RECONSTRUCTION OPPORTUNITY ZONE PREP - GAINING SOME TRACTION?

UNCLAS SECTION 01 OF 03 ISLAMABAD 001917



SENSITIVE

SIPDIS



E.O. 12958: N/A

TAGS: ECON, EAID, ETRD, PGOV, PREL, PK

SUBJ: RECONSTRUCTION OPPORTUNITY ZONE PREP - GAINING SOME TRACTION?



1. (SBU) Summary: The GOP has begun to take some nascent steps at

the federal and provincial level to prepare for the creation of

Reconstruction Opportunity Zones, even though the U.S. Congress has

yet to pass the ROZ legislation. The Ministry of Commerce continues

its role as champion of GOP efforts in identifying ROZ sites,

ensuring proper ROZ regulation, and informing potential investors.

However, many Pakistani businesses complain that the ROZ financial

incentives will not match the increased labor, security,

infrastructure, and transport costs of doing business in the

designated areas of NWFP, Balochistan and Azad Jammu Kashmir. USAID

will provide technical support to the federal and provincial

authorities to put the proper regulatory structures in place for

ROZs and can also weigh in to some extent to address physical

infrastructure needs. Ultimately the ROZs' success will depend on

whether the ROZ "package" - to include both U.S. and domestic GOP

incentives - is sufficient and timely enough to overcome the

challenges and woo domestic and international investors. End

Summary.



Marrying Action to Talk?

--------------



2. (SBU) After much talk about GOP plans to prepare for ROZs both at

the federal and provincial levels, signs that concrete action is at

last getting under way are beginning to emerge. Secretary Commerce

Suleiman Ghani told Econ Counselor and visiting Senior Economist

(Pakistan) on August 3 that the GOP is moving forward with planning

and that he had, on the margins of introducing the 2009-2012 Trade

Policy on August 2 (septel) and since the two are closely linked,

taken the opportunity to brief the Prime Minister on Commerce

actions and plans for ROZs:



-- Commerce has initiated a dialogue with provincial governments in

Balochistan, NWFP and Azad Jammu Kashmir to finalize a list of

possible sites, institutional requirements and to develop an

incentive package.



-- A campaign to inform potential investors has been launched.



-- A total of $37.5 million for ROZs has been allocated from the

Public Sector Development Program.



-- A study has been initiated to identify possible changes required

in the regulatory framework.



-- A joint study group has been established with the United States

to discuss and finalize (among other issues) details of setting up

the ROZs; to develop a roadmap for a Free Trade Agreement; and to

discuss the possibility of earlier, additional market access.



3. (SBU) In his presentation to the Prime Minister, Ghani also

highlighted what he called necessary institutional arrangements, the

first of which was the formation of a body to coordinate all

activity on ROZs at the federal level and attached to the Ministry

of Commerce. Commerce prefers that this be a statutory body set up

under a specific legal authority. Commerce also foresees

establishing a project implementation unit to develop the concept,

institutional framework and other essential underlying tasks.

According to the Commerce model, the provinces would be empowered to

establish and operate ROZs; provinces would also take the lead in

certifying compliance. The Federal Board of Revenue (FBR) will also

establish units inside each individual ROZ.



4. (SBU) In a recent meeting with Peshawar PolOff and USAID,

Additional Secretary Commerce (and USAID POC at the Commerce

Ministry) Qamar Zaman and Joint Secretary Najeeb Awan said that an

inter-provincial meeting would be held "soon" to designate the areas

where ROZs would be built. Zaman also indicated that Commerce was

in contract talks with a legal consultant to help with ROZ

preparations. Awan subsequently confirmed that the GOP was

considering the main industrial estates in the areas designated thus

far for ROZs, adding that Hattar, Gadoon, Risalpur (export

processing zone),Peshawar and Jalozai were the prime areas of focus

in NWFP, as were Chaman and Quetta in Balochistan. On August 3,

Ghani indicated that the GOP intends to have seven (unnamed) ROZs

operational within the next three years, beginning with at least one

in each of the targeted geographical areas.



Provincial-Level Action Too

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5. (SBU) At the provincial level there is also some modest progress.

Staff from the USAID-funded FATA Capacity Building Project (CBP),

assisting provincial efforts to prepare for ROZs, report that the

governor and chief minister of the NWFP created a provincial level

committee led by the NWFP Ministry of Industry to spearhead efforts.





