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The Way Forward
EPZ magnetism -- a search for best practice
AMM Shawkat Ali
Investment in export processing zones (EPZs) is a worldwide phenomenon. There is strong evidence to show that there has been remarkable growth in the number of EPZ, also called special economic zones (SEZs). During the seventies, only 30 countries had such zones. In recent times, the number has swelled to more than 120 countries. The total number of EPZs variously called free zones used to be only 80 during the 70's. The figure now stands at more than 2,000. A key feature of the rising trend in the number of EPZs is the privately-owned and managed zones. The number of such zones worldwide is more than 1,200.
In the 70's, the total value of exports from the zones stood at US$ 6 billion. Today, it is said to be more than US$ 600 billion. During the 70's again, the zones created direct jobs to the tune of one million. Now, an international labour organization (ILO, 2003) report affirms that the number of direct jobs created stands at about 50 million, of which China alone accounts for more than 30 million.
The rationale
The rationale behind this process is that by encouraging private sector-led zones, the public sector is relieved from the burden of lumpy investment programme. The resources thus saved can fruitfully be utilised for other purposes such as for the benefit of the poor and the disadvantaged. The steady rise in the number of private zones tends to suggest that private development and management of zones, including on-site infrastructure is to be favoured as part of the policy package for an export-led growth strategy. The government's role should be limited to that of a facilitator and enforcement of the regulatory framework.Apart from the issue of savings associated with the question of encouraging private sector-led growth and management, there are other arguments. These include: (a) achieving allocative efficiency and (b) decongesting the government of additional responsibilities of management and administration in an area in which there is little or no experience with the government system.
In the public sector, allocative efficiency is more likely to be hampered by political considerations that may adversely impact on commercial viability. In the areas for management and administration, besides lack of experience in the related field, these may be hampered by lack of flexibility in operation and in decision-making.
Regional experience
Following export-import (EXIM) policy (1997-2002), India has four existing EPZs as SEZs effective from November 1, 2000. The policy allows public, private, joint sector or the states to set up SEZs. The minimum size of SEZs cannot be less than 1,000 hectares. This measure is intended to provide self-contained areas supported by world-class infrastructure for export production.In India, a SEZ area is considered essentially as a foreign territory for the purposes of trade operations, duties and tariffs. Under this system goods supplied to SEZ from domestic tariff area (DTA) are treated as exports and goods brought from SEZ to DTA are treated as imported goods. The SEZ scheme places full trust on the units. Import and export operations of the units in the zones are on the basis of self-certification. The units are governed by simplified customs and central excise procedures.
Bangladesh situation
Bangladesh started with EPZ in the public sector during the eighties. It was in 1980 that steps were taken to attract foreign direct investment. To this end, Foreign Private Investment (Promotion and Protection) Act, 1980 was put in place. During the same year, an act titled Bangladesh Export Processing Zone Authority (BEPZA) was finalised but it was officially notified on April 14, 1981. The act does not provide for privately-owned and managed zones.Pursuant to the act, the government had established six EPZs between 1980 and till date. One more is said to be in the offing. Available information indicate that (a) all but two public zones are in locations picked for political reasons with poor transport links and infrastructure, (b) the zones have poor cost recovery by world and regional standards, and (c) low share of total work force at 0.002 percent against Asian standards of 2.4 percent and world level of 1.9 percent. A separate law was enacted in 1996 for establishing zones by the private sector. The law is titled 'The Bangladesh Private Export Processing Zones Act, 1996”.
Why two separate laws?
