45191 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Bangladesh Development Series Paper No: 16 The World Bank Office, Dhaka May 2007 www.worldbank.org.bd/bds The World Bank IFC BICF is managed and executed by the IFC and funded by  the U.K. Department for International Development and the European Commission. The World Bank World Bank Office Dhaka The World Bank Plot- E-32, Agargaon, 1818 H Street, N.W. Sher-e-Bangla Nagar, Washington DC 20433, USA Dhaka-1207, Bangladesh Tel: 1-202-473-1000 Tel: 880-2-8159001-28 Fax: 1-207-477-6391 Fax: 880-2-8159029-30 www.worldbank.org www.worldbank.org.bd IFC Bangladesh Investment Climate Fund United House 10 Gulshan Avenue Gulshan-1, Dhaka-1212, Bangladesh Tel: 880-2-8833752-66 Fax: 880-2-8833495 www.ifc.org This report was completed and originally published in June 2006 by FIAS, a multi-donor service of the World Bank Group, and IFC’s SouthAsia Enterprise Development Facility (SEDF) under a joint venture program in Bangladesh 2005-2006. This program led to the establishment of the IFC Bangladesh Investment Climate Fund (IFC BICF). The report is now reprinted with support of IFC BIFC in partnership with the World Bank as part of the World Bank’s Bangladesh Development Series. 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Illustration Credits: Front cover (from left): Courtesy of PR Section, BEPZA, Andrew Biraj, Mustafizul Hye Shakir Back cover (from left): Mustafizul Hye Shakir, Courtesy of PR Section, BEPZA CURRENCY EQUIVALENTS US $1.00 = Tk 68.98 (Bangladesh Taka, May 2007) GOVERNMENT'S FISCAL YEAR July 1 – June 30 ABBREVIATIONS AND ACRONYMS AFL-CIO American Federation of Labor and Congress of Industrial Organizations API Active Pharmaceutical Ingredient BDT Bangladesh Taka BEPZA Bangladesh Export Processing Zones Authority BICF Bangladesh Investment Climate Fund BOI Board of Investment BOI Bangladesh Board of Investment BOO Build, Own and Operate BOT Build-Operate-Transfer BSCIC Bangladesh Small and Cottage Industries Corporation CCTV Close Circuit Television CEPZ Chittagong Export Processing Zones CETP Central Effluent Treatment Plant CFS Container Freight Station CSR Corporate Social Responsibility DEPZ Dhaka Export Processing Zone DPSG Development Partners Support Group EPB Export Promotion Bureau EPZ Export Processing Zone EZ Economic Zone FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service ft feet FTZ Free Trade Zone GDP Gross Domestic Product GoB Government of Bangladesh GSP Generalized System of Preferences ICA Investment Climate Assessment ICAO International Civil Aviation Organisation ICRIER Indian Council for Research on International Economic Relations ICT Information and Communication Technologies IE Industrial Estate IEA Industrial Estate Authority IFC International Finance Corporation ILO International Labor Organization IRD Industrial Relations Department IRO Industrial Relations Ordinance ISO International Organization for Standardization IT Information Technology KEPZ Korean Export Processing Zone iii KM Kilometer KV Kilovolt LDC Least Developed Country mmcfd Million cubic feet per day MoI Ministry of Industry MW Megawatt NGO Non-Governmental Organization Nos Numbers PAO Public Asset Owner PDB Power Distribution Board PPP Public-Private Partnership PSDSP Private Sector Development Support Project (multi-donor) REB Rural Electrification Board RTA Road Transport Authority SEDF South Asia Enterprise Development Facility (IFC) SEZ Special Economic Zone SEZA Special Economic Zone Authority SME Small and Medium Enterprises Sqft Square feet sqm Square meter TA Technical Assistance Tcf Trillion Cubic Feet UG Under ground (cables) UNCTAD United Nations Conference on Trade and Development USD United State Dollar VOR VHF Omni Range (aircraft navigation system) WCO World Customs Organization WTO World Trade Organization WWC Worker Welfare Committee Vice President, South Asia Region, World Bank : Praful Patel Country Director, World Bank Office, Dhaka : Xian Zhu Country Manager, IFC, Bangladesh, Bhutan and Nepal : Per Kjellerhaug Task Leader, Foreign Investment Advisory Service : Fatima Shah iv Contents Acknowledgements ......................................................................................................................ix Foreword.......................................................................................................................................xi Executive Summary .................................................................................................................. xiii Chapter 1: Introduction ...............................................................................................................1 I. Performance of Economic Zones in Bangladesh....................................................... 1 a. BEPZA Export Processing Zones ................................................................... 1 b. BSCIC Industrial Estates ............................................................................... 3 II. Rationale for Economic Zones .................................................................................. 3 III. Potential for a Modern Economic Zones Regime in Bangladesh.............................. 6 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework..............................9 I. Core Policies, Incentives, and Regulatory Framework............................................ 12 a. Territorial Status .......................................................................................... 12 b. Zone Development and Operations .............................................................. 12 c. Linkages to Domestic Market ....................................................................... 13 d. Incentives Regimes ....................................................................................... 13 e. Enterprise Eligibility and Approvals............................................................ 15 f. Licensing and Permitting ............................................................................. 15 g. Customs Control ........................................................................................... 16 II. Socioeconomic Policies ........................................................................................... 16 a. Labor Regulations ........................................................................................ 16 b. Environmental Policies ................................................................................ 18 III. Institutional Structures............................................................................................. 18 a. Export Processing Zones .............................................................................. 19 b. Industrial Estates.......................................................................................... 19 IV. Physical Development and Management Practices ................................................. 20 Chapter 3: Options for Zone Development ..............................................................................23 I. Option 1: Rehabilitate & Commercialize Existing Properties................................. 23 II. Option 2: Privatize Existing Properties and Implement New BOT Projects Under Current Regimes ...................................................................................................... 25 III. Option 3: Modernize Existing Regimes and Implement New Public-Private Partnerships (PPP) and Private-Sponsor Projects.................................................... 27 v IV. Option 4: Introduce a Master-Developed, Contiguous SEZ.................................... 30 V. Option 5: Introduce a Regional, Multi-Project SEZ Program ................................. 32 VI. Strategic Objective – Evaluating Options................................................................ 33 Chapter 4: PPP-Based Economic Zone Development Track..................................................39 I. Policy Regime.......................................................................................................... 39 II. Institutional Framework........................................................................................... 42 III. Legal and Regulatory Framework ........................................................................... 46 IV. Physical Development ............................................................................................. 48 Chapter 5: Regional SEZ Development Track ........................................................................51 I. Policy Regime.......................................................................................................... 52 II. Institutional Framework........................................................................................... 53 III. Legal and Regulatory Framework ........................................................................... 54 IV. Physical Development ............................................................................................. 