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STZs: priority or political gimmick?

The Senate body has finally passed the Special Technology Zones Authority Bill 2021 to fast-track the expansion of export-oriented IT companies at a time when Pakistan’s technology exports have already increased by more than 80% over the past year.

In fact, as per International Labour Organisation’s flagship report of 2021, Pakistan has now become the second largest supplier of human capital for outsourced software development – with cumulative IT exports crossing a whopping $2 billion mark for the first time ever.

So, the burning question of the hour is: does the country need a specialised zone for IT when the sector is already booming and has been enjoying tax incentives for years?

Yes! Despite having enormous ICT talent, Pakistan has only a few IT companies that have revenues exceeding $1 million. In fact, the IT services industry is highly fragmented, and there is absence of specialised companies with a strong niche.

Due to low barriers to entry, Pakistan has many small-to-midsized competitors with all of them selling the same technologies and going after the same customers without any product differentiation or innovation.

In this regard, the Special Technology Zones (STZs) are meant to be export-oriented hubs with an aim to transform the country into a preferred IT destination.

They can act as an experimental base for structural reforms and exploration of entrepreneurial culture by engaging firms in IP creation related to emerging technologies such as blockchain, artificial intelligence and Internet of Things (IoT). However, STZs can also be wasteful, if not carefully planned.

The zone authority must go an extra mile in ensuring the provision of world-class infrastructure on the lines of a smart city and guarantee services such as over 100Mbps Wi-Fi speed, extended banking hours, and uninterrupted power supply to server farms.

But if the government wants to create new technology clusters that are administered by bureaucrats working from 9 to 5, then the zones can’t be expected to inculcate innovation or kick-start a gig economy on its own.

In other words, the ease of doing business in tech zones should far exceed than that in big cities such as Karachi, Islamabad, Peshawar and Lahore.

READ Prime minister for setting up STZs

The private sector should take the lead as the government is usually part of the problem and excessive bureaucracy in STZs could defeat the purpose.

So, say, if a zone enterprise wants to establish a mini-solar farm for mining cryptocurrency such as ethereum by importing duty-free GPUs, servers and solar products, it should not be bogged down by the authority or the central bank for that matter.

Similarly, if an IT company plans to import duty-free state-of-the-art 5G equipment, it should not be barred by Pakistan Telecommunication Authority (PTA), neither should the firm be allowed to smuggle or resell hardware outside of the STZ.

This dynamic and open role of the authority is very crucial, otherwise the whole idea of developing technology zones will appear like selling real estate candies with a tech wrapper.

In fact, the STZ planned in Islamabad comprises 150 acres of prime land in Shahzad Town and the lease of that land held by the National Institute of Health has expired.

The choice of building the first STZ in Islamabad instead of any other megacity such as Karachi is questionable as Islamabad already has two IT parks – the Evacuee Trust Complex Software Technology Park and KSL Software Technology Park in I-9.

So, the demand for premium space for IT firms in Islamabad may be far-fetched, especially given the huge investment required for land development.

But when it comes to taxes, the government has taken many good steps in this regard.

Zone enterprises will enjoy a tax holiday for 10 years with exemption from income tax, sales tax, customs duty and property tax, and will be governed by a relaxed foreign exchange regime.

Though that means lost revenues in the shape of income tax and customs duty on the import of machinery, the STZs can act as a “miracle pill” for attracting foreign investment from big companies such as Microsoft and Google as there is no shortage of good local talent up for hiring – with around 18 IT universities in Islamabad alone.

A better legal environment and an efficient regulatory system inside the zones is the key, and the STZ authority should try to establish field offices of the Securities and Exchange Commission of Pakistan (SECP), Federal Board of Revenue (FBR), Customs and Capital Development Authority (CDA) as well as sub-campuses of top three IT universities of Pakistan inside the zone.

In the absence of such enabling factors and a concrete policy blueprint, the STZs will become another realty project and a tax haven for real estate developers in the long run.

However, if the will of the government is there to ensure more liberal laws in the zone, then the emerging ecosystem will leverage Pakistan’s unique position to make it a regional IT hub.

The writer is a Cambridge graduate and is working as a strategy consultant

Published in The Express Tribune, October 4th, 2021.

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