’t have right conditions for setting up fabric units. So Pakistan is the ideal location for such garment manufacturing because of abundance of cheaper labour. The investment and tax policies for SEZs and new projects are also good. We’ve confidence to be at here.”

Seizing the opportunity to attract export-oriented investors will help Pakistan avoid recurring balance-of-payments crises that have forced the nation to seek IMF bailouts with all their tough conditions. Focusing on "Plug and Play" Special Economic Zones (SEZs) is going to be essential to achieve this objective.

9 comments:

Shams N. said...

Your naivete is bewildering. What's truly happening to Pakistan is this: It is getting eaten up by the latest version of the British East Indian Company.

This is how China ate up Sri Lanka's two ports. Pakistan sold Gwadar to China for CPEC money which it spent solely on Punjab. Punjab is selling Balochi and Sindhi assets to China so it could get money for Punjab.

Riaz Haq said...

Shams: "This is how China ate up Sri Lanka's two ports"


The Chinese ‘Debt Trap’ Is a Myth
The narrative wrongfully portrays both Beijing and the developing countries it deals with.

BY DEBORAH BRAUTIGAM AND MEG RITHMIRE

https://www.theatlantic.com/international/archive/2021/02/china-debt-trap-diplomacy/617953/

Seen this way, China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.

The prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

The Trump administration pointed to Hambantota to warn of China’s strategic use of debt: In 2018, former Vice President Mike Pence called it “debt-trap diplomacy”—a phrase he used through the last days of the administration—and evidence of China’s military ambitions. Last year, erstwhile Attorney General William Barr raised the case to argue that Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.”

As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.

Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota. A Chinese company’s acquisition of a majority stake in the port was a cautionary tale, but it’s not the one we’ve often heard. With a new administration in Washington, the truth about the widely, perhaps willfully, misunderstood case of Hambantota Port is long overdue.

The city of Hambantota lies at the southern tip of Sri Lanka, a few nautical miles from the busy Indian Ocean shipping lane that accounts for nearly all of the ocean-borne trade between Asia and Europe, and more than 80 percent of ocean-borne global trade. When a Chinese firm snagged the contract to build the city’s port, it was stepping into an ongoing Western competition, though one the United States had largely abandoned.

It was the Canadian International Development Agency—not China—that financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. We obtained more than 1,000 pages of documents detailing this effort through a Freedom of Information Act request. The study, concluded in 2003, confirmed that building the port at Hambantota was feasible, and supporting documents show that the Canadians’ greatest fear was losing the project to European competitors. SNC-Lavalin recommended that it be undertaken through a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a “private consortium” on a build-own-operate-transfer basis, a type of project in which a single company receives a contract to undertake all the steps required to get such a port up and running, and then gets to operate it when it is.

The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defense—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.

Riaz Haq said...

Zhang Baozhong, the chairman of China Overseas Ports Holding Company – the firm that operates Gwadar Port – has said that the first phase of the special economic zone under the China-Pakistan Economic Corridor has been completed in which 43 Chinese companies are going to invest while 200 more firms have been registered for the purpose.

https://tribune.com.pk/story/2284513/43-chinese-firms-all-set-to-invest-in-gwadar-sez-cophc

Talking to The Express Tribune, the chairman said that besides infrastructure and energy projects, various industries, including textiles, chemicals, automobiles and mobiles, would be set up in the Gwadar industrial zone, which will create more employment opportunities.

Baozhong rejected the reports circulating in the media about hindrances in the multibillion-dollar project, saying that work on CPEC is going on in full swing and there are no impediments as the “government of Pakistan is extending full cooperation”.

“Despite the coronavirus pandemic, the pace of work has not slowed down and many CPEC projects have been completed ahead of time,” Baozhong said, adding that after the completion of CPEC, Gwadar will become the largest port in the region and an important economic hub in the world, which would benefit various countries.

“The Gwadar Port is fully operational and cargo ships have started arriving,” he said, announcing that a liquefied natural gas terminal will also be established at the port.

“CPEC is a great economic project,” he said. “It is a symbol of the cohesive relationship between

Pakistan and China and a testament to our friendship.”

Donning the national dress of Pakistan, he chanted the slogan "long live Pak-China friendship".

On the attire, he said, "I like shalwar kameez as my heart beats for Pakistan."
Meanwhile, Gwadar Development Authority Director General Shahzeb Khan Kakar told The Express

Tribune that under the 2050 Master Plan, the issues of water and electricity for the “150,000 people” of Gwadar would be resolved by the end of next year (2022). However, the people of the port city claim that their population is over 300,000.

“Work is in full swing on a desalination plant, which will convert five million gallons of seawater into drinking water and a 300 megawatts coal-fired power plant,” Kakar said. “Both the projects will be functional by January 2023.”