55 Chapter 6: BSCIC/BEPZA Property Transformation Track ................................................57 I. Policy Regime.......................................................................................................... 57 II. Institutional Framework........................................................................................... 57 III. Legal and Regulatory Framework ........................................................................... 60 IV. Physical Development ............................................................................................. 61 Chapter 7: Implementation: Sequencing and Risks ...............................................................63 I. Implementation Sequencing .................................................................................... 63 II. Implementation Risks .............................................................................................. 69 III. Monitoring and Evaluating Success ........................................................................ 69 vi List of Boxes Box 1: Types of Economic Zones..................................................................................................5 Box 2: Country Reform Examples.................................................................................................7 Box 3: Investment Incentives in Bangladesh EPZs .....................................................................14 Box 4: Growth in Industrial Land Markets..................................................................................25 Box 5: Economic Zones and Value-Added Services...................................................................28 Box 6: Examples of SEZs ............................................................................................................32 Box 7: Land Designation in Bangladesh .....................................................................................49 Box 8: Indicators for Monitoring and Evaluation........................................................................70 List of Figures Figure 1: Economic Zone Hybrid Model....................................................................................xvi List of Tables Table 1: Bangladesh EPZ Regime Scorecard ..............................................................................xv Table 2: Options for Reform Strategies ................................................................................... xviii Table 3: EPZ Investment and Employment, by Location (November 2005) ................................2 Table 4: EPZ Activity, by Location and Sector (November 2005) ..............................................2 Table 5: Summary Benchmarks of Bangladesh Zones against International Best Practice ........10 Table 6: Zone Fiscal Incentives ...................................................................................................15 Table 7: Rehabilitate & Commercialize Existing Properties.......................................................25 Table 8: Privatize Existing Properties and Implement New BOT Projects Under Current Regimes .........................................................................................................................27 Table 9: Modernize Existing Regimes and Implement New PPP and Private-sponsor Projects.30 Table 10: Introduce a Master-developed, Contiguous SEZ.........................................................31 Table 11: Introduce a Regional, Multi-project SEZ Program......................................................33 Table 12: Economic Zone Development Options........................................................................35 Table 13: Strengths and Weaknesses of Existing Institutions .....................................................42 Table 14: Institutional Framework Options Summary ................................................................44 Table 15: Legal Framework Options Summary...........................................................................46 Table 16: Implementation Responsibilities and Indicators..........................................................66 Table 17: Potential Risks and Mitigating Measures ....................................................................69 Volume II - Annexes (The Annexes are made available on a CD-ROM attached to this report) vii Acknowledgements The Piloting Reform through the Development and Management of Economic Zones study was led by Fatima Shah (FIAS), with some components managed by Craig Wilson (SEDF), under the guidance of James Crittle at FIAS. Estem Islam, Mustafizul Shakir, Jennifer Wilson, and Shihab Azhar in the IFC’s Dhaka office were also part of the project team. Bearing Point, a private consulting firm based in the United States, was retained by FIAS to undertake the field work and technical analysis required for this project. Lead consultants on this study were Kishore Rao and Markus Mueller. Their efforts were complimented by additional international and local consultants including Peter Carr, Ajit Kumar, Sheri Pitigala, Nurul Hoque, and Khurshed Alam. This report has benefited from a World Bank Group peer review process and has incorporated comments from Syed Akhtar Mahmood, Zaidi Sattar, Gokhan Akinci, Paul Martin, Maitreyi Das, Sandeep Mahajan, and Robert Floyd. The report was edited by Aniqah J. Khan and Erwin De Nys. The project also profited from inputs provided by Government, especially BEPZA, BSCIC, BOI, and the PSD Core Group, as well as the Development Partners Support Group (DPSG), which included representatives from the World Bank, U.K.’s Department for International Development (DFID), the Japan Bank for International Cooperation (JBIC), the Japan International Cooperation Agency (JICA), the European Commission (EC), the Canadian International Development Agency (CIDA), and the Asian Development Bank (ADB). Piloting Reform through the Development and Management of Economic Zones was co-funded by FIAS, SEDF, DFID and CIDA as a core project in a series of advisory interventions undertaken as part of the design phase of a proposed $150 million World Bank-led, multi-donor funded, Private Sector Development Support Project (PSDSP). We are thankful to Mahmudur Rahman, then Executive Chair of the Board of Investment and Energy Advisor to the Prime Minister, and Kamal Siddiqui, then Principal Secretary to the Prime Minister as they guided us in assisting the Government of Bangladesh (GoB) in evaluating the country’s existing export processing zones (EPZs) and industrial estates (IEs), and to recommend options for developing a modern strategy to maximize the impact of economic zones on the economy at large. The team also appreciates the extensive consultation with public and private sector stakeholders during each of the 4 project missions. Equally helpful was the SEZ Working Group who thought of reforms necessary to create an environment for a special economic zone. We must thank the private sector representatives whose experience with doing business in Bangladesh helped define the preliminary findings and recommendations for specific issues which were discussed at a day-long Workshop on Enhancing Economic Zones in Dhaka in February 2006. These workshop discussions, as well as related meetings with stakeholders, were critical to finalizing the analysis in this report. ix Foreword Bangladesh has achieved an impressive steady economic growth of more than 5.5% annually over the last decade. However, this growth rate will need to increase dramatically if Bangladesh is to reach the Millennium Development Goal of reducing poverty by half by 2015. Critical to achieving this growth is private domestic and foreign direct investment. Both domestic and foreign investors in Bangladesh face many constraints which can be addressed by Export Processing Zones (EPZs), industrial parks and Special Economic Zones (SEZs). However, for zones to have an impact on poverty reduction, they must be part of a larger economic growth strategy which allows for an overall improved investment climate in Bangladesh. Recognizing the need for modernizing its zones regime, the Government of Bangladesh invited the Foreign Investment Advisory Service (FIAS), a multi-donor service of the World Bank Group, and IFC’s South-Asia Enterprise Development Facility (SEDF) to help assess the Economic Zones Regime and develop a strategy for the country in light of global good practices. The report Piloting Reform through the Development and Management of Economic Zones recommends that Bangladesh pursue reforms that leverage the benefits of public-private partnerships. The public sector can allocate large tracts of developable land for the purpose of developing economic zones and provide the necessary regulatory oversight, while the private sector may offer expertise in zone development and management along principles of demand responsiveness and commercial viability. This study recommends that Bangladesh implement three parallel and inter-related reform tracks, which firstly aim to rehabilitate and commercialize existing publicly-managed Economic Processing Zones and industrial estate properties