Legal Framework for Special Economic Zones to Attract Investment
The Pakistani government seems to be of the view that developed countries such as Britain, France and Germany will become a part of the China-Pakistan Economic Corridor (CPEC) in future and with their participation, the scope of foreign direct investment will be broadened and expanded further. The government also does not seem to have any doubts about the potential vastness of CPEC or its staggering ambition.
However, one should be mindful of the fact that international investors — apart from evaluating economic, political and sovereign risk — also focus on legal and quasi-legal factors before investing overseas. They desiderate to work in a holistic legal regime that ensures at least two idiosyncrasies of a legal system with regard to the enforcement of legal rights of parties to a transaction in the event of a commercial or contractual dispute:
- certainty and predictability of results under legal procedures and documents, and
- conceptual sophistication of the legal system.
Unfortunately, the Pakistani legal system as a whole lacks in these aspects. It is diffused in a complex structure of economic and policy directives and therefore considered inconducive for the ease of doing business.
Moreover, investors expect that a system of law is capable of accommodating sophisticated and complex concepts, transactions and structures within its framework. In Pakistan, the legal regime lacks the depth and breadth to appreciate the needs of commercial viability, as a result of which loans worth billions of rupees get stuck owing to protracted litigation, delays, adjournments and stay orders granted by the courts, making the entire commercial and financial activity precarious.
The concern is to address investment paucity in the country and the legal intricacies attached to it and it is high time to truly search for out-of-the-box solutions.
To achieve the maximum objectives in the minimum time possible, it is recommended that the government invest all possible resources in upgrading the facilities at Special Economic Zones (SEZs). The SEZs are relatively larger estates and could be considered cities on their own. They usually cover all industrial and service sectors and target both foreign and domestic markets. They provide an array of incentives, ranging from tax incentives to regulatory incentives, and often on-site residence as well.
However, for the SEZs to operate separately, efficiently and effectively, the government should tailor specialised legislation specific to their operation. The legislation should, among other aspects, cover the following:
- declare SEZs as zones holding independent jurisdictions under the Constitution of Pakistan, with their own civil, commercial, corporate and employment laws distinct from those that are applied country-wide;
- create an independent financial regulatory authority to render one-window operational support to domestic and foreign investors; and
- guarantee an investment-friendly environment by offering lucrative financial models such as long-term mortgages, zero per cent tax on income and profits, one hundred per cent foreign ownership, and no restrictions on foreign exchange or capital/profit repatriation, etc.
Alongside, the legal structure should also have an impartial and independent alternative dispute resolution (ADR) authority at each SEZ for expeditious adjudication of civil and commercial matters. The jurisdiction of an ADR authority should be extended to any legal dispute arising directly out of investments between contracting parties, while providing legal protection to investors against the antagonism of state institutions in the garb of accountability.
Unless the aforementioned legal and commercial challenges get addressed, participation would remain doubtful from not only foreign investors but domestic investors as well. International investors tend to avoid a legal regime that exposes contractual agreements between parties to the conception of reasonableness, fairness or policy of the host country’s domestic courts.
Local and international investors would also be encouraged to invest in SEZs if they are offered an integrated platform with an independent legal and regulatory system and specialised infrastructure, which could act as a single point of contact for end-to-end client servicing.
An earlier version of this article previously appeared in The Express Tribune. Republished here with permission.
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