He also announced projects worth Rs20 billion for the uplift of the people of Gwadar.
“Efforts are afoot to turn Gwadar into a tax-free economic zone and a port city,” he said, adding that a one-window system is also being introduced to facilitate investors.

He shared that they were inviting the business community to establish industries in Gwadar for the generation of revenue. “A 250-km road network has been laid in Gwadar,” Kakar said, adding that an industrial zone in Gwadar would comprise three divisions. “An education city and a diplomatic zone will also be established in the port city.”

Further, Balochistan Department of Industry and Commerce Additional Secretary Manzoor Hussain said that the provincial government has formulated rules for allotment of land in industrial zones in the province. “Land will now be allotted in industrial zones only to those industrialists who will set them up within the stipulated timeframe,” Hussain said, adding that work on development projects in Gwadar was under way under CPEC.

On the development of the port city, Gwadar Industrial Estate Development Authority Managing Director Attaullah Jogezai said that the provincial government will soon allocate 20,000 acres of land for the special economic zone.

Gwadar Club Chairman Brigadier (retd) Asif Mehmood said, “Special security arrangements have been made in and around Gwadar, which has led to peace in Balochistan.”

IndusPak said...

Riaz Sahib this is the 100 billion dollar problem. This statement might sound inconsequential but actually is fundamental. The problem Pakistan has is that it is not open to outside cultures. Instead of learning and adapting Pakistan culture is to force others to adapt to their level.

Find me another country where a Chinese investor would be obliged to dress like the locals? This is a symptom of deeper cultural wall that exists. Baozhong or Karen Chen might adapt to the local culture but most Chinese will not. To bring sea change in Pakistan economy, a country of 220 million will need 100s of Karen Chens and Baozhongs but they won't come for the aforementioned reason.

Instead most will go to more culturally accomodating countries like Vietnam, Philipines, Malaysia, Indonesia etc

Riaz Haq said...

IndusPak: "Instead most will go to more culturally accomodating countries like Vietnam, Philipines, Malaysia, Indonesia etc"


I think the Chinese investors' decision will mainly be guided by their commercial interests. If they see an opportunity to make a buck by relocating industrial units to Pakistan, they will. They are a lot more practical than most other nationalities, including Pakistanis.

Anonymous said...

The tendency in Pakistan is alway about making big bucks as soon as the investment is made. For a business to flourish it takes hard work, patience and not cut corners. There are too many holidays as well. The idea of having a disciplined work force is also a big challenge.

samir sardana said...

SEZs with IPPs independent of Pakistan Grid - like I said on September 17, 2020 at 9:01 AM, on the post - http://www.riazhaq.com/2020/09/thirlwall-law-why-hasnt-pakistans-gdp.html

Jiye Jiye Pakistan ! So long as Pakistan supports the independence of Kashmir - Allah will bless Pakistan

IndusPak: "Instead most will go to more culturally accomodating countries like Vietnam, Philipines, Malaysia, Indonesia etc"

Sample - the Indonesian Pogrom of Chinese in 19918

https://theaseanpost.com/article/rising-anti-chinese-sentiment-indonesia
https://www.scmp.com/lifestyle/arts-culture/article/3009984/may-1998-jakarta-riots-against-chinese-we-cannot-heal-what

Sample - The Vietnamese love for Chinese in 2014 and 2018

https://www.scmp.com/news/china/diplomacy-defence/article/2150653/anti-china-protests-vietnam-set-aggravate-tensions

Malaysia is too expensive

Pinos are way up in cost curve - but lesser than Malaysia.dindooohindoo

samir sardana said...

IndusPak: "Instead most will go to more culturally accomodating countries like Vietnam, Philipines, Malaysia, Indonesia etc"

Vietnam - The entire manufacturing is 10-100 kms on the sea coast line.Sea levels are rising and land is eroding.There is no space for industrial land.Land in the interiors has no infra - and will take billions and time to build.Secondly,there is the issue of skilling. Viet education and culture is suited to low end manufacturing - which has shifted to Vietnam,as the cost curve has risen in PRC.Thirdly the time has come for Vietnam to pay for the costs of pollution due to low cost manufacturing - in terms of health care costs. Fourthly,Vietnam will NOT allow SEZ in Vietnam owned,run and STAFFED BY 100% Chinese. Fifthly,the young population of Vietnam - as time passes,will move into the axis of the USA -as they have a mortal fear of the PRC.This will make for Political Risk for the PRC investments in Vietnam.Sixthly, PRC SEZs have their own ports and power plants.Vietnam
has a naval axis with India and will soon fall in the lap of the USA - so the integrated strategy of the PRC in SEZs is not viable in Vietnam,Lastly,there is the problem of the Dong !