to better serve the needs of their tenants. Secondly, the need to develop new, modern zones based on public-private partnerships. Lastly, the report suggests the creation of a large Special Economic Zone, to be implemented on a single property by a master developer, reflecting integrated planning practice and fair and transparent processes of land acquisition, resettlement and compensation. It is hoped that the findings and recommendations in this report will help Government of Bangladesh and development partners to explore options for maximizing the impact of economic zones and to develop a modern strategy that would further promote an attractive investment climate. Per Kjellerhaug Xian Zhu Country Manager, IFC Country Director Bangladesh, Bhutan and Nepal World Bank Office, Dhaka xi Executive Summary Foreign direct investment into Bangladesh was approximately $400 million in 2004 – less than half of FDI into Pakistan and less than a twelfth of FDI into India over the same period.1 This comes as no surprise since Bangladesh ranked 110 out of 117 countries rated in the Global Competitiveness Report 2005. Analytic work by the World Bank Group, including the 2003 Investment Climate Assessment and the 2005 Growth and Competitiveness Study, identifies three sets of factors as particularly important in Bangladesh’s competitiveness: the regulatory interface between Government and the private sector, the prevailing policy environment, and the provision of infrastructure services. Economic zones can offer an oasis of regulatory simplicity amidst administrative complexity and hassle, a liberal policy environment in an otherwise restrictive trade and overall policy regime, and serviced industrial land to investors, which is a rare commodity in infrastructure- and land-starved countries like Bangladesh. Countries set up zones to attract investment, boost employment, increase exports, generate foreign exchange, and pilot policy and regulatory reforms. In the medium-term, by scaling up reforms nationwide and maximizing linkages between zones and the economy at large, economic zones can create a multiplier effect on growth. The most successful economic zones tend to be those used as one tool in a broader growth strategy that includes complementary reforms in areas such as transportation, public administration, land use, labor relations, and internal security. Rather than being a part of an integrated private sector development strategy, the export processing zones (EPZs) regime in Bangladesh has been more of a stand-alone initiative and has led to modest impacts. Increased direct and indirect impacts could be realized if the zones regime was modernized to reflect international best practices, including public-private partnerships in development, private management, implementation of WTO-consistent policy and incentive frameworks, and innovative regulatory frameworks. This study recommends that Bangladesh pursue reforms that leverage the benefits of public-private partnerships, combining public sector regulation and assembly of tracts of developable land with private sector-driven economic zone development and management along principles of demand responsiveness and commercial viability. After discussions with Government decision makers and private sector representatives, it is recommended that Bangladesh pursue an economic zones strategy that combines elements of the following 3 approaches: 1. Rehabilitating and commercializing existing publicly-managed EPZ and industrial estate properties to better serve the needs of their tenants (transition approach rather than centerpiece to the strategy); 2. Developing new, modern hybrid zones based on public-private partnerships in development and operations (central to the strategy); and 3. Creating a large master-developed special economic zone, reflecting integrated planning practices (more ambitious and longer-term option). 1 UNCTAD website: http://www.unctad.org/Templates/Page.asp?intItemID=3277&lang=1. xiii Bangladesh: Piloting Reform through the Development and Management of Economic Zones Impact of Economic Zones in Bangladesh Has Been Limited While EPZs have had some success in attracting investment and in contributing to exports – leading to $890 million in total investments,2 accounting for nearly 20 percent of annual exports, bringing in 25 percent of total FDI, and employing over 160,000 people – their impact remains modest in the amount and type of exports, investments, and employment. The impact of the smaller BSCIC industrial estates is even more limited, with their main achievement being employment for 96,000 workers. Although foreign investors are not prohibited from operating in these estates, the tenant base is exclusively domestic SMEs since the physical development and service standards are quite low, duty-free privileges are not extended, and streamlined permitting and customs administration is not available. This is not to say that the impacts of economic zones the world over are generally limited. The success of a zone depends on how it is designed, developed, and managed. In fact, zones in the Dominican Republic account for over 80 percent of total exports, in China employ millions of people (3 million in Shenzhen alone), in Malaysia account for 61 percent of total inward FDI, and in Mexico generated $1.2 billion in total investments in 2003 alone (more than cumulative investment in Bangladeshi zones over the 1983- 2005 period). Moreover, zones in Taiwan and Korea were used as tools for export diversification, in China to test financial, legal, labor, and pricing policy reforms, and in Jordan to catalyze investment policy liberalization and regulatory streamlining in the rest of the economy. By examining the strengths and weaknesses of the existing economic zones framework in Bangladesh, policymakers can better understand the opportunities for reforms that would increase their attractiveness to investors and maximize their contribution to the economy. The table below gives a snapshot of how policies, regulatory frameworks, incentives regime, institutional structures, infrastructure facilities and management practices in EPZs compare in light of international best practice principles. The picture that emerges is that of an old-style, globally uncompetitive economic zones regime that has not kept pace with modern changes in the development and management of zones. The good news is that there are some clear wins that can be highlighted and that high level champions in Government are willing to undertake these reforms in Bangladesh. The areas in which the greatest departures from principles of good practice exist are in zone development and operation, institutional provisions for private sector development roles, physical development and management practices, and socioeconomic policies. Room for significant improvement also exists in fostering linkages with the domestic economy, creating a better incentives regime (including eligibility criteria as well as actual fiscal and non-fiscal benefits), and further streamlining of administrative processes (including licensing, permitting, and customs controls). Zone development and operation. Currently, EPZs in Bangladesh are purely publicly developed, owned, and operated. While a legal basis for privately developed and managed economic zones exists, the license for operating the private Korean EPZ has been pending since 1995 and continues to overshadow any real efforts to attract private investment in this area. By contrast, new generation zones in other countries are developed and operated by the private sector, which can offer a better range of facilities and services to tenants and reduce the fiscal burden on the public sector. As many as 1200 private zones exist in the world today. Where government-run zones continue to operate in parallel, public and private zones operate under a single legislative and institutional framework to ensure consistency in implementation and a “level playing field” in regulation such that public zones do not have unfair advantages (such as subsidies) that undercut private projects. 