6. (SBU) In another positive development, at the behest of Shakeel

Qadir, the former chief economist of the NWFP and current Director

General of Provincial Reconstruction Rehabilitation Settlement

Authority (PaRRSA) and Provincial Disaster Management Authority

(PDMA),FATA-CBP has engaged a labor consultant to assist NWFP

officials to meet the labor requirements likely to be embedded in

the final ROZ legislation. The consultant has held one stakeholder

meeting thus far, and is planning to examine existing laws with a

particular eye toward identifying the prerogatives of the federal

government in relation to the provincial authorities. The resulting

recommendations will facilitate federal government and provincial

government coordination in monitoring labor compliance specifically

related to ROZs.



7. (SBU) Finally, an "ROZ cell" is being created in the Sarhad

Chamber of Commerce in Peshawar to coordinate with the NWFP

provincial government on ROZ implementation. Funding for the cell

was recently included in the NWFP budget. According to FATA-CBP

staff, the ROZ cell is hiring a director and two managers. The cell

will focus on investment promotion as well as regulatory matters.



But Concerns Remain

--------------



8. (SBU) Post hears consistently concerns from Pakistani businesses

that financial incentives are insufficient for them to establish

production centers in the areas designated for ROZs. Industrialists

from the Sarhad Chamber of Commerce have practically made it their

mantra that the increased cost of production in the NWFP (where

workers will have to be trained or imported from other parts of the

country initially and infrastructure is currently quite limited),as

well as increased costs for security and transporting goods to ports

for export will outweigh any incentive the GOP or the USG can

provide - barring significant expansion of the textile categories.

If the number of letters received at Post is any guide, Pakistani

business is focusing its efforts on enacting changes to the U.S.

legislation rather than lobbying the Pakistani government to augment

its own incentives.



9. (SBU) In an August 6 meeting with Treasury Attach and Consulate

General Econ Officer, S. Ali Raza, President of National Bank of

Pakistan, stated his customers were expressing concern about setting

up business in the ROZs due to security conditions and access to

trade. More troubling, Raza also admitted he had instructed his

loan officers to steer clients away from the ROZs because the

security and financial risks were too great.



10. (SBU) Ghani acknowledged that the GOP must take concrete steps

to make ROZs attractive to business, particularly as he said he

agreed privately that the product mix being offered is not optimal.

Among other ideas, Commerce is advocating establishment of a

dedicated infrastructure and energy development fund; improving

transportation corridor efficiency; building institutional capacity

at Customs and the Ministry of Labor, and for security; developing a

special incentive package; establishing dedicated manpower

development institutions; establishing "social infrastructure" to

address the housing health and educational needs in ROZ areas.

Although he admitted to being "a little behind schedule," Ghani said

that the GOP was aiming to have an in-depth study of ROZs submitted

by 15 September and to have a plan for the institutional set-up

sometime in October. An assessment of infrastructure and other

requirements is due by the end of the year and work is to begin on

at least one ROZ per area/province by March 2010.

11. (SBU) Comment: Ghani, the engine behind the GOP ROZ effort, was

both pragmatic and explicit in his comment that the GOP is

determined to "make a go" of the ROZs even if changes in product or

geographic coverage are not forthcoming. While Ghani states that

the GOP is not waiting for U.S. legislation to be passed in its

preparations for ROZs, signs point otherwise. Despite rosy

presentations at the federal level, action is harder to find. For

instance, at the federal level no date has been set for the

interprovincial meeting and in the NWFP, the provincial level



ISLAMABAD 00001917 003 OF 003





committee led by the NWFP Ministry of Industry has only met once

since its creation three months ago. However, the GOP is eager to

work with the United States on ROZs; Commerce officials are looking

forward to convening soon the Joint Study Group to which both sides

committed at the TIFA talks in April, although Ghani offered no

specific dates.



12. (SBU) Comment cont'd: The progress at the national and

provincial levels is modest and reflects the slow pace of action to

date. The years of waiting for ROZ legislation to pass Congress has

affected our ability negatively to push for urgent GOP actions.

Fortunately, the arrival on the scene of USAID's "Empower Pakistan:

Trade" program brings to bear a greater array of technical

assistance, to augment that already being provided by the FATA-CBP

program at the provincial level: ROZ implementation is one of the

new program's highest priorities. With that additional leverage,

Post will be able to support more closely and encourage GOP efforts

that, despite these steps, remain for the most part very

preliminary. Unless the GOP picks up the pace, ROZ implementation,

if finally approved in Congress, will be slowed while the GOP plays

catch-up to meet ROZ requirements.



PATTERSON