Free-trade zones have recently become more popular with the name of Special Economic Zones (SEZ) in some countries. The change in terminology has been driven by the formation of the World Trade Organization which prohibits members from offering certain fiscal incentives to promote the exports of goods and services, thus the term Export Processing Zone (EPZ) is no longer used with new zones. India for example converted all of its EPZs to SEZs in 2000.
The basic objectives of SEZs is to attract domestic and foreign investment, enhance foreign exchange earnings, develop export-oriented industries and to generate employment opportunities. Corporations setting up in a SEZ may be given a number of regulatory and fiscal incentives such as the right to establish a business, the right to import parts and equipment without duty, the right to keep and use foreign exchange earnings and sometimes income or property tax breaks as an incentive. There may also be other incentives relating to the methods of customs control and filing requirements. The rationale is that the SEZ will attract investment and create employment. These SEZs are often used by multinational corporations to set up factories to produce goods (such as clothing, shoes, and electronics). In such cases flexible labor laws allows the production of goods at relatively lower costs.
LEGAL FRAMEWORK IN PAKISTAN
In Pakistan, the main law dealing with SEZs was enacted in 2012 as Special Economic Zones Act 2012 (the Act). The object of the law is “the creation, development and efficient operation of special economic zones through provision of a legal and regulatory frame work to encourage domestic and international investors for promotion and establishment of industrial infrastructure and for other matters connected or ancillary thereto”.
Section 4 of the Act provides that “[t]he Federal Government and Provincial Governments may establish special economic zones by themselves or in collaboration with private parties under various modes of collaboration including public- private partnership or exclusively through the private parties as provided under this Act”.
SEZ is defined in clause (n) of section 3 as “a geographically defined and delimited area which has been approved and notified by the BOA” while BOA stands for “Board of Approval” [section 2 (c)] which is the highest authority under the Act for the purposes of establishment, operation and monitoring of a SEZ. Other authorities worth mentioning are described in clauses (d), (k), (l) and (m) of section 3 respectively as Board of Investment (BOI) (which is also a SEZ Authority for the capital area territory of Islamabad), Provincial Investment Promotional Authority (PIPA), (provincial) SEZ Authorities and SEZ Committee (for each SEZ). The “existing zones” [(section 3 (l)] which include economic zones established under Export Processing Zones Authority Ordinance 1980 and other economic zones may also apply under the Act seeking grant of status as SEZ (section 15).
The SEZ Authority pursuant to section 12 applies to the BOI for approval of zone application which will submit it for approval to BOA and if approval is granted by BOA, the concerned SEZ Authority will select a developer. After selection of developer, a “development agreement” shall be drafted by the SEZ Authority and thereafter negotiated by the SEZ Authority with the developer for final approval of BOA. The latter may approve the agreement unconditionally or conditionally and after fulfilment of conditions by developer, or if approval was unconditional, the development agreement shall be signed on behalf of BOA, concerned SEZ Authority and developer. In case of rejection of development agreement by BOA, the concerned SEZ Authority may either renegotiate the agreement with the selected developer or after reaching agreement with a different developer, resubmit the agreement for BOA approval. SEZ Authority is authorized by section 14 to simultaneously submit “zone application” and “development application” for approval of BOA.
Section 16 lays down that the BOA shall issue the criterion for approval of SEZs. Certain conditions have been laid down in section 16 (2) itself. The developer shall develop the SEZ in accordance with the provisions of section 20, the provisions of section 21 which lay down contents of development agreement and the terms of development agreement. In case of developer’s failure to abide by applicable laws, rules, regulations and conditions of development agreement, sanctions are provided by section 22. “Zone Enterprises” shall be admitted into a SEZ by a developer “in accordance with applicable zone admission criteria, the zone regulations and the terms of the development agreement”. It is further provided that “[a]ny enterprise which is refused admission into a SEZ by a developer may appeal to the SEZ Authority of the relevant Province, which shall have the power to direct the relevant developer to allow admission to the enterprise in question in accordance with the applicable zone regulations and development agreement.” Sanctions against delinquent enterprises are provided in section 25.
INCENTIVES AND BENEFITS
Incentives for SEZs, developers and zone enterprises are mentioned in sections 34, 36 and 37. These incentives, thus, have a statutory backing. Section 35 guarantees that benefits once awarded shall not be withdrawn to the prejudice of the beneficiary. This is intended to pacify foreign investors over the risk of political instability in Pakistan. In case of any dispute under the development agreement, jurisdiction is provided to the concerned High Court and in any other case, to the District Court concerned. Provisions of alternate dispute resolution are provided in section 39. Functions and responsibilities of BOI are mentioned in section 6 and 7 and 29 while that of PIPA in section 9 and SEZ Authority in 10 and 29. The responsibility for provision of public utilities and transport links is fixed in section 27. Rules under the Act were framed in 2013.
HOW CAN WE HELP?
The corporate and commercial team at ABS & Co. has worked with the property and real estate practice to advise the Khyber Pakhtunkhwa Economic Zones Development and Management Company on the development of Rakashai Economic Zone (an SEZ) in KPK. Similarly, our team has advised the Faisalabad Industrial Estate Development and Management Company on the M-3 Industrial City in Punjab.
In addition to this, we have advised different manufacturers in developing their plants in different economic zones across Pakistan and are well positioned to leverage our experience in providing deeper and more robust advice to our clients.