2 This figure reflects cumulative amount since 1983. Over $450 million of these investments occurred in the period 2000-2005, and nearly $750 million occurred between 1994 and 2005 (BEPZA statistics). xiv Executive Summary Table 1: Bangladesh EPZ Regime Scorecard POLICY AREA RATING = Good Practice = Poor Practice Core Policies and Regulatory Framework Extra-territoriality Zone Development and Operation Linkages with Domestic Economy Eligibility for Benefits Fiscal and Non-Fiscal Benefits Licensing and Permitting Customs Controls Socioeconomic Policies Labor Policies Environmental Policies Zone Institutional Structures Agency Powers and Authorities Private Participation on Governing Boards Private Sector Development Roles and Responsibilities Physical Development And Management Practices Location and Access to Markets Zone Designation Onsite Infrastructure and Facilities Institutional provisions for private sector development roles. The BEPZA and BSCIC institutional regimes currently do not allow for any private sector development. A separate Executive Cell in the Prime Minister’s Office is tasked with licensing and regulating private EPZs and attempts to separate development and operating roles from regulation responsibilities as per best practice (BEPZA, by contrast, is both developer and regulator of public zones) – however, the regime remains untested because no operational private EPZ exists in Bangladesh. In addition, the institutional disparity between an autonomous BEPZA responsible for public zones and an Executive Cell within the Government structure responsible for supporting private EPZs puts public zones at an advantage – particularly since the Executive Cell has no independent financial capacity. Physical development and management practices. Location decisions need to be based on market analysis and existing utility and multi-modal transport networks need to be leveraged. Zones in Bangladesh that have the “right” location are fully occupied and account for the bulk of investment – e.g. the Dhaka and Chittagong EPZs together account for 97 percent of employment and 99 percent of exports out of the 6 existing EPZs. Where location decisions have been made based on political favors and xv Bangladesh: Piloting Reform through the Development and Management of Economic Zones regional development goals, zone investments remain underutilized – e.g. occupancy is as low as 4 percent in some industrial estates with poor access to input and output markets. The biggest infrastructure advantage conferred by EPZs is the relatively rare power disruption. However, utility services remain constrained by issues facing external networks from which supply is sourced – no dedicated sources exist – and physical site management is very poor. Socioeconomic policies. Labor and environmental management practices are becoming increasingly important to firms in the global supply chain who are much more conscious of the differentiating global consumer. In order for zones to be competitive in attracting tenant firms, it is important to ensure compliance with international labor standards and environmental rules. While the labor regime in EPZs has made some progress in setting minimum wage and rules governing working conditions, Bangladesh is one of the few countries that officially exclude zones from the national labor legislation. Freedom of association remains limited and specialized dispute settlement mechanisms within EPZs have not been effective in practice. In terms of environmental management in economic zones, the track record is extremely poor. Central effluent treatment does not exist and while tenants are required to conduct pre- treatment prior to discharge, this is not monitored or enforced. Linkages with the domestic economy. The EPZ regime has also not actively fostered linkages between zones and the domestic economy. On the contrary, the regime has, thus far, subscribed to the traditional model of fenced-in enclaves rather than integrated developments. While purchases from the domestic market are permitted and indirect exporters are eligible for duty rebates, sales to the domestic market are limited to 10% for most sectors (and must be authorized on a case-by-case basis) and are entirely prohibited for the garments sector. By contrast, international best practice zones allow unlimited sales to the domestic market provided that all applicable duties and taxes are paid. Hybrid economic zones tend to cultivate much greater backward and forward linkages than either domestically-oriented industrial parks or traditional fenced-in EPZs. Hybrid zones are typically about 250 acres and subdivided into a general industrial park open to all industries regardless of export- orientation and a separate EPZ area reserved for export-oriented, EPZ-registered enterprises. Related infrastructure and facilities (housing, commercial buildings, recreational facilities, utilities, etc.) are also integrated into the zone (see figure below). Private developers prefer hybrid projects because they are both less risky (more potential tenants compared to EPZs which cater only to export-oriented manufacturers) and offer better returns (than just industrial land). Such projects are generally developed on a public-private partnership (PPP) basis where the government provides land on a long-term lease and last mile infrastructure to the site, and the private sector develops on-site infrastructure and operates the EZ. Figure 1: Economic Zone Hybrid Model Port Housing Tourism Export Industrial Zone Park Area Area Utilities Commercial xvi Executive Summary Incentives regime. Duty-free privileges in EPZs are largely aligned with international good practices and allow for extension of these privileges to production inputs, construction materials, and equipment. However, eligibility criteria for benefits are relatively restrictive compared to best practices, with a minimum export obligation, absence of a negative list of activities, and different policies for foreign and domestic/joint venture investments. The regime should introduce greater transparency to transform investment approvals from case-by-case evaluation to simple registration meeting explicit criteria. Moreover, the minimum 90 percent export requirement should be eliminated as it does not stimulate exports – firms either export or they don’t. Instead, by too selectively limiting eligibility, the quota serves to limit investment in zones. It also prevents the formation of natural clusters, as non-export ancillary service providers to exporters are excluded from the zones – and this can also induce exporters themselves to invest outside the zones (recall that only a quarter of FDI in Bangladesh is located in EPZs, relative to 80 percent in the Dominican Republic). Reform of the zones regime also presents an opportunity to rationalize corporate income tax incentives with national policies according to performance incentives. Administrative and regulatory streamlining. In Bangladesh, licensing and permitting procedures have been largely consolidated within BEPZA to provide a more streamlined investment environment, in line with international practices. However, procedures remain centralized in BEPZA’s Dhaka main office rather than decentralized to individual EPZ management offices, reducing the potential benefits of a “one- stop” window. Moreover, Customs does allow BEPZA to facilitate import and export documentation. There is no single administrative document and goods must be escorted to zones rather than relying on a bond system and post-audit. Contrary to beliefs that increased administrative and regulatory efficiency within zones creates an unfair advantage relative to firms outside zones, reforms within zones should catalyze more efficient regulatory practices in the economy-wide regime – this depends on how large and integrated the zone is with the domestic economy, and how committed policymakers are to using zones to play this catalytic function. xvii Bangladesh: Piloting Reform through the Development and Management of Economic Zones A Range of Options for Modernizing the Economic Zones Regime in Bangladesh The existing zones, with their limited scope, scale, and ambition, have not produced the desired results. In other countries’ reform experiences, poorly performing zones have been able to transform themselves by liberalizing their policy regimes and aggressively pursuing private sector participation. The following 5 options were considered as strategies for enhancing the existing zones regime in Bangladesh, listed in order of reforms that will have the most limited impact and progressing to the more ambitious: Table 2: Options for Reform Strategies Option Main Characteristics Economic Public Dev’t Political Dev’t Cost Feasibility Potential 1. Rehabilitate/ commercialize Performance-based management contracts Low High High BSCIC/BEPZA retain investment and service existing properties delivery responsibility under existing core policies regime 2. Privatize existing properties/ Privatize existing properties where possible Medium Medium Low/ Develop new BOT projects, following market Medium new BOT projects demand under existing core policies regime 3. Modernize regime and Create liberal free zone regime to replace High Medium Medium current EPZ regime implement privatization, PPP, Remove export and local sales restrictions and private-sponsored projects Diversify user base Rationalize investment incentives Post-audit duty-free compliance and penalties Wider variety in forms of zones, including hybrid developments Private zone projects and single-factory zones 4. Introduce master-developed, Builds on Option 3 with broader range of uses High High Low/ (industrial, commercial, residential, tourism) Medium contiguous SEZ regime May require additional regulatory capacity May deal with duty-free consumption Master-developer responsible but could engage sub-developers 5. Introduce a regional, multi- Designation of large contiguous area as SEZ High High Low Creation of dedicated SEZ authority with project SEZ program substantial