So Vietnam is NOT an option

Indonasseah - Everything that works in that country is due to the Chinese - as owners or managers or bureaucrats.Which is Y no Indonesian likes them.Then there is the Chinese treatment of Uighurs.Then there is the issue of resources.The fact is that the Indonasseans do not like the idea of foreigners selling their resources (like the Dutch did with Tin and Nickel).But between the PRC and the US/EU,they will choose PRC.However,manufacturing investments from PRC will not flow into Indonasseah - as there is a severe shortage of skilled labour and managers.

However,given a choice between an Indian and a Chinese - the Indonasseans would jump for the Chinese.If they had their way they would shut down IndoRama - run by an Indian Marwari

Pinos - This nation is an Option as it has an abundance of highly skilled and literate staff and managers,good infra and a solid and stable currency.However,after Duterte leaves the Pinos will be back in the lap of the USA.This makes for political risk for Chinese investments.MOST IMPOFRTANTLY,IT IS NOT A LDC !

Malaysia is too expensive.dindooohindoo

So the only option,is the Islamic Republic of Pakistan.

With COVID,if manufacturing requires a 10 foot distance,at the shop floor,then manufacturing from EU/USA will have to shit to Pakistan - as it has the best COVID track record, among all the above nations.Vietnam's numbers cannot be believed

samir sardana said...

The Solution

Let the PRC come in and set up Integrated SEZs with IPPs and ETPs,and let them use
their staff (100%) in Phase 1

These will be 100% SEZs,with no DTA sale - but with some DTA contractors and DTA purchase (
as necessitated by economic expedience).By doing DTA transactions,they will have some interaction with Pakistani enterprise,and develop their enterprise - and also get management comfort,w.r.t the Pakistani supply chain.

Let them import and export whatever they want and do "wherever they want".In other words, let them use hazardous chemicals,spent catalysts,bio hazards - so long as,THEY SECURE ITS DISPOSAL.

If the PRC wants the LDC status of Pakistan (for exports),and the COO of Pakistan - they will use the minimum Pakistani labour and Pakistani Raw Materials required - for meeting the VA norms,of the LDC treaty.dindooohindoo

In lieu of the above concessions,what can the Pakistani state demand from PRC ?

That the FX earned on Exports,be brought into Pakistan immediately
That each SEZ unit,should be NFE positive throughout
That the dividend repatriation be staggered,so that the PKR is supported,and there is no
need for IMF or Saudi loans (So the FX treasury of SBP,is outsourced to the PRC-SEZ)
That the Capital in the SEZ not be repatriated for 20 years
That the SEZ profits can be invested in SBP-USD/YUAN Bonds (to bring parity with Chinese investments) - which will be priced lower than IMF/Saudi/US Hedge Fund money

This will be enough to stabilise the PKR,and zeroise the cost of the sterlisation and FX intervention transactions of the SBP.

Even if the SEZ is moving cash - it is irrelevant,as the same cash could come via hedge funds,into Pakistani High Yield USD Bonds (or Argentine/Turkish Bonds).The cash will goes into High Yield Debt VIA FUND HOUSES,is basically,partly slush cash.

As time passes,the SEZ-PRC will rely more and more on the Pakistani supply chain and develop Pakistani management expertise

In the next step,the SEZ can sell into the DTA,the excess capacity and subprime stocks,and Pakistani buyers can treat it as imports,and pay in USD,and accrue a tax free profit,to the SEZ-PRC.The point is that the SEZ is fully integrated - and is not a burden on the Pakistan state and people - so no tax needs to be levied on the SEZ - even on DTA sales.USD paid by DTA to SEZ will stay in Pakistan,or come back to Pakistan.

Sales from SEZ to DTA will be on VAT (as an offset to BCD) so the Pakistan state will get the customs duty avoided by Pakistani importers,in the normal course (and still be cheaper for the Pakistani in the DTA).

Therefore,the aim is to get USD in Pakistan and keep the USD in Pakistan.Why tax it ? Therefore the SEZ can have a 10 year holiday with say a 5 year loss period (thereafter which,the holiday starts).Even the DDT on dividend can be waived,if the SEZ agrees to the SBP repatriation rules - so that USD outflow pressure,is reduced

Once the PRC-SEZ gets comfort,then there are Billions to be invested in low cost housing using new and innovative materials,education,agri supply chain,mining and tourism.These very Chinese (of the SEZ) will invest the SEZ profits and MORE Capital,into these new businesses.

Therefore,all the USD,will stay in Pakistan.

And then,the Pakistan state,can tax the profits of the SEZ

So,1st step is TO get the USD into Pakistan
Then keep the profits of the SEZ in Pakistan
Then entice the SEZ to invest the profits in Pakistan
THEN TAX THEM ALL !

THERE IS NO OTHER NATION IN THE WORLD WITH WHICH PRC HAS THAT LEVEL OF COMFORT -EXCEPT WITH PAKISTAN - EXCEPT DPRK.In DPRK,with Joe Biden,peace has no chance - as the intent of Joe is irrelevant - it is the perception of Kim which counts.