TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Special Economic Zones and Industrial Parks in South Asia: An Assessment of Their Regulatory Structures Rami Galal © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Washington, DC: World Bank. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Diego Catto / www.diegocatto.com >>> Contents Abstract 4 Acknowledgments 5 1. Introduction 6 2. The Proliferation and Diversity of Economic Zones in South Asia 8 3. Good Practices for Zone Programs 14 4. Incentives, Requirements, and Regulatory 18 Structures of Zone Programs in South Asia 5. Conclusion and Recommendations 26 References 28 >>> Abstract This paper reviews the policies and regulations for special economic zones and other spatial development modalities in the countries within proxim- ity of the Eastern Corridor in South Asia, and it assesses whether those policies and regulations are effectively designed. The assessment finds mixed results. On the positive side, governments in these countries exhib- it a strong political commitment to the zones’ success, providing them with dedicated policies of both fiscal incentives and regulatory concessions, combined with administrative simplification to help zone developers and tenant enterprises. However, these arrangements include some notable shortfalls. For example, some incentives are inconsistent with the zone objectives, violate some international regulations, or miss necessary busi- ness facilitation measures. Moreover, there is no mechanism to evaluate the effectiveness and cost-efficiency of different incentives. Zone tenancy requirements are not always well specified, feasible, or consistent with zone objectives. As for the regulatory and institutional structures of zone programs, there are some common shortfalls, especially in terms of (a) clarity of zone objectives, (b) the roles of different agents, (c) the auton- omy and inclusivity of those agents, and (d) the agents’ authority to carry out their responsibilities, and there are some shortfalls in the resources that agents need to manage operations effectively. To maximize the ben- efits from these zones, governments of the region could adopt reforms to ensure that incentives and tenancy requirements are aligned with zone objectives and that regulatory frameworks are clear, fair, and effective. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 >>> Acknowledgments The author, Rami Galal (rgalal@worldbank.org), is an economist in the World Bank’s Finance, Competitiveness and Innovation Global Practice. The paper is part of a larger project, “Logistical and Spatial Solutions for Inclusive Economic Corridors.” The author would like to thank Michael Engman for his guidance and multiple rounds of thoughtful comments, and the following people for their helpful comments and suggestions: Gabi Afram, Jose Ceron, Andres Garcia, Hemang Jani, Esperanza La- sagabaster, Peter Mousley, and Siddharth Sharma, as well as peer re- viewers Thomas Farole, Martin Norman, and Michael Wong. All remaining errors and omissions are the author’s. The views expressed in this paper do not necessarily represent the views of the World Bank Group, its affili- ated organizations, the executive directors of the World Bank Group, or the governments they represent. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 1. >>> Introduction This paper reviews the policies and regulations for special economic zones (SEZs) and other spatial development modalities in the countries within proximity of the Eastern Corridor in South Asia, and it assesses whether those policies and regulations are effectively designed.1 It is part of an ongoing program at the World Bank that looks at the determinants of performance of SEZs in four countries in the South Asia region (SAR). The scope of analysis in this paper spans federal policies and regulations governing zones across Bangladesh, Bhutan, India, and Nepal (BBIN), as well as a number of Indian states. The paper is operationally focused and strives to support policy makers in the region in their efforts to enhance their effective implementation of spatial development policies in the BBIN region. There is no consensus on a definition for spe- cial economic zones, and no attempt is made here to resolve this debate. Instead, SEZs are tak- en as those special arrangements that display any of the structural features identified by Farole (2011): a regulatory regime distinct from that of the rest of the country; a dedicated governance structure charged with management of the zone regime; and a physical infrastructure composed of industrial or mixed-use activity parks that supports the activities of economic agents in them. Zones have proliferated in the BBIN region, and this trend is poised to continue. Starting with a single export processing zone (EPZ) in Gujarat in 1965, India has developed more than 3,350 zones, according to the Ministry of Commerce and Industry. The government of Bangladesh has announced plans to establish 100 SEZs by 2025, and the government of Bhutan has said that it will establish several industrial parks. Nepal currently has 10 operational industrial districts, but the passage of new SEZ legislation in 2016 signals more to come. The expansion of SEZs reflects the belief that they can play an important developmental role. This connection is evident in the objectives stated in the SEZ acts themselves, which identify such goals as (a) attracting foreign direct investment (FDI), (b) increasing exports, (c) enhancing productivity, (d) spurring industrialization, (e) expanding employment, and (f) supporting spatial development, among others. The economic rationale for economic zones rests mainly on two arguments. The first argument is that they can enhance productivity by providing returns to scale from the availability of shared infrastructure and through agglomeration effects such as knowl- edge spillovers. The second argument—a “second-best” argument—reflects situations in which the growth of industries is hindered by institutional limitations and other market failures that can- not be readily corrected at the national level because of fiscal or political constraints but can be overcome within specific geographical areas (Duranton and Venables 2018). 1 Throughout this paper, the terms special economic zone and zone are used as generic umbrella terms to cover all zone types. When referring to a specific zone type, such as an industrial district or EPZ, we refer to them by that particular term. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 Success of zone programs requires that the programs meet in terms of (a) clarity of zone objectives, (b) the roles of differ- multiple conditions covering geography, the business environ- ent agents, (c) the autonomy and inclusivity of those agents, ment, and policy design. This requirement results in a weak- and (d) their authority to carry out their responsibilities, and est-link problem, in which programs can fail if they are miss- there are some shortfalls in the resources that agents need to ing key elements of the package. Although there is no single manage their operations effectively. blueprint to guarantee the success of zones, international ex- perience points to a set of good practices. Broadly speaking, To maximize the benefits from these zones, governments of the determinants of zone performance have to do with zone the region could adopt reforms to ensure that incentives and characteristics, which relate to factors such as the size, indus- tenancy requirements are aligned with zone objectives and trial focus, and location of the zone; contextual characteristics, that regulatory frameworks are clear, fair, and effective. To which are factors that are exogenous to the zone itself, such this end, the most significant steps include the introduction of as the institutional setup in the country; and program charac- a rigorous monitoring and evaluation system to keep incen- teristics, which refer to the rules governing the development, tives and requirements that are most effective and to rework operation, and regulation of zones. The focus of this paper is or eliminate those that are not. Ensuring clarity of zone rules on program characteristics. and responsibilities and coordination among relevant actors is also essential, especially when multiple agencies at both The assessment of the policy and regulatory frameworks in state and federal levels are involved. Increasing the role of the Bangladesh, Bhutan, India, and Nepal points to mixed results. private sector in the development and operation of zones is On the positive side, governments in these countries exhibit necessary to encourage further investment and raise produc- a strong political commitment to the success of these zones, tivity. Ensuring that the regulators are independent and have providing them with dedicated policies of both fiscal incen- the capacity to fulfill their responsibilities is another area that tives and regulatory concessions, combined with administra- deserves consideration. In addition to bringing zones closer tive simplification to help zone developers and tenant enter- to achieving their objectives, the combined effect of these re- prises. However, these arrangements include some notable forms would reduce mission creep and help avoid white el- shortfalls. For example, some incentives are inconsistent with ephants and politically motivated zones. the zone objectives, violate some international regulations, or miss necessary business facilitation measures. Moreover, The rest of the paper is organized as follows. First, it pro- there is no mechanism to evaluate the effectiveness and cost- vides an overview of the evolution of zone programs across efficiency of different incentives. Zone tenancy