delegated powers Wide-ranging economic liberalization and privatization not possible in national context Extensive administrative reform/simplification Enables multiple sub-projects – “town planning” approach These options were reviewed during a workshop on Enhancing Economic Zones and Reducing Administrative Barriers to Investment held in Dhaka in February 2006, and subsequently discussed with GoB decision makers. Based on these discussions, a consensus emerged regarding a reform strategy of 3 parallel and inter-related Tracks: o Option 3, an aggressive development of smaller-scale modern Economic Zones (EZ) based primarily on a public-private partnership (PPP) development model, holds the most immediate promise for realizing economic benefits in the Bangladeshi political and institutional context; o Option 5, developing a large-scale regional SEZ Program, enjoys significant support among decision-makers, but also requires substantial preparatory groundwork and commitment and requires a longer-term implementation horizon than the EZ PPP approach; and xviii Executive Summary o Option 1, rehabilitating and commercializing existing properties under BSCIC and BEPZA, is not an appropriate approach for new developments, but some form of improved operation will have to be created to allow these existing properties to remain productive and serve the needs of their tenants, even if only as a transition strategy to the more central PPP-Based Economic Zone Track or the more ambitious SEZ Track. Option 3: PPP-Based Economic Zone Development Track This PPP-Based Development Track is central to the modernization of economic zones in Bangladesh. The focus of the new zones strategy should be to develop new and larger zones in locations chosen based on demand and feasibility assessments, under a liberalized framework where different types of industrial activity can co-exist under established land use criteria, and with a higher level of infrastructure and value added services developed by the private sector and offered to tenants on commercial principles. The “hybrid” nature of this Track speaks to the co-existence of industrial activity geared towards the domestic market as well as a free zone area within the same property. By lifting export requirements and allowing unfettered sales to the domestic market on a duty-paid basis, there will be greater integration of economic zones with the broader economy.3 The Government’s main role would be to regulate economic zone activity, promote the zone regime, and aggressively identify, assemble, and make available land suitable for industrial development through PPPs. While this approach would lay the groundwork for maximizing the impact of zones, it would also require important legislative and regulatory changes as well as new institutions and capacities to be developed in Government. The main implementation aspects of this Track include: Policy regime: Quickly resolving the Korean EPZ issue to build credibility; defining a new incentive and market access regime, including a convergence of national and EPZ incentives as well as allowing full duty-paid access to the domestic market; designing a more flexible and streamlined duty deferral mechanism; designing a new licensing and permitting regime; and improving labor standards. Market- oriented public-private partnership approaches to zone development should be developed and quickly tested with one or more pilot projects. Institutional framework: Defining the requirements, roles, and responsibilities for a new Economic Zones Regulator responsible for licensing projects and monitoring compliance with performance, planning, and environmental standards; a Development Agency to aggressively package land for development and facilitate PPP and purely private projects; and a Public Asset Owner to retain ownership and management responsibility for existing public zones, with a view towards commercialization and eventual privatization through the PPP process. This should be supported with a capacity building program and supporting information technology. Legal and regulatory framework: Selecting an appropriate level of autonomy for the Economic Zones Regulator and the Development Agency and enshrining this in a new legal and regulatory framework. The new framework legislation should give clear priority to hybrid, privately managed zones developed on a PPP basis; support a variety of concepts including multi-use, sector-focused, and single-factory zones; amend the BEPZA and BSCIC laws to eliminate their regulatory functions and end development of new zones under these laws; allow existing zones to continue but be commercialized; harmonize tax incentives; and cancel the EPZ law under a grandfather arrangement for any already issued private 3 Duty-paid sales to the domestic economy are neutral on domestic producers (who already compete with imports) but allow zone manufacturers more flexibility and give rise to more integrated zones. This mirrors other duty deferral mechanisms open to manufacturers. xix Bangladesh: Piloting Reform through the Development and Management of Economic Zones licenses. This process should be supported with a lobbying strategy and complemented with draft transaction documents for the pilot project(s). Physical development: Analyzing market demand, identifying available land, and assessing the feasibility of the pilot project(s). The pilot effort should be complemented with a medium-term industrial property development program and an infrastructure development program. Related environmental and planning guidelines and enforcement mechanism will also have to be developed. Option 5: SEZ Development Track This Track is the most complex and would require the highest degree of public investment of effort and resources in creating the supporting infrastructure, regulatory reform, and institutional oversight. Rather than establishing a single development, this approach designates a large contiguous geographic area – hundreds of square kilometers – as a special pilot area for liberalized economic development and creates a dedicated policy regime and institutional framework to support this liberalization. This “country within country” aspect of the SEZ Track also poses some administrative capacity challenges. In an effort to help select an appropriate location for a pilot SEZ, land zoning and development masterplans (including complete infrastructure plans) should be developed for 2-3 feasible areas. The actual development of the zone will involve significant budget outlay and would be best served by the resources, skills, and experience of an international zone master-developer (e.g. private developers in Thailand, Malaysia, Korea, etc). Establishing twinning programs between these international developers and smaller-scale local developers would both ensure that appropriate local knowledge is built in to the SEZ project and that local capacity is built for a second generation of PPP-based SEZs. The main implementation aspects of this Track include: Policy regime: Defining the rationale for an SEZ in Bangladesh, building national consensus on the SEZ concept, and preparing a detailed feasibility study. Policy makers must first determine their objectives – whether to catalyze bold reforms on the national level, to unlock economic value in existing infrastructure, or to realize scale economies from new infrastructure investments, or some mix of these and other objectives. The policy regime would determine the extent of tax and duty simplification; special advantages conferred to residents; political and administrative autonomy; land and infrastructure planning/ provision; labor regulations; licenses and permits streamlining; maximizing private participation in public service provision; and the role that large-scale developers will play. The regime may initially focus on making SEZ land available under single management and planned to the highest standards before opting for bolder reforms. Institutional framework: Defining the division of responsibilities among existing and new institutions and an overarching organizational structure. The SEZ Authority would be created with broader powers and a more specific mandate than the Economic Zones Regulator (option 3 above). This involves defining areas strictly under control of the Authority, those under the purview of other agencies, and those requiring formalized coordination. Once defined, a change management plan and capacity building program will be required to support the formation of the new institution. To be fully effective, the Authority should operate outside the civil service structure and be able to pay market salaries, and have streamlined procedures for asset management, procurement, and service delivery. Legal and regulatory framework: Selecting an appropriate level of autonomy for the SEZ Authority and enshrining this in legislation and regulation. The SEZ Law will have to establish the SEZ Authority with an adequate level of operation authority so it can meet its mandate. Depending on the powers granted, the SEZ Law could establish the