The current government’s experiment to attract FDI specifically in technology sectors (with an eye on boosting export competitiveness) received a boost last week when the National-Assembly-approved the Special Technology Zones Authority (STZA) Bill (2021) was also passed by the Senate. This development should help the investment promotion efforts of the STZA team, which has been making preparations to set up their first special technology zone (STZ) in Islamabad.
For background, STZA provides technology firms with a number of incentives, including tax exemptions on income, profits, capital gains, and dividends; zero taxes on property; tax exemption on custom duties and sales tax relating to capital goods import; and tax exemption on dividend income received by venture capital funds. These benefits apply to both zone developers as well as zone entities. After Islamabad Technopolis, other STZs are also planned to be set up across Pakistan.
It was important to protect those concessions via an Act of Parliament so this initiative could outlast political transitions and short-term-ism. It remains to be seen how effective those incentives will be in pulling global tech majors, or their suppliers, to Pakistan. Such concessions can highlight investment opportunities, but a sound business case for an investor depends on non-fiscal factors, too, such as regulatory ease, sectoral preference, skills availability, and legal recourse when things go wrong.
In that regard, firstly, it will be interesting to see how STZA is able to operationalize the one-window facilitation it has promised to investors. Turning STZs into an investor-friendly island-of-excellence will remain contingent on how much support the Authority is able to count on from ministries, sector regulators, the taxman, among others. Empowerment is critical for STZA’s existence, for if investors have to knock on other doors for permits, approvals or licenses, it will dilute the whole charm.
Secondly, STZA will have to be smart about their priority areas of technology investment and to ensure that only high-quality and tech-oriented investors set up shop in the zones. Hoping for Pakistan to venture into exports of high-end tech hardware and AI/block-chain services is all good, but the ground reality is that the country’s comparative advantage lies in IT BPO business, and this needs to be reasonably exploited first. Conditions will develop later on to move up the technology ladder. This is not to discourage interest in exploring high-end tech avenues, maybe STZA will surprise!
Thirdly, the priority sectors need to link up with IT-based human resource availability in the country. There is already a shortage of skilled technology workers in Pakistan, with software exporters complaining about overall quality of IT graduates as well. Foreign tech investors won’t wait for five years for a 100,000-strong talent pool to come online. Relevant stakeholders must urgently work to scale up supply of IT workers in the short-term via focused, skills-based and export-oriented trainings.
Lastly, foreign players need to be reassured about investment/tax-related dispute resolution mechanisms, considering recent litigations in both telecom and non-telecom sectors. Big tech firms have also recently voiced their grave concerns over government’s demands under social media regulations (one doesn't have to agree with them, but it is what it is). For comfort of local and foreign investors, the government may need to work on some acceptable, globally-aligned alternative dispute resolution framework. Having just started, the STZA certainly needs those kinds of support to fly!