requirements the BBIN region. Next, it presents a framework for evaluating are not always well specified, feasible, or consistent with zone zone program design. After that, it discusses the incentives, objectives. As for the regulatory and institutional structures of requirements, and regulatory structures of zone programs in zone programs, there are some common shortfalls, especially the BBIN region. Last, it offers policy recommendations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 2. >>> The Proliferation and Diversity of Economic Zones in South Asia Economic zones are everywhere in South Asia, but some countries have a longer history with them than others (see figure 1). This section provides an overview of the evolution of economic zones across India, Bangladesh, Bhutan, and Nepal (see summary highlights in figure 2). In 1965, India became the first country in the region to set up an EPZ to promote exports from spatially confined areas that had a liberalized policy environment in the midst of a more closed economy. Firms operating in EPZs received fiscal incentives such as tax exemptions and sub- sidized credit from federal and state financial agencies. Initially, there was no formal EPZ policy, and the main driving force was earning foreign currency. EPZs were managed primarily by the Foreign Trade Policy of the Ministry of Commerce and Industry, which set overall policies in five-year cycles, complemented by evolving instructions by other ministries and government agencies. The authority over economic zones fell foremost under the commerce secretary, but the establishment of units was decided by a board of approval, an interministerial body, while the actual management of zones was carried out by a development commissioner (DC). Over time, the landscape of economic zones became more diverse. In 1981, the government of India initiated the Export Oriented Units (EOU) scheme, which provided tax exemptions to enter- prises that exported a minimum threshold of output. Amendments to the Foreign Trade Policy in 1994 allowed EPZs to be set up by state governments, autonomous agencies, and the private sector. These arrangements were further amended in 2000, expanding the economic and social mandates of EPZs and allowing the provision of infrastructure and services to the zones beyond regulatory incentives. The SEZ Act of 2005 expanded the objectives of the zones to include in- dustrialization and development more broadly. Individual states have followed suit and adopted SEZ acts and policies. Bangladesh too has a long history with various types of economic zones. The Bangladesh Small and Cottage Industries Corporation (BSCIC) was established in 1957 as a statutory body oper- ating under the Ministry of Industries. As part of its establishment act, BSCIC was to “maintain common facility centres to afford common facilities to small industries” and “prepare schemes to set up . . . industrial units in fields of high priority.”2 This program remains in operation today, overseeing as many as 74 operational industrial estates in 2018. Firms within the estates benefit from plot allocations at subsidized rates, initial tax exemptions, infrastructure facilities, and other forms of support. 2 Bangladesh Small and Cottage Industries Corporate Act, chapter 24, §2e–f (1957). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 In Bangladesh, attention also shifted toward export promo- eight export-processing zones. Investors receive a range of tion, and the government—which was under military rule at fiscal incentives such as tax exemptions, customs-free im- the time—passed the Bangladesh Export Processing Zones ports, and exemptions on dividends. The act also provided Authority Act of 1980. The act led to the establishment of the nonfiscal incentives, such as allowing full foreign ownership semiautonomous Bangladesh Export Processing Zones Au- and full repatriation of capital and dividends, and a host of ser- thority (BEPZA). Under the successive chairmanship of mili- vices aimed at helping investors navigate the sluggish busi- tary officers as a legacy to its roots, BEPZA owns and oper- ness environment (World Bank 2018). ates EPZs and leases serviced land to industrial tenants in > > > F I G U R E 1 . - Timeline of select federal economic zone policy milestones Bhutan: SEZ policy Nepal: SEZ regulations Nepal: SEZ act 2015 Bangladesh: BEZA, BHTPA act India: Federal SEZ rules India: Draft 2005 India: Federal SEZ act Nepal: Begins SEZ act formulating circulated SEZ policy India: SEZ policy India: EPZs can be set 1995 up by state government, autonomous agencies, India: STPs and and private sector EHTPs established 1985 India: EOUs Bangladesh: BEPZA established 1975 India: First 1965 EPZ established Source: World Bank Staff. Note: BEPZA = Bangladesh Export Processing Zones Authority; BEZA = Bangladesh Economic Zones Authority; BHTPA = Bangladesh Hi-Tech Park Authority; EPZ = export processing zone; EHTP = Electronics hardware technology park; EOU = Export Oriented Unit; EPZ = export processing zone; SEZ = special eco- nomic zone; STP = Software technology park. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 The most recent shift in Bangladesh came with the passage inaugurated (WTO 2019; World Bank 2018). Although BEZA of the Bangladesh Economic Zones Authority (BEZA) Act may prove to be short of inaugurating all planned EZs by the and the Bangladesh Hi-Tech Park Authority (BHTPA) Act in target date, it has amassed the largest public land bank in 2010. Under these new acts, the addition of new zones under the country, allocated land to domestic and foreign investors, BEPZA was disallowed as the objective of zone policy moved and received investment proposals worth nearly US$20 billion beyond export promotion to play a greater role in the national by 2020. It has established partnerships with foreign govern- industrialization agenda producing goods for both domestic ments as well as international conglomerates such as the one and foreign markets. Unlike EPZs that are publicly owned and with Sumitomo Corporation and the China Harbor Engineering operated by BEPZA, BEZA and BHTPA were intended to rely Company. The other EPZ, BHTPA, was established to support primarily on private capital and expertise to build and operate the strategy of the government of Bangladesh to reach US$5 new zones. The government of Bangladesh announced plans billion in ICT exports by 2021. It issues licenses to high-tech to establish 100 economic zones (EZs) by 2025, to increase parks that support both manufacturing and services compa- export earnings by US$40 billion, and to create 10 million nies. The BHTPA offers training programs and incentives for jobs by 2025. As of October 2018, the government had ap- technical quality certification and is aimed at supporting an proved 89 EZs—56 public and 23 private—of which 10 were entrepreneurial tech ecosystem. > > > F I G U R E 2 . - Summary highlights of zone programs across the BBIN region Afghanistan China Nepal Pakistan Bhutan Bangladesh India India: Bangladesh: Nepal: Bhutan: • Initiated spatial • Established BSCIC • Maintains 10 • Nascent zones development programs in 1957 industrial districts, program, with with EPZs in 1965 • Passed the BEZA and some started in the two currently • Currently maintains BHTPA acts in 2010 1960s in operation federal and multiple • Ambitious zone • SEZ Act finalized state-level SEZ Acts and expansion plans in 2016 other zone programs • Plans for expansion • Different zones types Source: World Bank staff. Note: BBIN = Bangladesh, Bhutan, India, and Nepal; BEZA = Bangladesh Economic Zones Authority; BHTPA = Bangladesh Hi-Tech Park Authority; BSCIC = Bangladesh Small and Cottage Industries Corporation; EPZ = export processing zone; SEZ = special economic zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 The government of Nepal also has a long history with indus- across the country, only the Bhairahawa SEZ is operational, trial districts. As of January 2020, Nepal had 10 industrial and it remains largely vacant. districts in operation across the country. Some of these, like the Balaju, Hetauda, and Patan industrial districts, have been In contrast, Bhutan’s engagement with economic zones is at in operation since the 1960s. These districts are tasked with a nascent stage. To boost industry and export competitive- providing the industrial sector with access to land and infra- ness, the government of Bhutan is constructing four industrial structure to support development in lagging regions. Industrial parks set to be completed in 2021: Jigmeling Industrial Park Districts Management Limited (IDM), which began operation in Sarpang, Dhamdum Industrial Park in Samtse, Motanga In- in 1988, manages industrial districts. dustrial Park in Samdrupjongkhar, and Bondeyma Industrial Park in Mongar. The parks are intended to support a range Nepal also more recently adopted a formal SEZ policy frame- of development objectives, such as spurring industrialization, work and has one operational SEZ. Having begun the process increasing exports, expanding employment, and attracting of formulating a SEZ policy in 2004 under the Ministry of In- FDI. These new parks will complement two existing industrial dustry, Commerce and Supplies, the government institutional- estates: Pasakha Industrial Estate near Phuentsholing in the ized SEZs by establishing the SEZ Formation Order (2012) south and Bjemina on the outskirts of Thimphu. and forming an SEZ Development Committee to conduct fea- sibility studies for SEZs across the country. Parliament passed A common trend across these countries is that economic the Special Economic Zones Act of 2016 (Act No. 9 of the Year zones have evolved from a focus on enhancing exports and 2073), followed