Authority as an independent regulatory body, a regional development agency, a government-owned corporation, or a similar entity. The legal framework should include the legal and regulatory instruments governing residential activities, possibly duty-free consumption, special xx Executive Summary immigration benefits, tourism/recreation activities, and other aspects of the SEZ regime not found in smaller zones. However, the basic steps for designing and implementing the regime are quite similar to the PPP-Based Economic Zone Track (option 3). Physical development: Identifying the SEZ area, appraising and transferring existing physical assets, and preparing both the public infrastructure improvement and private infrastructure investment programs. In addition, planning and environmental controls must be put in place and proper infrastructure planning and maintenance capacity developed. Physical implementation of the SEZ can then be carried out through a series of privatization and public-private partnership transactions. The SEZ should be located strategically, on well-identified land areas of at least 2,500 acres (internationally, these regional SEZs usually range between 100-500 km2), and chosen not only to minimize public sector outlays but contain the requisite population, commercial and transportation centers to ensure rapid development. Resettlement issues must be considered in site identification and planning, and benefit-sharing schemes should be integrated into a design and feasibility study. Option 1: Existing Property Transformation Track The most modest approach to upgrade the economic zones regime in Bangladesh is to rehabilitate existing industrial parks and EPZs and to introduce commercial management principles through reliance on performance-based management contracts, service outsourcing, and other commercial mechanisms to improve the industrial property offering for investors. Although this approach will increase the quality of services offered at existing parks and require few changes to the existing regulatory and institutional frameworks, it will also yield the smallest impact. While efforts can be made to revitalize and improve existing properties, this approach should not form the center of a modern economic zones strategy. It should be considered as a medium-term initiative to allow current tenants to continue undisrupted operations while gradually exposing these existing EPZs to market competition so that a level playing field is created for any new zones developed under the PPP-Based Economic Zone or SEZ Development Tracks. The main implementation aspects of this Track include: Policy regime: Ceasing all future development under the BEPZA and BSCIC umbrellas and developing a transition mechanism to bring commercially viable existing EPZs and industrial estates under a reformed economic zone framework. This would include a time-phased transfer of obligations and responsibilities that will be reflected in the legal/ regulatory/ institutional frameworks and in asset transfer. Institutional framework: Restructuring BEPZA to identify individual properties as business units, unbundling physical assets, outsourcing commercial functions, and preparing for eventual concessions or divestitures (BEPZA would eventually become a Public Asset Owner, as described under option 3, and its regulatory functions assumed by the new Economic Zones Regulator). BSCIC industrial estates would come under the purview of a new Industrial Estates Authority which would primarily act as a Public Asset Owner and Regulator of these properties. A SME support strategy would be required to separate subsidies provided by existing industrial estates from their underlying commercial viability. Legal and regulatory framework: Analyzing existing leases and amending the BEPZA and BSCIC Acts, regulations, and internal rules to support the new development approach. In addition, the legal basis for the Industrial Estates Authority will have to be created. Physical development: Prioritizing individual properties for transformation, phasing out under- performing properties, and implementing an intensive infrastructure improvement and environmental upgrading program. The initial review of properties suggests that there exists significant room to rationalize current properties and refocus scarce resources on the most promising ones. xxi Bangladesh: Piloting Reform through the Development and Management of Economic Zones Ensuring the Success of a New Economic Zones Strategy Economic zones in Bangladesh were developed by Government at a time when private developers would have shied away from assuming such large risks, playing an important demonstration role and attracting foreign investors that may not have otherwise set up operations in Bangladesh. However, the benefits of the traditional enclave-style zones with limited services have proven to be limited. Simply offering subsidized industrial land and trying to substitute incentives packages for real reforms in the regime is not a competitive or sustainable strategy. In order to realize the full value of economic zones, Bangladesh must modernize its economic zones regime along the lines discussed above. Greater value can be created through integrated development, private participation in infrastructure, larger scale and agglomeration effects, broader economic activities, deregulation, and one-stop shop administration. Even the most limited changes recommended in the Existing Property Transformation Track require considerable changes to allow full commercialization and competition with new PPP and private zones. The central PPP-Based Economic Zone Track and the more ambitious SEZ Track will require significant policy and institutional changes and hefty investment. Private zone developers will need to be attracted through aggressive marketing and a stable, predictable, and rational policy and institutional framework. This will require strong Government commitment at the highest levels, preparation of tight business models and market-oriented implementation approaches (including transparent site selection based on market dynamics), extensive collaboration and consultation with all stakeholders, plus sustained donor technical assistance and financial support in the design and implementation phases. As the new regime is designed and implemented, policymakers must remain cognizant of the fact that economic zones are not ends in themselves. While direct benefits in terms of generating investment, employment, exports, and realizing cost reductions from scale economies cannot be underestimated, the real value of economic zones lies in their ability to stimulate widespread growth through linkages with the domestic economy and to catalyze nationwide reforms by offering an opportunity for pilots. Bangladesh should seize this opportunity in its new regime. xxii Chapter 1: Introduction Export processing zones (EPZs) in Bangladesh have been successful in attracting FDI only in the typical labor-intense, first-generation industries – primarily garments and footwear – that characterize the initial development of many zone programs. These subsidized EPZs offer basic infrastructure facilities and improved customs procedures, but their perhaps greatest advantage is the fact that they offer serviced industrial land at all – development densities and fragmented land ownership in the rest of Bangladesh leave investors (especially foreign investors) with few attractive alternatives to the EPZ regime. As a result, several of the existing EPZs in attractive locations are full despite their infrastructure deficiencies, and new EPZ projects are now under development by BEPZA (though site identification and land assembly remain difficult). BSCIC’s industrial estate program, by contrast, provides subsidized facilities that are not suitable for foreign or large domestic investors. With their focus on small-scale and cottage industries, these estates are geographically dispersed capital improvements on industrial land that lack adequate maintenance funding or management. While such industrial estates can serve an important SME development purpose if properly implemented, they play only a subordinate role in the kind of economic development that an investment in a national economic zones program should target. The BSCIC program would have to undergo a far deeper transformation than the BEPZA program in order to attract large-scale investment. I. Performance of Economic Zones in Bangladesh The Bangladesh zones regime has, to date, had a mixed impact on economic development in terms of investment, exports, employment, linkages with non-zone enterprises, and regional development. a. BEPZA Export Processing Zones Six zones are currently operating under the BEPZA scheme—these are located in Dhaka (Savar), Chittagong, Comilla, Mongla, Ishwardi, and Nilphamari. Two others are currently under development (Adamjee and Karnaphuli).4 As of November 2005, there are 223 companies operating in the existing zones, generating over to 160,000 jobs (equivalent to approximately 3.5 percent of manufacturing sector employment), producing approximately 20 percent of total exports (US$115 billion) by value in 2004 (up from US$228 million or less than seven percent in 1995), and accounting for 25 percent of annual FDI inflows. However, Dhaka and Chittagong account for the bulk of this activity, including 208 of the 233 operating enterprises, 97 percent of zone employment and 99 percent of exports. The following tables provide a breakdown of activities by location. 