The government has recently approved an action plan to move Pakistan’s special economic and technology zones away from a traditional real-estate model and towards production, exports and investment.
The direction is sensible. Pakistan has 44 notified special economic zones, but only 23 are operational. The question is no longer whether more zones should be announced. It is: why has the existing model generated such limited industrial momentum?
Even ‘operational’ can conceal more than it reveals. A recent Board of Investment assessment found that, among approximately 1,242 surveyed allottees across 19 zones, only about 338 were producing and 255 were under construction. A zone may therefore be functional while much of its land generates no output, employment or exports.
One possible explanation emerges from Pakistan’s manufacturing record. Between 2011–12 and 2025–26, large-scale manufacturing grew by an average of only around 2.8 per cent annually. Its performance was highly volatile, including contractions of 11.2 per cent in 2019–20, 9.9 per cent in 2022–23 and 0.7 per cent in 2024–25.
Small-scale manufacturing, by contrast, averaged just over 8.0 per cent annual growth and remained positive every year. It is not synonymous with the entire SME sector, but the contrast raises an important question: why has dispersed small-scale manufacturing remained resilient while the larger, formal activity that zones seek to attract has struggled?
Part of the answer may lie in flexibility. Smaller firms enter and expand gradually, locating near customers, suppliers, workers and commercial networks. Many operate in existing clusters, industrial estates, workshops and mixed commercial areas.
Large manufacturers make heavier, less reversible investments. They require demand, long-term finance, reliable utilities, imported machinery, technical workers and regulatory certainty. When the wider environment is weak, notifying a zone cannot transform the investment proposition.
Most operating costs remain similar inside and outside an SEZ. Electricity tariffs, interest rates, exchange-rate risks, imported-input costs and regulation do not disappear at the boundary. Subsidised land and fiscal benefits cannot compensate indefinitely for an uncompetitive business environment.
The economic case for zones must therefore rest on agglomeration benefits. A successful zone should bring related manufacturers, suppliers, logistics providers, testing facilities, training institutions and business services together. Firms should benefit from shared infrastructure, specialised labour, shorter supply chains, common facilities, knowledge spillovers and lower transaction costs.
Too often, however, zones are approached primarily as land-development projects. A location is identified, plots are designed and infrastructure is promised, on the assumption that industry will follow. Manufacturers choose locations according to commercial viability, not administrative notification.
This matters when zones are established in secondary cities. Regional development is legitimate, but subsidised land alone cannot create investor demand. A location distant from ports, markets, supply chains and skilled workers needs a compelling sectoral advantage.
Sectoral demand should therefore determine zone location. Agro-processing zones should follow agricultural output, storage and cold-chain networks. Mineral-processing zones require access to raw materials, power and transport. Technology zones need universities, skilled workers, connectivity and urban amenities. General-purpose zones without anchor sectors risk becoming infrastructure projects in search of investors.
Even plot utilisation and production are not sufficient measures of success. A more fundamental issue is additionality. A firm may move an existing factory or planned investment to an SEZ to obtain subsidised land or fiscal benefits. The zone may then report another enterprise, additional investment and employment even though the country has gained little new economic activity. Production has changed location, not necessarily increased.
Relocation is not inherently undesirable: a well-designed cluster may raise productivity, improve compliance, strengthen supply-chain linkages or enable expansion. But these gains must be demonstrated. Transferring existing machinery, workers and output should not be counted like new capital formation.
The performance framework should distinguish relocated from net additional activity. It should ask whether the investment would have proceeded without the incentive; whether production and exports increased; and whether new workers and suppliers benefited. Otherwise, public incentives may merely move firms between locations at public expense.
This issue has become more urgent as the incentive regime changes. Under the IMF-supported programme, Pakistan has committed to phasing out existing fiscal incentives for SEZs and export processing zones by June 2035, subject to pre-existing legal and contractual obligations. The Finance Act 2025 has introduced a sunset clause for the income-tax exemption available to SEZ enterprises: it will expire by tax year 2035 or after ten years from the commencement of commercial operations, whichever comes earlier. A similar limit applies to special technology zones.
This does not mean economic zones will end in 2035. It means their rationale will increasingly have to rest on productivity rather than preferential tax treatment. During the transition, incentives should reward incremental investment, output, exports, employment, skills and technology – not the mere presence of a firm within a notified boundary. Zones must simultaneously develop the non-tax advantages needed to remain competitive after tax holidays expire.
The institutional architecture is already extensive. The Board of Investment coordinates approvals and federal-provincial matters, while FBR, Customs, the State Bank, utility agencies and SIFC shape the investor experience. Provincial bodies manage proposals, land, infrastructure and facilitation.
The problem is fragmented accountability. A developer may construct internal roads but wait for another agency to provide external access. A province may provide land but depend on a utility for connections. A zone authority may approve an enterprise but remain unable to resolve customs, taxation, environmental or foreign-exchange problems. Every institution may perform its formal function while the investor experiences the chain as a slow, uncertain process.
There is also a compliance paradox. A manufacturer inside a zone is visible and easily reached by tax, labour, social-security, environmental, utility and local-government authorities. A partly informal competitor outside it may be harder to inspect or tax. What should be a concentration of facilitation can become a concentration of compliance.
This is an argument not for exemptions, but for equal and predictable enforcement. Formalisation becomes a competitive disadvantage when it increases exposure to the state without improving services.
A genuine one-window system must cover the enterprise’s full life cycle. Firms should have one digital profile recognised across agencies; inspections should be risk-based; and complaints should have enforceable resolution timelines.
Land policy must also discourage speculation. Plots should be allotted against credible investment and production plans, with clear milestones and meaningful non-utilisation charges. Obligations must run both ways: investors should not be penalised when production is delayed because the state has failed to provide promised roads, utilities or drainage.
At the same time, industrial land is a costly input, and Pakistan should learn from the instruments used by competitors to reduce its upfront burden. Bangladesh’s export-processing-zone model offers serviced plots on renewable 30-year leases and standard factory buildings on shorter rental arrangements. Indian states have also used long-term leasehold allotments, while some industrial policies permit leasehold land to be mortgaged for project finance and waive or reimburse duties associated with leases and mortgage deeds.
The precise instrument should reflect Pakistan’s legal and financial context, but outright subsidised sale is not the only model. Renewable leases, rental factories, deferred or instalment-based payments, and bankable mortgage or charge arrangements can lower entry costs while preserving public control and discouraging speculative holding.
The approved action plan identifies the right destination: from real estate to industry. But land is only one input into production. Affordable industrial land can remove an important constraint; it cannot substitute for reliable energy, competitive finance, market access, skilled labour, regulatory certainty and effective logistics. Industrial investment emerges from a longer pipeline – from demand and financing to approvals, utilities, construction, production and access to markets.
Pakistan should therefore treat serviced industrial land as last-mile infrastructure rather than the starting and finishing point of industrial policy. The objective is not simply to make plots cheaper or fill them faster, but to connect commercially viable firms to functioning infrastructure and clusters when they are ready to invest.
Competitor-country land models show how to reduce the cost of this input without turning zones into real-estate schemes. The larger task remains to make the entire investment pipeline competitive. Only then will zones translate land into sustained production, exports and employment.
The writer is a research fellow at the Sustainable Development Policy Institute (SDPI),Islamabad.
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