by the Special Economic Zones Regulations attracting FDI to broader developmental mandates. The objec- of 2017 to make the act fully operational and later the Special tives of federal and state SEZ acts and policies across South Economic Zone Act (First Amendment) 2075 Bill in 2019. Al- Asia are presented in tables 1 and 2, respectively. though the government has plans to establish several SEZs > > > T A B L E 1 . - Objectives of economic zone acts and policies across South Asia Country Act or Policy Objective “An act to make provisions for the establishment of economic zones in all potential areas The Economic Zones Act, 2010; including backward and underdeveloped regions and development, operation, management and Act No. 42 of 2010, preamble control thereof including the matters ancillary thereto with a view to encouraging rapid economic development through increase and diversification of industry, employment, production and export.” The Bangladesh Hi-Tech Park “An act to make provisions for the establishment of hi-tech parks in different places within the country Authority Act, 2010; Act No. 8 of for setting up and development of hi-tech industries in Bangladesh and for the establishment of the 2010, preamble Bangladesh Hi-Tech Park Authority for proper management, creation and development thereof.” Bangladesh “The objects of the Authority shall be: (a) To foster and generate economic development of Bangladesh by encouraging and promoting foreign investments in a Zone; (b) to diversify the sources The Bangladesh Export of foreign exchange earnings by increasing export of Bangladesh through a Zone; (c) to encourage Processing Zones Authority Act, and foster the establishment and development of industries and commercial enterprises in a zone 1980; Act No. XXXVI of 1980, in order to widen and strengthen the economic base of Bangladesh; (d) to generate productive §3, 4A employment opportunity and to upgrade labour and management skills through acquisition of advanced technology.” The Industrial Infrastructure Development Division under the “. . . to promote balanced regional development and enhance growth of country’s economy. The Department of Industry, Ministry Bhutan industrial parks are developed to have clustering industries to promote private sector development of Economic Affairs, 2018; 20/ and enhance socio-economic activity.” MoEA/DoI/IIDD/2017-18/1147, Annexure I “(a) generation of additional economic activity; (b) promotion of exports of goods and services; The Special Economic Zones Act, (c) promotion of investment from domestic and foreign sources; (d) creation of employment India 2005; No. 28 of 2005, § 5(1). opportunities; (e) development of infrastructure facilities; and (f) maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.” Special Economic Zone Act, 2073, “Whereas it is expedient to proceed with the industrialization process in the country through export Nepal 2016; Act No. 9 of the Year 2073, promotion and to provide impetus to economic development through the provision of establishment, preamble operation and management of Special Economic Zone” Source: World Bank staff. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 > > > T A B L E 2 . - State-level SEZ Act and policy objectives in India Country Act or Policy Objective “The SEZ scheme seeks to create a simple and transparent system and procedures for enhancing State government's policy productivity and the ease of doing business in Maharashtra. . . . Exploiting the full potential of the Maharashtra regarding setting up of SEZs, concept of SEZs would bring large dividends to Maharashtra in terms of economic and industrial 2001 development and the generation of new employment opportunities.” Department of Industries, “Jharkhand Government intends to exploit the SEZ concept for impacting the State’s socioeconomic Jharkhand Notification no. 2460, Ranchi, fabric through enhanced job opportunities and industrial development.” 02.08.2003 (Policy) The Indore Special Economic “The proposed legislation will attract investors by facilitating the development of world class Madhya Zone (Special Provisions) Act, infrastructure for making the products competitive in the international market and will also facilitate Pradesh 2003; Statement of object and investments reasons and creation of opportunities for employment for the people of the State” Policy regarding setting up of “The effort has been to create delineated duty-free enclaves with world-class infrastructure and fast Kerala Special Economic Zones in the track clearances to attract investments, including FDI, for servicing the global market.” State, 2003, preamble The West Bengal Special “. . . to accelerate economic reforms and to promote the rapid and orderly growth, development and West Bengal Economic Zone Act, 2003, operation of industries in such Special Economic Zone” preamble “In order to achieve rapid economic growth to attract investment and to Gujarat Act No.11 of 2004; ensure systematic and integrated development of the industry in the State, it is Gujarat Statement considered necessary to enact a law for the establishment of the Special Economic Zone in the State.” “(a) generation of additional economic activity; (b) promotion of exports of goods and services; (c) promotion of investment from domestic and foreign services; (d) creation of employment Tamil Nadu Act No. 18 of 2005, §3 opportunities; (e) development of infrastructure facilities; and (f) maintenance of sovereignty and integrity of India, the security of State and friendly relations with foreign State.” “Whereas it is considered necessary and expedient to promote the Industry in general, including the Chandigarh Administration; No. Knowledge Industry comprising IT, IT Enabled Service and Business Process Outsourcing (BPO) Chandigarh 27/IT/2005/2122 Companies in Chandigarh to generate employment, increase exports and boost the economy.” “. . . to accelerate and facilitate both public and private sector participation in an internationally The Haryana Special Economic competitive and hassle free environment for export promotion thereby securing large dividends in Haryana Zones Act, 2005 (Haryana) Act terms of economic and industrial development and to act as strong catalytic of regional development No. 9 of 2006), preamble in the State.” Uttar Uttar Pradesh SEZ Policy, 2007, “. . . in order to foster the industrial and economic development” Pradesh preamble “. . . to accelerate and facilitate both public and private sector participation in an internationally The Punjab Special Economic competitive and hassle free environment for export promotion thereby securing large dividends in Punjab Zones Act, 2009 (Punjab Act terms of economic and industrial development and to act as strong catalytic of regional development No.17 of 2009), preamble and for the matters connected therewith or incidental thereto.” “They [SEZs] are expected to promote establishment of large, self contained areas supported by world–class infrastructure oriented towards export production. Exploiting the full potential of State Policy for Special Economic Karnataka the concept of SEZs would bring large dividends to the State in terms of economic and industrial Zones – 2009, preamble development and the generation of new employment opportunities. The SEZs are expected to be engines of new economic growth.” Source: World Bank staff. Note: IT = information technology; SEZ = special economic zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 Because of the SEZs’ long history and expansion to accom- clusters, areas, and more, although these different labels do modate new objectives, their diversity has increased over not imply that each is governed by a different regulatory re- time, both in their sectoral focus and their formal classification. gime (figure 4). Different names and types of zones may in- In India, approximately half of economic zones span multiple deed reflect actual differences in their form or function, but industrial activities (figure 3). The largest of those with sec- differences also owe to varying terminology across countries, toral focuses are in engineering, textiles, and food processing. different translations from other languages, attempts by zone Economic zones are also classified under many different cat- promoters to differentiate their product from those of competi- egories, according to the Ministry of Commerce and Industry. tors, or a desire on the part of successive governments to dis- These include SEZs and industrial regions, parks, estates, tinguish their industrial policies from previous ones. > > > F I G U R E 3 . - Economic zones by industry, India 6% 3% 2% 2% Chemicals 1% Automobiles 4% Other 2% Textile 2% Software Pharmaceuticals Petroleum Mixed Food processing Engineering Electronics and hardware 24% 5% 49% > > > F I G U R E 4 . - Economic zones by classification, India 17% SEZ 2% 39% Industrial region 5% Industrial park 6% Industrial estate Industrial cluster Industrial area Other 28% 3% Source: Ministry of Commerce and Industry, government of India. Note: SEZ = special economic zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 3. >>> Good Practices for Zone Programs This section sets the stage for assessing the policy and regulatory environment facing SEZs in the BBIN region by reviewing good practices. Broadly speaking, the determinants of success- ful SEZs include zone characteristics, contextual characteristics, and program characteristics (World Bank 2017). For zones to be successful, each of these elements needs to be sound. The term zone characteristics refers solely to the structure and layout of the zone. These include fac- tors such as the maturity, size, operator, location, and industrial focus. For instance, the choice of location (whether