4 Adamjee EPZ was formally opened on March 7, 2006, although it is only partially occupied at the moment and development work is continuing. 1 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Table 3: EPZ Investment and Employment, by Location (November 2005)5 Sector No. of Enterprises Investment (US$ ‘000) Local Employment EPZ-Chittagong 127 478,067.25 96,472 EPZ-Dhaka 81 374,925.67 61,872 EPZ-Mongla 11 2,868.00 394 EPZ-Ishwardi 2 701.25 20 EPZ-Comilla 11 32,324.31 3,514 EPZ-Uttar 1 1,500.00 1,050 EPZ-Adamjee -- -- -- EPZ-Karnaphuli -- -- -- TOTAL 233 890,386.47 163,322 6 Table 4: EPZ Activity, by Location and Sector (November 2005) Sector Chittagong EPZ Dhaka EPZ Others Agro Poducts -- -- 10 Caps 4 3 -- Chemical & Fertilizer -- -- -- Electronics & Electrical goods 11 2 1 Fishing Reel & Golf Equipment 1 -- -- Footwear & Leather Goods 8 4 -- Furniture -- -- -- Garment Accessories 11 14 3 Garments 27 18 -- Knitting & Other Textile 9 5 6 Metal Products 7 3 2 Miscellaneous 6 9 2 Paper Products 1 1 -- Plastic Goods 6 6 -- Ropes 2 -- -- Service Oriented Industries 3 1 -- Tent 4 -- -- Terry Towel 16 -- -- Textile 11 15 1 Toys -- -- -- TOTAL 127 81 25 Primary investors in the EPZs are from Korea, Bangladesh, Japan, Hong Kong, United States and United Kingdom. Wholly foreign-owned enterprises account for three-quarters of total investment and employment in the zones. Local companies account for 15 percent of investment and 17 percent of employment. Joint venture enterprises comprise the remainder. Employment in EPZs grew from 10,700 in 1995 to more than 160,000 in 2005. In terms of sectors, textiles, apparel, footwear/leather, and related sectors account for the majority of investment, together accounting for nearly 75 percent of investments and 80 percent of employment. 7 5 BEPZA Statistics. 6 BEPZA Statistics. 7 BEPZA statistics. 2 Chapter 1: Introduction Both the Dhaka and Chittagong EPZs are operating at virtually full capacity. BEPZA is therefore considering the expansion of these sites and others to accommodate ongoing demand for space in the EPZs. While Dhaka and Chittagong EPZs have had a substantial and direct impact on Bangladesh’s economic development, indirect spillover effects from the zones has been less impressive. Spillover effects, including backward linkages with the domestic economy, appear to remain largely unrealized. For example, in the garment sector, which is the largest sector in the zones, more than 70 percent of inputs (i.e. virtually all non-labor inputs) are still sourced from foreign suppliers. Regional development goals also remain largely unrealized. Investment in the other 4 zones, despite the evidence of demand for EPZ space, remains marginal. These 4 zones are all located in less developed regions of the country as part of a regional development strategy. However, these EPZs have not yet realized their goal of regional investment despite added incentives to investors, such as subsidized rents – e.g. cost of land in the Dhaka EPZ reflects a 32 percent subsidy relative to the cost of private land outside the EPZ in Savar.8 This is primarily due to politicized, rather than a market-based, site location rationale and the lack of supporting services and infrastructure to support industrial development. b. BSCIC Industrial Estates BSCIC industrial estates serve as investment locations for approximately 3,000 small industries. BSCIC currently has 67 estates across the country, of which 38 are fully occupied. However, while the average occupancy rate is 84 percent, occupancy in some estates is as low as 4 percent largely due to poor location in terms of access to urban centers and markets, as most industrial estate residents are domestically oriented and, therefore, rely on local markets for their output The majority of investment in these estates is local, though they are open to foreign investors, as well. Investments cover a wide range of sectors, including tanning and leather goods, textiles and apparel, light engineering, chemicals, food processing, paper and packaging, and ceramics. The industrial estates provide employment to 96,000 workers. The 10 largest estates account for roughly 40 percent of employment, though this is proportional with their relative physical size compared to some of the smaller estates. For example, the Joydebpur estate provides employment to approximately 13,000 workers; Jessore, 3,500 workers; Bogra, 3,870; Rajshahi, 2,640; and Tangail, 3,000. The performance of individual industrial estates is affected by market accessibility – those close to larger urban centers have, in general, performed better than those in more remote areas. While an important source of employment, spillover effects with the rest of the economy have been low. With the exception of the printing and packaging sectors, evidence suggests that few linkages with other firms have been realized – a reflection of weak value chains within the Bangladeshi economy. II. Rationale for Economic Zones There are a variety of types of economic zones, including industrial estates, free trade zones, export processing zones, and special economic zones (see box below). Zones remain important tools for attracting private investment and promoting exports in both developing and developed countries alike. The following five policy objectives commonly influence the development of economic zones in developing countries: 8 Calculations are based on the Review of the Market for Industrial Land, a background study commissioned for the current report. The study calculated even higher subsidies in the case of industrial estates which can be as high as 80 percent. 3 Bangladesh: Piloting Reform through the Development and Management of Economic Zones To support a wider economic and/or export diversification strategy. In the most limited sense, policy makers with this view narrowly define economic zones as EPZs and see them as simple tools permitting a country to develop and diversify exports. Zones allow protective barriers to remain while reducing an anti-export bias. EPZs of Taiwan and South Korea follow this pattern, but the approach has had more limited success in Bangladesh. To realize the benefits of cluster developments. When unplanned developments take place and industry is scattered in congested urban areas, policymakers may use zones as a clustering device. Serviced land with shared facilities/ services (e.g. effluent treatment, logistics, bulk purchases of inputs, shared labor pools, etc.) and other benefits provide incentives for relocation of existing industry and this agglomeration, in turn, can give rise to further expansion/ new activity as these clusters are an attraction in themselves to further domestic and foreign investment. Currently, this approach is currently used in Bangladesh. To serve as “pressure valves” to alleviate growing unemployment. Policy makers using this approach rely on economic zones as job creation vehicles. Without a more holistic approach, zones can yield robust job-creation, but remain enclaves with little linkages to the rest of the economy. The EPZ programs of Tunisia and Dominican Republic are such examples. To attract foreign direct investment. Most new economic zone programs are designed to attract FDI. Their success depends on their ability to offer an investment location that is not subject to all of the barriers to investment – poor infrastructure, complex regulation, inefficient customs procedures, inadequate security – that characterize the rest of the economy. In developing economies with few foreign investors, zones can also be effective in establishing an initial safe haven where FDI can initially cluster before investors gain the confidence to locate elsewhere in the economy. While local investors are welcome in these zones, zones must offer modern, adequately-sized, world-class facilities that meet the expectations of foreign investors. Zones of this kind can be seen in the Middle East but are currently lacking in Bangladesh. 