The need for two separate laws, one for a public sector-led and managed and the other for private sector-led and managed zone is not clearly understood. It is felt that a single and integrated law could have better served the purpose. This view draws its strength from a reading of the two acts. There appears to be a curious merger and consequent confusion between the objectives and functions as laid down in the two sets of laws. Thus the objectives of BEPZA have been repeated word for word in the functions or responsibilities of the law relating to the privately-owned and managed zones.Large measure of executive discretion
The large measure of executive discretion is built into the law relating to the setting up and operation of a private EPZ. This is reflected by the same authority given to the Board for private EPZ and the executive cell headed by a director general (DG). The law lays down that “subject to the provision of the Act”, the sponsor company must 'do such acts or things as may be directed by the Board or the Executive Cell'. Why this double control mechanism is necessary or even desirable remains incomprehensible. There are two built-in checks. First, the sponsor company is given a permission letter, which is in the nature of a notice to proceed with proposed investment in private EPZ. Second, a license is to be granted later after the conditions set out in the permission letter are fulfilled.Cancellation of permission letter or licence
The above view is premised on the ground that there is a specific provision that authorises the licensing authority (the Board of Governor) to cancel permission letter or license in the event of violation of (a) any provision of the act, (b) the terms and conditions of the license or permission and (c) order and instructions given by any authority exercising the power under the act.
It is the last mentioned element that tends to expand the areas of executive discretion. In this case also legally valid authority is merged as well as confused with executive order and instructions. This smacks of anti-private sector policy sanctioned by law that impedes furthering the overriding objective of private sector investment for EPZ.
Need to pull up the socksPolitical centralisation of private sector development of EPZ vately-owned and managed EPZ has led to further political centralization in decision-making and policy development process. There is a separate Board of Governors for private EPZ with the head of government as chairperson supported by as many as seven ministers and an equal number of secretaries. There is only one representation from the private sector in the person of the president, federation of Bangladesh chamber of commerce and industries (FBCCI). The executive chairman of BEPZA is represented in the board but none from the sponsor company. There is, however, provision to co-opt other members but this requires approval of the prime minister.
India presents a contrasting situation in this regard. All approvals for SEZs are given by the Unit Approval Committee headed by the development commissioner who is an appointed official.
There is a single transparent policy-framework for SEZ units and SEZ developers. The policy is outlined in chapter 7 of EXIM Policy and further elaborated in the handbook of procedures. All relevant notifications and information are available at website. Nothing of the sort is available in Bangladesh for privately-owned and managed EPZ.
Potential for private EPZ in Bangladesh
Pending a more detailed investigation into the ways the public sector-led EPZ causes a strain on the scarce resources of developing countries, an attempt is made to highlight this aspect in respect of Bangladesh. The strain on limited resources of the government arises from a variety of factors. First, the government's policy, as stated in the relevant project document, is to set up EPZ in least developed areas. Little or no consideration is given to the feasibility of such ventures. In this process initiatives were approved to set up EPZs at Comilla, Mongla, Ishurdi and Nilphamari. The work on Comilla EPZ is said to have been completed and others are under implementation. No feasibility study for Ishurdi was undertaken. In case of Nilphamari EPZ, officially known as Uttara, a small feasibility was made. No feasibility was done in case of Karnaphuli EPZ (KEPZ) proposed to be constructed in the Chittagong Steel Mills (CSM) site. Yet, the total cost of the project is about Tk. 340 million or US$ 5.5 million. Similarly, no feasibility study was done in case of Comilla EPZ. The cost of the project is Tk. 835.6 million or US$ 13.7 million.The cost will be more if the concessions allowed are taken into account. Total land area of 222.42 acres owned by CSM will be handed over to KEPZ in two phases at a nominal token price. The total investment cost will be an interest free loan with a repayment period of 20 years and a moratorium of 10 years. Recurring operating annual expenditure is estimated to be Tk.26.46 million or US$ 0.43 million.
A Bengali daily (Janakantha, June 6, 2005) carried a news titled “Mongla EPZ is now without any industrial unit. Two functioning units have also been closed”. If this is true, it reflects the dangers associated with public sector-led EPZs most of which have not been subjected to rigorous appraisal prior to their establishment.
The potential for private sector-led EPZ can be best assessed by means of a case study. The case of Korean Export Processing Zone is enumerated below.
Korean EPZ corporation (Bangladesh) limited
The government issued a permission letter on August 3, 1995 to set up EPZ to Youngone Corporation of Korea. Following this, a new company called Korea EPZ Corporation (Bangladesh) Ltd. (KEPZCL) was established in May, 1996.After completion of necessary administrative formalities, a total land area of 2,526.19 acres or 1,022 hectares was acquired. The formal gazette notification in this regard was issued on October 7, 1999.