the economic zone is situated near ports, consumer markets, and workers) plays an important role in its success. Contextual factors are exogenous to the setup of the zone itself, and they include factors such as the institutional quality in the country, rule of law, access to markets, the level of income, human capital, and population density. For instance, proximity to large markets can mean lower transport costs for goods. Human capital endowments, in terms of both abundance and skill level, can be an important factor for an investor depending on their production. Finally, program characteristics refer to the rules governing the development, op- eration, and regulation of the zone. These characteristics play an important role in a program’s success. Successful zone programs will need to perform well across all of these determinants; however, as noted in Farole and Kweka (2011, 1), “although multiple factors contribute to the failure of an SEZ program, in most cases, they can be traced back to the initial planning stages, and derive from an ineffective regulatory and institutional framework.” Program characteristics are the focus of this paper. The paper evaluates SEZ program design along three dimensions (see figure 4). The first has to do with the fiscal and nonfiscal incentives provided to investors in the SEZs. The second concerns the requirements that zone developers and tenants must meet to qualify for these incentives. The third is related to the institutional and regulatory frameworks that govern the de- velopment, operation, and regulation of economic zones. Although there is overlap across these dimensions, the distinctions are useful to make the analysis tractable. With respect to the incentives provided to zone developers and tenants, there is no single formula that is optimal, but incentives should be cost-effective and consistent with other legal obligations. On the fiscal side, these incentives may include relaxations from import duties on inputs; reduc- tions on different types of taxes such as income, value added tax (VAT), or corporate taxes; and subsidized utilities. Because these fiscal relaxations constitute a cost through forgone revenue, it is important to assess their effectiveness in achieving their intended objectives. Another con- sideration is that fiscal incentives should be consistent with international laws such as antidump- ing regulations. Nonfiscal incentives frequently include relaxations from labor protection laws, or EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 regulations related to land-use or construction. Evidence sug- compete on equal footing. Alternatively, if the zone is set up gests that tax incentives alone do not guarantee success of to increase exports, firms are often required to export a mini- the zone. Although it is difficult to assess the isolated effect of mum percentage of their output. There may also be minimum individual exemptions, Farole (2011) found that infrastructure requirements for investment or employment in order to qualify and trade facilitation had a significant positive effect on zone for incentives. One consideration regarding zone tenancy re- performance, compared with tax and other financial incen- quirements is that zones should not simply enable existing tives that were less important. Furthermore, the provision of firms to relocate to evade taxes but rather should stimulate physical infrastructure, utilities, and other incentives does not economic activity that would not otherwise have taken off. The guarantee their quality, affordability, or accessibility. It is also latter would support additional job creation rather than just dis- important that nonfiscal incentives such as relaxations of labor placement. Another consideration is that maintaining stringent protections do not undermine worker safety within zones. domestic content requirements for products made in SEZs may discourage investors. Instead, working to build up do- The requirements for tenant firms of SEZ programs vary from mestic capacity and encourage knowledge spillovers between one case to another, but they should be consistent with zone zone tenants and local firms outside the zone can be a way to policy objectives. Because many economic zone programs facilitate the ultimate objective of convergence between well- are geared toward attracting FDI, these requirements may performing zones and the rest of the country. (It should also stipulate a minimum foreign ownership for clients. In such cas- be noted that maintaining export requirements alongside input es, it is important to ensure that local and international firms subsidies can infringe upon international trade regulations.) > > > F I G U R E 5 . - Drivers of SEZ performance SEZ Program Institutional Incentives Requirements and regulatory framework Clarify of Autonomy Resources Investment Ownership Authority and Fiscal Nonfiscal roles and and and requirements requirements coordination responsabilities inclusivity caoacity Source: Adapted from World Bank 2017 and Farole and Kweka 2011. Note: SEZ = special economic zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 In terms of the institutional and administrative structure gov- Successful economic zones also tend to have autonomous erning the operation of economic zones, there is no one-size- regulators with inclusive representation on their executive fits-all approach. Rather there are a number of good practices board. Good practices tend to favor establishing the regula- that are associated with successful economic zones. The four tor as an autonomous agency with representation from both key principles identified by Farole and Kweka (2011) for an key public sector entities and the private sector and ensuring effective institutional framework are (a) clarity in roles and re- that it is not involved in the ownership, development, or opera- sponsibilities, (b) autonomy and inclusivity, (c) authority and tion of zones (Farole and Kweka 2011; OECD 2009; Cheng coordination, and (d) resources and capacity. 2019). If the regulator is embedded within a single ministry, in- volving other ministries and the private sector becomes more The operation of an economic zone involves the zone owner, difficult. Experience has also shown that conflicts of interest developer, operator, and regulator. In many instances—es- arise when the regulator is engaged in the zone development pecially among older economic zones—these roles were all process (Akinci and Crittle 2008). For instance, in Tanzania, played (at least in part) by the government, but this formula where the Export Processing Zones Authority both regulates is not without risks. For instance, when the same government all zones and is the developer of the Benjamin William Mkapa agency acts as the developer and regulator, private sector de- SEZ, it has been suggested that lease rates for industrial fa- velopers may perceive that they are at a disadvantage and cilities in the publicly run zone are below market rates (Farole consequently may be discouraged from investing. Moreover, and Kweka 2011). an opaque structure in the management of economic zones can deter the engagement of the private sector. Therefore, Another way to promote autonomy of the regulator is to have clarity of roles and responsibilities is a key factor for success- its board report directly to the highest authorities in the gov- ful economic zones. However, although several best practices ernment. For example, it might report directly to the president, guides have emphasized the advantages of private zone op- prime minister, or minister of finance. Such an arrangement erators (Watson 2001; OECD 2009), the results of other stud- would serve to bolster the authority of the regulator, but it may ies have found that this factor alone has not led to improved also carry risks. For instance, the central authority may cause performance (Farole and Kweka, 2011; Frick, Rodríguez- delays in decision-making if it is tending to other priorities of Pose, and Wong 2019). national interest, or it may engage in micromanaging the regu- lator, thus opening the door for political capture. Similarly, there is no one formula for demarcating SEZ respon- sibilities between federal and subnational authorities. Howev- Including the private sector in the zone development process er, coordination is important to ensure well-functioning SEZ is also critical for success. Owing to limited public resources, programs. Often, local authorities have greater knowledge of many countries have relied on the private sector to provide local conditions with regard to infrastructure, land and capital the needed financing and expertise. Engaging the private endowments, and region-specific investment obstacles and sector at this stage is also important to ensure that investors’ investment needs. They may also have greater authority to voices are heard. Private sector members on zone develop- provide incentives, enforce requirements, support firms, and ment boards should not be hand-selected by a government ensure that the benefits of zone programs extend beyond their chairperson; boards should also include representatives from walls. Central governments can play an important role in coor- zone operators. dinating zone programs, especially to mitigate the risk of splin- tering institutional and regulatory regimes under devolution. For the SEZ regulator to deliver effectively on its mandate, Different countries have gone about the division of labor dif- it must have the legal authority and coordinative capacity to ferently. In the case of Indonesia, zone councils bring together monitor and enforce laws and standards and to act as a “one- central and regional authorities to support the national council stop shop” facilitator of investment. It must have domain over in administering and overseeing SEZs. In Mexico, the federal customs; land use and zoning; taxation; business registration SEZ law stipulates that once a zone is established, federal, and licensing; immigration; and environmental, labor, and so- state, and municipal governments must enter into a coordi- cial compliance. One of the principal reasons behind the es- nation agreement to clarify responsibilities of different actors, tablishment of economic zones is an otherwise cumbersome harmonize financial arrangements, ensure smooth provision business environment. Providing the regulator with the power of incentives, and facilitate administrative procedures (UNC- to make and enforce rules is thus key for its success. In con- TAD 2019, 172). texts with devolution to local authorities, the regulator should EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 be empowered over not only federal laws but also state laws. could discourage investors. To monitor and evaluate zone per- Given the large array of responsibilities that would fall under formance, zone authorities also require a high degree of ca- the regulator, it may be necessary to build up the capacity of pacity to compile statistics on outcomes. Moreover, capacity the regulator gradually and focus on coordination among ex- to develop zone master plans and assess those developed by isting ministries in the meantime. the private sector requires technical expertise. The regulator must be empowered in terms of both resources Finally, there is no question that investors’ confidence hinges and capacity to carry out its functions. One way to ensure it is on a credible long-term commitment to economic zones by the more financially independent is to link its budget to revenues government. Support from high-ranking authorities and a ca- earned through the zones. This would incentivize zone au- pable and empowered zone regulator serve as strong signals thorities not to compete on tax holidays. However, authorities to the private sector of such a commitment. This, along with should not be expected to be fully financially self-sufficient be- responsiveness to tenant firms’ concerns, gives confidence to cause that might encourage excessive charging of fees, which investors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 4. >>> Incentives, Requirements, and Regulatory Structures of Zone Programs in South Asia This section assesses the policy frameworks and regulatory frameworks of the SEZ programs in Bangladesh, Bhutan, India, and Nepal against good practices outlined in the previous section. More concretely, it reviews the incentives provided to firms in SEZs, the requirements for firms to enjoy those incentives, and the regulatory framework governing zone administration. Regarding the regulatory framework, the section looks at the clarity of objectives of the zones along with the roles assigned to different actors, the extent of the autonomy enjoyed by the operators, the au- thority operators have, and the adequacy of resources and capacity to enable operators to carry out their responsibilities. The bottom line is that although many features of good practices have been adopted in the design and operation of SEZ programs in South Asia, significant shortfalls remain. Addressing those shortfalls is necessary if these economic zone programs are to more effectively fulfill their objectives. Before delving into the assessment of the policy and regulatory framework governing SEZs in South Asia, it is worth recalling that SEZs were adopted there, as elsewhere, to escape the regulatory and bureaucratic obstacles that the private sector faces nationwide. Such constraints in the business environment are indeed prevalent in our group of countries, as shown in figure 5, which is based on the World Bank’s Doing Business surveys. The results indicate that Ban- gladesh is the lowest performer of the group, ranking at 176 out of 190 countries. Nepal and Bhutan perform relatively better, while India is the best performer, having improved its ranking significantly in recent years. It remains true, though, that our sample of countries continues to lag aspirational comparators that also have active SEZ programs, such as China, Thailand, and Vietnam. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 > > > F I G U R E 6 . - Doing Business rankings, 2019 Bangladesh Nepal Bhutan India Vietnam China Thailand 0 20 40 27 46 60 80 69 77 Rank 81 100 120 110 140 160 180 176 Source: World Bank Doing Business surveys. Note: Rank out of 190. The incentives embodied in SEZ acts in the region are abun- entry for imports and exporters file shipping bills (Aggarwal dant, in the form of both fiscal incentives and regulatory con- 2012, chapter 4). These bills are processed without physical cessions. A summary of the incentives offered across SEZ examination by customs. The SEZ also provides a host of tax acts in India, Bangladesh, and Nepal is provided in table 3. concessions to units, including full income tax exemption for Taking India as an example, the SEZ Act provides fiscal in- the first five years of operation, 50 percent exemption for the centives to zone developers and entrepreneurs operating in next five years, and 50 percent of the ploughed-back export zones. Those individuals are exempted from customs tariffs on profits for the following five years. SEZ developers also re- goods imported and exported to the SEZ by the Customs Act, ceive full income tax exemption for 10 years, with additional 1962 and the Customs Tariff Act, 1975 (chapter VI, §26.1a–g). exemptions for offshore banking units within SEZs. Units and The trading activities of SEZ units are done on the basis of developers are also exempt from most indirect taxes, central “self-certification,” where units inside the SEZ submit bills of sales tax, service tax, and VAT, and from all state sales taxes. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 > > > T A B L E 3 . - Summary of incentives in India, Bangladesh, and Nepal based on federal SEZ acts Bangladesh Incentives for developers: • Income tax exemption for 12 years: first 10 years 100%, 11th year 70%, 12th year 30% • Exemption from customs duty on imports for zone development; stamp duty and registration fees for land registration for the first time; registration fees of loan or credit document; tax on dividend income for 10 years Incentives for units: • One-stop services • Tax incentives: tax holiday for 10 years; duty-free import of raw materials; exemption from dividend tax, stamp duty and registration fees, and VAT on all utility services; duty exemption on export; exemption of customs duty for import of vehicles; exemption of double taxation subject to double taxation agreement; exemption of salary income from income tax for expatriates; tax exemption on capital gains from transfer of shares • Other: full repatriation of capital and dividend; no cap on FDI; 100% backward linkage of raw materials and accessories to sell for export oriented indus- tries in DTA; 20% sale of finished product to DTA by an Export Processing Area; subcontracting with DTA allowed; foreign loan allowed in compliance with existing laws; foreign currency account for nonresidents; foreign currency account for both local and joint venture industry; foreign investors free to enter into joint venture; provision of transfer of shares by foreign shareholders to local shareholders and investors; issuance of work permits to foreigners allowed up to 5% of total officers and employees of an industrial unit • Reinvestment of remittable dividend to be treated as new foreign investment; resident visa for investment of US$75,000 or more; citizenship for invest- ment of US$500,000 or more India Incentives for developers: • Exemption from customs/excise duties for development of SEZs • Income tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under section 80-IAB of the Income Tax Act (sunset clause for developers took effect April 4, 2017) • Other tax exemptions: central sales tax; service tax (section 7, 26, and second schedule of the SEZ Act); supplies to SEZ are zero-rated under IGST Act, 2017 Incentives for units: • Single-window clearance for central and state-level approvals • Duty-free import and domestic procurement of goods for development, operation, and maintenance of SEZ units • 100% income tax exemption on export income for SEZ units under section 10AA of the Income Tax Act for first five years, 50% for next five years, and 50% of the ploughed-back export profit for the next five years • Exemption from central sales tax, service tax, and state sales tax (these have now been subsumed into GST, and supplies to SEZs are zero-rated under IGST Act, 2017) and other levies as imposed by the respective state governments • Supplies to SEZs are zero-rated under IGST Act, 2017. • No routine examination by customs authorities of export/import cargo and full freedom for subcontracting Nepal • One-window service • Income tax concessions (industries situated in designated mountain districts receive 100 percent tax exemption for the first 10 years of operation, followed by 50 percent thereafter; industries in other areas receive the 100 percent income tax exemption for 5 years, followed by 50 percent thereafter; 100 per- cent dividend tax exemption for 5 years, followed by 50 percent exemption for 3 years; foreign investors entitled to 50 percent tax concession on income generated from service fees or royalties via transfer and or management of foreign technology to firms in SEZs) • VAT exemptions (100 percent exemption on exported goods and services; 100 percent exemption on raw materials sold to firms within SEZs) • Industries having rented land or building inside SEZ are entitled to concessions in the rent or lease amount (first year, 50%; second year, 40%; third year, 25%) • Customs duties concessions (firms exporting or selling domestically in convertible foreign currencies can import raw materials against the bank guarantee equivalent to import-related customs duties and other fees on such raw materials; firms can import capital inputs against a bank guarantee equivalent to import-related customs duties and other fees on such materials, which will be released after confirmation of input installation; firms can import one pas- senger vehicle and two cargo vehicles for 1% customs duties) • Income repatriation (foreign investors can repatriate foreign currency earnings from partial or total shares held in firms; foreigners can repatriate dividends generated from investments) Source: World Bank staff. Note: DTA = Domestic tariff area; FDI = Foreign direct investment; GST = goods and services tax; IGST = Integrated goods and services tax; SEZ = special eco- nomic zone; VAT = value added tax. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 The incentives accorded in the SEZ legislation across Bangla- of the rest of the country to accord further guarantees against desh, India, and Nepal tend to be similar and generous by in- expropriation or nationalization. The SEZ laws in Bangladesh ternational standards. Table 4 provides a summary of the main and Nepal stipulate additional support in the process of land features of the incentives offered, along with a comparison acquisition compared with a quarter of SEZ laws globally. The to the share of SEZ laws globally that provide each incentive three countries also provide some means of trade facilitation type.3 As in almost 80 percent of SEZ laws globally, those in through simplification of import/export operations compared Bangladesh, India, and Nepal include fiscal incentives such with less than a fifth of SEZ laws globally. The operators of as tax breaks and provide a special customs regime with ei- SEZs in the three countries are also required to supply zones ther tariff reductions or expedited or simplified customs pro- with infrastructure such as electricity, fuel, water, and telecom- cessing. Each country’s legislation also provides investment munications services. In rare cases, SEZ laws also call for facilitation to help streamline business registration and other the provision of social amenities such as hospitals or schools. bureaucratic procedures compared with a global average of Among the SEZ laws covered in this analysis, only India’s SEZ one-third. Unlike about a quarter of SEZ laws globally, there Act makes a reference to the provision of social infrastructure. are no additional investment protections that go beyond those > > > T A B L E 4 . - Types of incentive instruments employed in SEZ legislation Share of SEZ laws globally Bangladesh India Nepal that include investment attraction instrument (%) Fiscal incentives 77 Special customs regime 74 Investment facilitation 32 Investment protection 26 Preferential land use 25 Trade facilitation 17 Infrastructure provision 17 Social amenities 3 Source: UNCTAD 2019 and SEZ legislation of Bangladesh, India, and Nepal. Note: The global sample of SEZ legislation covers 127 acts. SEZ = special economic zone. 3 See World Investment Report 2019: Special Economic Zones (UNCTAD 2019) for a full comparison of SEZ incentives globally. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 Notwithstanding the generous web of incentives provided in ors. The program has resulted in significantly improving the the SEZ acts in Bangladesh, India, and Nepal, these incen- working environment, dispute resolution, and environmental tives suffer from at least four shortcomings. First, although it is compliance in EPZs. difficult to discuss all these incentives in detail here, the most glaring shortcoming is that there is no monitoring and evalu- Fourth, the generous incentives provided in some types of ation mechanism to assess the incentives’ impact systemati- economic zones may not produce their full effect because cally to ensure their effectiveness and efficiency in achiev- they are not accompanied by necessary institutional sup- ing their objectives. This is a critical shortcoming because it port. For instance, tenants of the industrial districts under the means that (a) forgone revenues may be squandered, and (b) BSCIC in Bangladesh benefit from various incentives, includ- governments are deprived of an instrument correct for short- ing plot allocations at subsidized rates, initial tax exemptions, comings within zones, learn from experience, and potentially infrastructure facilities, and various other supports, but they implement successful policies beyond the zone’s borders. lack a one-stop shop for administrative procedures. In Bhutan, the government reportedly provides long-term leases on land Second, some of the incentives may be inconsistent with gov- for parks, basic infrastructure, and a range of fiscal incentives, ernments’ international commitments. A case in point is the fis- but no business facilitation services. cal incentives provided to firms through the SEZ Act in India, which prompted accusations of relying on prohibited export sub- In terms of requirements set out for firms to qualify for these sidies. Although the World Trade Organization’s (WTO) Agree- incentives, South Asian countries taken different approaches, ment on Subsidies and Countervailing Measures (SCM) does but in some cases requirements are inconsistent or vague. not directly refer to SEZs, the agreement prohibits the use of The case of Nepal is a positive one. The SEZ Act objectives export subsidies contingent on the use of domestic goods over are centered on export promotion, and firms in SEZs can sell imported goods (Article 3, Annex 1 SCM) (UNCTAD 2019). The their products domestically in the first year of operation, though rules allow for some exceptions in the context of SEZs (Cop- they do not receive tax exemptions. Beginning with the sec- pens 2013)—for instance, general infrastructure provided to all ond year of operation, firms must export at least 60 percent of firms is not deemed a subsidy, and relief on duties and taxes of goods or services produced within SEZs. On the other hand, exported goods is also permitted. The United States accused in India, units are required to achieve positive net foreign ex- India of employing prohibited export subsidies inconsistent with change, calculated cumulatively for a period of five years from the SCM Agreement, and the WTO’s Dispute Settlement Body the commencement of production (Special Economic Zones ruled in favor of the United States (dispute number DS541) in [Amendment] Rules, 2018), but they are also required to meet 2019. The government of India has challenged the ruling in the a value-addition requirement (Special Economic Zones [Sec- WTO’s appellate body but has also reportedly begun to prepare ond Amendment] Rules, March 2019). Targeting both value reforms to make SEZ provisions WTO compliant. addition and exports can be contradictory. Outside of the for- mal SEZ framework in Bangladesh, requirements for tenancy Third, reducing the regulatory requirements as an incentive in industrial districts are not fully specified, leaving room for for investors may also backfire, as happened in the case of discretion and inviting the perception of bias, which in turn can insufficient protections for laborers in Bangladesh’s EPZs. In deter firms and investors. 1989, the government of Bangladesh exempted EPZs from the Factories Act, the Industrial Dispute Act, and the Employ- Multiplicity of zone policy objectives makes consistency with ment of Labor Act, which represented major nonfiscal incen- tenancy requirements problematic. Governments in the BBIN tives for investors (Aggarwal 2005). A 2006 Labor Act did not region tend to define zone policy objectives in broad and mul- fall in line with international standards according to the Inter- tiple terms. For example, India’s 2005 SEZ Act expanded the national Labour Organization (ILO) and did not cover workers mandate of economic zones to cover the generation of eco- in EPZs. The EPZ Workers’ Association and Industrial Rela- nomic activity, investment, infrastructure, employment, and tions Act of 2009 did not provide workers the right to unionize. supporting Indian interests and external relations. In Bangla- Citing the adverse conditions faced by factory workers, the desh, BEZA has a mandate to support relatively underdevel- US suspended the Generalized System of Preferences (GSP) oped regions and to support overall development through di- trade benefits with Bangladesh. Since then, a new Labor Act versification of industry, greater employment, production, and of 2013 and the Bangladesh EPZ Labor Act of 2013 have im- export. Although broad objectives can allow flexibility in zone proved conditions, and in 2020 the government requested the focus over time, they do not easily translate into concrete and restoration of GSP. The World Bank Group has also supported measurable outcomes. In addition to causing ambiguity about BEPZA’s efforts to improve social and environmental condi- the core objective(s) of the zone, this broad definition of ob- tions through the hiring of social and environmental counsel- jectives makes the assessment of their effectiveness difficult, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 and the failure in achieving one objective can be attributed to In Nepal, as in Bangladesh with the BSCIC, industrial districts attempting to pursue others. fall under the management of one public entity, possibly re- sulting in similar shortcomings. The IDM is responsible for Turning to the institutional and regulatory framework govern- essentially all activities in the development, operation, and