About a year later, the Executive Cell of private EPZ set the following preconditions for issue of license to KEPZCL.
a. The sponsor must have at least 100 acres of land under their ownership.
b. For infrastructural development of the land, the sponsor must have a minimum assets worth Tk. 500 million including a liquid cash of Tk. 50 million.
c. With the application a site clearance certificate from the Department of Environment will have to be submitted.KEPZCL is said to have complied with all the above requirements by June 2000 and licence for establishment of the zone is yet to be issued.
The fate of KEPZCL hangs in the balance
It has been said that KEPZCL has met all the conditions and requirements of the grant of a license. However, the license is yet to be issued. The lost opportunities and potential for incremental addition to the volume of export were highlighted in some of the daily newspapers. One of the English dailies carried a detailed account of the opportunities lost in this process. The title of the news item was “Biggest EPZ in limbo” and the subtitle was “Denied license for 3 years for no express reason” (The Daily Star, February 19, 2005).In January 2002, the Board of Governors of EPZ formed a Minister level committee to look into the issue of grant of license to KEPZCL. The substantive question of whether the large area of land already determined and acquired at the cost paid by KEPZCL was necessary. KEPZCL contended that (a) 60 percent of the total area consisted of hills and ditches and only 40 percent could be used for industrial purposes, (b) KEPZCL layout plan was much broader in scope than any of the other EPZ and (c) the government did not put any ceiling on land area for an EPZ.
Despite such explanations, the inaction relating to the grant of licenses continued thereby creating uncertainties about investment by the private sector. Few more official level committees followed. The last of such committee was led by the Principal Secretary to the Prime Minister. This committee, formed in November 2003 was reported to have recommended that there was no need to amend the existing law and further that license could be issued without any additional condition “in the interest of national image and foreign investment”.
It is not known what the recommendations of the Minister level committee are. Similarly, it is also not known why the government is dragging its feet to grant the license to KEPZCL. This complete lack of transparency in decision-making has led to different types of speculations articulated by the media that seem to tarnish the image and authority of the governments of different periods.
There is also an element of discriminatory treatment that license for a local private sector EPZ at Rangunia was officially notified effective from December 3, 2000. The name of the company is Chittagong Industrial Park Ltd. Not much information is available for the private EPZ at Rangunia. As earlier mentioned, KEPZCL fulfilled all the conditions required in June 2000. Yet, its fate for grant of license still remains uncertain.
Constraining factors for SEZs/EPZs in private sector
Based on the foregoing evaluative account, it is possible to identify some of the key factors that constrain the development of SEZ/EPZ in the private sector.First, other than the relevant laws, there is no published policy available to the investors. Second, even the public pronouncement of policies articulated by government leaders appear to change when it comes to implementation. Lack of continuity of substantive elements of policy is a matter of concern. Third, although some of the existing laws relating to FDI are attractive in paper, the ground realities are different. The striking element is the absence of a level-playing field between public and private sectors. Fourth, frequent changes in rules/acts is a discouraging factor for the investors. Fifth, the cost of doing business erodes the competitiveness of investors. Sixth, overcentralization of authority in granting permission and licenses remains a serious impediment for investment. Seventh, even when the rules are explicit, interpretations by officials adversely affect the entrepreneurs.
The way forward
The way forward involves the following actions:
- A clear and transparent policy-framework based on best practice model and ensuing continuity of policy;
- Revamping the existing laws/rules and regulations to conform to the policy framework;
- Decentralisation of authority for grant of permission/licenses for EPZ;
- Levelling the playing field between public and private EPZs based on a single set of law, rules and regulations;
- Levelling the playing field between public and private EPZs based on a single set of law, rules and regulations;
- Reducing the cost of doing business to enhance global competitiveness; and
- Enhancing the volume and quality of services from public and private utilities.
Finally, it is sometimes said, and not without justification, that even when policies are right, the process of implementation lags behind. The case of development of private EPZ appears to substantiate this contention.
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The author, a former Agriculture Secretary to the government, is a development specialist and columnist.