ing zones, there are a number of shortcomings. These relate regulation of industrial districts. It provides land, infrastructure, to the roles, authority, and responsibilities of different actors; utilities, and other services to industrial districts; carries out the inclusivity of the private sector; the autonomy of the regu- feasibility studies on establishing new industrial districts and lators; and the adequacy of resources and the capacity for projects within them; engages in the promotion of industrial regulators to fulfill their mandate. districts; evaluates policy impacts on industrial districts; pro- vides consulting services to enterprises; and encourages pri- The roles of the owner, developer, and operator are not always vate sector participation through either cooperative arrange- kept separate. This separation is particularly important when ment or full majority private sector ownership. the government is responsible for regulating and promoting all zones in a country and some zones are owned and developed The clarity of roles and responsibilities is also undercut when the by the private sector and others by the government. This situ- rules governing economic zones are subject to frequent changes. ation creates an actual or at least perceived conflict of interest. The example from India is most telling. India’s SEZ Act of 2005 In Bangladesh, the government’s role across these responsi- provided a new set of rules for the establishment, development, bilities is not yet settled. At the outset, BEZA and BHTPA were and management of economic zones. The act was complement- to rely on the private sector for the financing and management ed by a set of SEZ Rules from 2006, and by 2014, more than 80 of zones, with the government acting as the regulator and additional instructions had been issued (Mukherjee et al. 2016, facilitator. However, the majority of zones established have 56). The 2005 Federal SEZ Act encouraged states to pass their been publicly funded. The industrial districts under the BSCIC own SEZ legislation, and some have done so. Gujarat, Haryana, suffer from a range of challenges, according to a study by the Madhya Pradesh, Tamil Nadu, and Punjab have state-level SEZ Bangladesh Institute of Development Studies (Hossain et al. acts, whereas other states have put in place SEZ policies (table 2018). According to the study, (a) approximately a quarter of 5), though the objectives remain largely similar. West Bengal was plots are unused, (b) the choice of location of the district was among the first states to introduce an SEZ act; however, the state frequently politically motivated rather informed by feasibility cabinet repealed it in 2012 for political reasons and instead intro- studies, (c) poor maintenance of infrastructure within estates duced the Information and Communication Technology Incentive resulted from limited fiscal resources of the BSCIC, and (d) Scheme, 2012, providing a series of fiscal incentives and subsi- limited coordination among key agencies resulted in the ab- dies to investors. These amendments may have led to confusion sence of gas and electricity provision to districts. among state and federal authorities over respective responsibili- ties and may have made it difficult for investors to make invest- ment decisions and to plan ahead. > > > T A B L E 5 . - Indian state-level SEZ policies and acts 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Madhya Pradesh Policy Act West Bengal Act Repealed Gujarat Act Tamil Nadu Act Haryana Act Punjab Policy Act Maharashtra Policy Kerala Policy Jharkhand Policy Chandigarh Policy Uttar Pradesh Policy Karnataka Policy Source: World Bank staff. Note: SEZ = special economic zone. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 The regulatory regimes do not always provide a voice for the veloper has been granted approval (Chapter V, §14.1a-g). To private sector. In India, the structure is dominated by repre- set up a unit within the zone, prospective tenants must submit sentation from public sector entities. This structure has three a proposal to the concerned DC, who in turn submits it to the tiers. It is headed by the board of approval, which is a commit- AC. The third step in the hierarchy is the SEZ Authority, which tee composed of 19 members representing the federal gov- includes representatives who are from the private sector but ernment, a nominee from the state government, the director who are nominated by the government. The DC of each re- of foreign trade, a development commissioner (DC), and a spective zone serves as the chief executive of the concerned professor from the Indian Institute of Management (SEZ Act of SEZ Authority. The board of the authority is chaired by the 2005, Chapter III, §8.1). The board of approval is tasked with DC and includes federal government representatives; it also approving proposals for the establishment of SEZs, the provi- includes two entrepreneurs who are nominated by the cen- sion of infrastructure in zones, and the involvement of foreign tral government (Chapter VII, §31.5a-d). The SEZ Authority is collaborators, as well as evaluating appeals brought to the charged with the development, operation, and management zone developer by rejected tenants (Chapter III, §9.2a-i.) The of the respective SEZ. Its duties include the development of second step in the hierarchy is the approval committee, which infrastructure, the promotion of exports, the review of the func- similarly has limited engagement with the private sector. Its tioning and performance of the SEZ, and the levying of user or members include the DC as the chairperson, representatives service charges, fees, or rent for the use of properties belong- from the federal and state governments, and one representa- ing to the authority (Chapter VII, §34.2a-e). As a whole, there tive of the developer designated as a special invitee (Chapter is an acute absence of a direct voice for private investors and V, §13.2a-f). The approval committee is responsible for ap- companies involved in the zone program. A better example in proving the import or procurement of inputs from the Domestic this respect is the IDM in Nepal. It is governed by a board of di- Tariff Area; approving the provision of services within the SEZ; rectors that consists of appointees and representatives of the monitoring the use of goods, services, warehousing, or trading government representing the Ministries of Industry, Finance, within the SEZ; approving proposals for units; and monitoring and Energy, as well as a representative of the Nepal Industrial and supervising compliance of conditions under which the de- District’s Chambers of Commerce. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 The autonomy of the regulators and their ability to coordinate ogy-enabled services technology parks, including matching are often compromised, especially when they report to line capital investments and tax exemptions. Although the state’s ministries. In this regard, the experience of the BBIN region previous IT policy (2014–19) supports some coordination with is mixed. In Bangladesh, BEZA reports directly to the prime SEZs by noting it will facilitate IT parks obtaining SEZ status, minister’s office, whereas BHTPA reports to the Ministry of In- more recent versions do not. There are many more such ini- formation and Communication Technology. In Nepal, both the tiatives across different states, among them Sri City in Andhra SEZ Authority and the IDM fall under the Ministry of Industry. Pradesh, an integrated business city that includes an SEZ and Reporting directly to a high authority such as the prime minis- a domestic tariff zone, and the Dholera Special Investment ter can increase the chances of greater autonomy of the regu- Region in Gujarat, essentially an SEZ but constituted under lator and make it easier to coordinate across line ministries. Gujarat’s Special Investment Region Act of 2009. The variety of incentives makes it challenging for investors to know how to Similarly, the multiplicity of spatial development modalities make the most of available schemes. It also signals an area at the state level complicates coordination with the federal in which greater coordination between state and federal policy government. In India, even within the formal SEZ framework, makers can lead to more aligned incentives. the federal Department of Commerce does not have a formal mechanism for cooperation with state governments on land al- In terms of resources, SEZ Authorities in India and the IDM location, infrastructure provision outside the zones, or single- in Nepal are somewhat financially independent, but that inde- window clearance (Mukherjee et al. 2016, 222). In addition, pendence may lead to an excessive burden for investors. In there are many other zone programs that are initiated by state India, each SEZ Authority maintains its own fund. It receives governments, sometimes through state-owned industrial de- grants and loans from the central government and collects all velopment corporations with similar mandates as other SEZs, sums due from user or service charges, fees, or rent for the including attracting investment, generating revenue, and cre- use of properties belonging to the authority (Chapter VII, §35- ating employment. For instance, the Haryana State Industrial 36e). The fund is used for remuneration of authority employ- and Infrastructure Development Corporation Ltd. (HSIIDC) de- ees, repayment of loans, and other operating and administra- velops industrial townships, industrial estates, industrial clus- tive expenses of the authority. In Nepal, the IDM is reliant on ters, and theme parks. Such zones are governed by estate generating its own income. It does so through the rental of management procedures determined by the HSIIDC. Tenancy district land and buildings, revenue from the price differential requirements vary and some zones have a sectoral focus, but between concessionally received electricity from the Nepal zones frequently have minimum requirements for FDI, capital Electricity Authority, revenues from other utility provision such investment, or employment generation. Incentives provided to as water in some districts, entry fees from new tenants, and tenants vary by zone, but they range from basic infrastruc- agreement fees from renewing tenants. The entry fees are ture such as utilities and security to services such as banking, fixed per industrial district by the IDM, and renewal fees are logistics, and, in large zones, even housing and schooling. set at 60 percent of the initial fee. The IDM also receives gov- While not all HSIIDC zones provide fiscal incentives like ex- ernment financing through public expenditure in repairs and emptions from VAT or utility subsidies, some do. The informa- reconstruction of industrial infrastructure. The key is to strike tion technology (IT) policy for the state of Gujarat (2016–21) a balance between maintaining financial independence and provides incentives for developers of IT/information technol- keeping user charges affordable for tenants. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 5. >>> Conclusion and Recommendations In principle, the benefits from successful economic zones in South Asia can be wide ranging. Zones can support economic growth by attracting FDI, facilitate a transition to higher value- added production, and promote job creation. They can also foster greater economic inclusion. In developing countries, businesses tend to face a series of constraints, and typically, because of their size, small and medium enterprises (SMEs) are less well equipped to overcome them. Providing a friendlier business environment in zones to alleviate these constraints can make a big difference. Moreover, SMEs tend to have strong potential to provide jobs and are more likely to employ relatively vulnerable groups in society. Also, if zones are established in underserved regions, they may help mitigate inequality and balance regional development. Finally, experi- menting in the SEZs by adopting regulatory innovations and soft policies can enable govern- ments to find out what works best in a relatively low-cost way and to generalize the results for the entire country. To realize these potential benefits, policy frameworks and regulatory frameworks governing the zones ought to be well designed and executed. Drawing on good international practices, this section offers some specific recommendations regarding incentive packages, tenancy require- ments, and institutional setup. Incentive packages should strike a balance between attracting investors and furthering the de- velopment objectives of zone programs. Maintaining this balance requires ongoing evaluation of the trade-offs between the costs and benefits of incentive packages, ensuring the packages’ compliance with international laws, and monitoring the well-being of laborers. Such a mecha- nism is largely missing in South Asia. As a result, an opportunity is lost to have an avenue for testing new policies and possibly adopting them outside the zones. SEZ authorities should be empowered to provide one-stop-shop services for tenant firms. Such services are often a key determinant of the success of economic zones, as they help overcome an otherwise adverse business environment. In some cases, even though SEZ policy or legisla- tion stipulates that such services should be provided within zones, in practice they are absent. This disconnect should be resolved. The requirements for eligibility to operate within zones should be clear, transparent, and con- sistent with the objectives of the zone program. When the authorities have a large degree of discretion in accepting tenant applications, it can create uncertainty and discourage investors. It may also leave room for rent-seeking and inefficient allocation of plots. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 In order to clarify the roles of different agents in the zone gov- greater coordination at different levels of government. Better ernance framework, steps could be taken to avoid housing all coordination would help investors know how to make the best aspects of zone development, operation, and regulation under of different available schemes and would improve delivery of the same entity. Responsibilities can be distributed among a services to zone tenants. There should also be a uniform and variety of shareholders representing the government, zone meaningful classification of zones. owners, and an independent regulator. Although increasing the capacity of an independent regulator may take time, en- The institutional and regulatory structures can be made more suring coordination among existing institutions is important in inclusive by increasing the role of the private sector in the de- the interim period. In the longer term, agencies working on velopment and operation of zones. The private sector is of- facilitation may most effectively collaborate and coordinate ten absent from the development, ownership, and operation under a single umbrella to enhance bureaucratic expediency. of economic zones in South Asian countries. In cases where However, these functions should remain separate from those private sector representatives serve on boards of zone author- of the regulatory body. ities, those individuals are typically handpicked by the gov- ernment. This practice discourages new investment and may It is also critical that the rules governing zone development also result in unrealized potential where input from the private and operation at the state and federal levels be clarified to sector would support the efficiency and productivity of zones. ensure their effectiveness. In India, frequent amendments to SEZ policy cause confusion for both administrators and inves- Given the extensive and diverse experiences that countries tors, as does the web of different zone programs at the federal in the BBIN region have with economic zones, there is poten- and state levels. The diverse and broad zone objectives also tial for regional collaboration. At a minimum, countries in the make the role of evaluation more difficult. Clarifying roles and region can learn from each other’s experiences. There may establishing more concrete zone policy objectives would en- also be room for regional development zones or cross-border hance zone effectiveness. Moreover, the wide range of spatial zones spanning two or more countries that foster greater re- development policies at the state and federal levels requires gional economic cooperation. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 >>> References Aggarwal, Aradhna. 2005. “Performance of Export Processing Zones: A Comparative Analysis of India, Sri Lanka and Bangladesh.” Working paper 155, Indian Council for Research on Inter- national Economic Relations, New Delhi. Aggarwal, Aradhna. 2012. Social and Economic Impact of SEZs in India. New Delhi: Oxford University Press. Akinci, Gokhan, and James Crittle. 2008. Special Economic Zones: Performance, Lessons Learned, and Implication for Zone Development. Washington, DC: World Bank. Duranton, Gilles, and Anthony J. Venables. 2018. “Place-Based Policies for Development.” Pol- icy Research Working Paper WPS 8410, World Bank, Washington, DC. Cheng, Teresa. 2019. Special Economic Zones: “A Catalyst for International Trade and In- vestment in Unsettling Times?.” The Journal of World Investment & Trade, 20(1), 32–67. doi:10.1163/22119000-12340122 Coppens, Dominic. 2013. “How Special Is the Special and Differential Treatment under the SCM Agreement? A Legal and Normative Analysis of WTO Subsidy Disciplines on Developing Coun- tries.” World Trade Review 12 (1): 79–109. Farole, Thomas. 2011. Special Economic Zones in Africa: Comparing Performance and Learn- ing from Global Experiences. Washington, DC: World Bank. Farole, Thomas, and Kweka, Josaphat. 2011. “Institutional Best Practices for Special Economic Zones: An Application to Tanzania.” Africa Trade Policy Note 25, World Bank, Washington, DC. Frick, Susanne A., Andrés Rodríguez-Pose, and Michael D. Wong. 2019. “Toward Economically Dynamic Special Economic Zones in Emerging Countries.” Economic Geography (95) 1: 30–64. doi:10.1080/00130095.2018.1467732. Hossain, Monzur, Harunur Rashid Bhuyan, Iqbal Hossain, and Marjan Hossain. 2018. An Evalu- ation of BSCIC Industrial Estates. Dhaka, Bangladesh: Bangladesh Institute of Development Studies. Mukherjee, Arpita, Parthapratim Pal, Saubhik Deb, Subhobrota Ray, and Tanu M. Goyal. 2016. Special Economic Zones in India: Status, Issues and Potential. New Delhi: Springer. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 OECD (Organisation for Economic Co-operation and Development). 2009. “Towards Best Prac- tice Guidelines for the Development of Economic Zones.” OECD. https://www.oecd.org/mena/ competitiveness/44866585.pdf. UNCTAD (United Nations Conference on Trade and Development). 2019. World Investment Report 2019: Special Economic Zones. Geneva: UNCTAD. Watson, Peter L. 2001. “Export Processing Zones: Has Africa Missed the Boat? Not Yet!” Africa Region Working Paper Series no. 17, World Bank, Washington, DC. World Bank. 2017. Special Economic Zones: An Operational Review of Their Impacts. World Bank, Washington, DC. World Bank. 2018. “Bangladesh Policy Notes: The Rise of Special Economic Zones in Bangla- desh.” Bangladesh Policy Notes, World Bank, Washington, DC. WTO (World Trade Organization). 2019. Trade Policy Review: Report by Bangladesh. WT/ TPR/G/385. Geneva: WTO. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29