4 Chapter 1: Introduction Box 1: Types of Economic Zones There are a wide variety of free zones internationally, each with differing objectives, markets, and activities. As depicted in the table below, zones can commonly be divided into several broad categories based on the development objective, physical configuration, market orientation and other features: Type of Zone Development Physical Typical Eligible Markets Examples Objective configuration Location Activities Single Factory Export Designation Country- Manufacturing, Export Mauritius; EPZ manufacturing for individual wide other market Mexico; enterprises processing Madagascar Enterprise Zone, Urban Size < 50 Distressed Multi-use Domestic Empowerment Empowerment, revitalization hectares urban or Zone, Chicago Urban Free zones rural areas Traditional EPZ Export Size < 100 None Manufacturing, Mostly Karachi EPZ, manufacturing hectares; total other export Pakistan; area is processing Bangladesh designated as an EPZ Hybrid EPZ Export Size < 100 None Manufacturing, Export Lat Krabang manufacturing hectares; only other and Industrial part of the processing domestic Estate, area is market Thailand designated as an EPZ Free Trade Zone Support trade Size < 50 Ports of Entrepot and Domestic, Colon Free (Commercial Free hectares entry trade-related re-export Zone, Panama Zone) activities SEZ/Freeport/Free Integrated Size >100 None Multi-use Domestic, China Economic Zone development km2 internal Subic Bay, and Philippines; export Aqaba Special markets Economic Zone, Jordan Single Factory EPZ scheme is where incentives are provided to individual enterprises regardless of location; factories do not have to locate within a designated zone to receive incentives and privileges. Enterprise Zones are intended to revitalize distressed urban or rural areas through the provision of tax incentives and financial grants. Export Processing Zones, industrial estates offering special incentives and facilities for manufacturing and related activities aimed mostly at export markets, typically take two forms. The traditional EPZ model is where the entire area within the zone is exclusively for export-oriented enterprises licensed under an EPZ regime. Hybrid EPZs, in contrast, are typically sub-divided into a general zone open to all industries regardless of export orientation and a separate EPZ area reserved for export-oriented, EPZ-registered enterprises. Free Trade Zones, also known as commercial free zones and free commercial zones, are small, fenced-in, duty-free areas, offering warehousing, storage and distribution facilities for trade, transshipment and re-export operations, located in most ports of entry around the world. Freeports/Special Economic Zones (SEZs) are generally a much broader concept—typically encompassing much larger areas; accommodating all types of activities including tourism, retail sales; permitting people to reside on site; and providing a much broader set of incentives and benefits. 5 Bangladesh: Piloting Reform through the Development and Management of Economic Zones To provide experimental laboratories/demonstration effect for the application of new policies and approaches. Economic zones allow for a critical mass of reforms to be undertaken in contained areas; based on these pilots, reforms can be fine-tuned and scaled up to the nationwide level. The more integrated zones are with the economy (i.e. the greater the backward and forward linkages to the domestic economy), the stronger this catalyzing effect becomes. In addition, the more integrated, the greater the employment and skills diffusion impact. Enclave-style EPZs, as the ones in Bangladesh, do not lend themselves to benefiting from these spillover effects. The SEZs in China offer classic examples of financial, legal, labor and even pricing policy reforms tested in zones before being extended to the rest of the economy; the Aqaba SEZ has been promoted as an important model for the rest of Jordan to liberalize investment policies and reduce regulatory burdens; and the Philippines’ ecozones have created a demonstration effect for more environmentally-friendly, sustainable development overall. The most successful economic zone programs are those that rely on a holistic approach, maximizing linkages and building the momentum for critical reforms to permeate the economy at large. Policy makers governing such zones regimes recognize the supporting role that zones play in the growth strategy of their countries. Zones are only one tool to support economic growth, and cannot substitute for critical policy reforms. Zones can address a number of infrastructure and administrative deficiencies; However, they are only one building block in the broader trade and investment regime, and should be developed with complementary reform efforts in areas such as transportation, public administration, land management, labor relations, and internal security. III. Potential for a Modern Economic Zones Regime in Bangladesh In a country like Bangladesh, where investors are skeptical of the business environment (as evidenced in low investment levels compared to the country’s potential), economic zones – if executed according to best practice principles – can offer an oasis of regulatory simplicity, investment security, infrastructure provision, and hassle-free access to inputs. In the medium term, the results from these zones can catalyze national-level reform through a successful “demonstration effect” of policies and development approaches. The passage of the 1980 EPZ Act, which created export-oriented economic enclaves, was intended to ease the barriers to entry for foreign investors. However, the Act had neither the intent nor the effect of diffusing economic liberalization into the broader economy. Private EPZs do not exist in Bangladesh and the small-scale industrial parks program operated by BSCIC is more akin to industrial zoning than growth-oriented industrial property development. Overall, this de facto economic zone regime remains limited in scope, scale, and ambition. Bangladesh is not alone in having to overcome this challenge. Internationally, many “first generation” EPZ regimes created in the 1980s have faced similar constraints to growth (see box below). While Bangladesh has been slow to reform its EPZ regime, it is now in a position to learn from the successful reform experience of other countries in charting its own reform course. 6 Chapter 1: Introduction Box 2: Country Reform Examples The Dominican Republic, a leader in private free zones in the late 1980s, built on a public zone program that was initiated in 1968. When public zones were unresponsive to growing investor demand, the country saw the rapid development of private zones which now dominate (there are 33 private zone, compared to 21 public ones) and are able to command as much as three times the rental rates of public zones because they offer superior infrastructure, facilities, and services. However, because the national economy remains relatively protected, the program has been less successful in establishing linkages with domestic suppliers. Kenya introduced private EPZs in 1991, and now hosts 37 private EPZs (only 2 are public). The Kenyan EPZ Authority has strong private-sector participation on its board (6 out of 14). However, Kenya still has to make the transition to a more diversified manufacturing base (heavy dependence on garments). The Philippines has been a pioneer in the development of both private free zones and large-scale Freeport SEZs. In the mid-1990s, the regime made a successful transition from public EPZs to a flexible economic zone framework that facilitates private investment. Foreign investors clearly prefer the country’s 61 private zones to the 4 public zones. However, the country’s two freeports continue to struggle with an institutional framework that combines development and regulatory responsibilities in the same public agency. China developed an ambitious program of SEZs that were specifically designed as experimental “laboratories” for the application of liberalized economic policies nationwide. Five large-scale SEZs and more than a dozen economic and technical development zones have now been established on China’s coast. Designing an appropriate policy and regulatory framework for economic zone development in Bangladesh requires an assessment of current policies and practices, as well as lessons learned from economic zones worldwide. The next chapter evaluates strengths and weaknesses of the existing zones framework in Bangladesh in light of global good practices. The document, then, presents options available to the Government of Bangladesh (GoB) to consider in reforming and extending its strategy on economic zones and recommends a course of action for introducing those reforms in a pragmatic manner that balances near-term economic impacts with longer-term objectives. 7 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework In understanding the opportunities for reform in the existing zones framework, it is important to understand how Bangladesh’s experience with EPZs and industrial estates to date compares with leading international practices in this area. The project team examined the existing economic zones framework and compared its policy, legal, and regulatory aspects, institutional framework, and infrastructure assets and management against these leading practices. 9 The following table summarizes how Bangladesh stacks up against its competitors in each area; subsequent sections of this chapter provide a discussion on each area. The picture that emerges is that of a public-sector dominated development approach that is unable to make the transition to private-sector participation not simply because this is a new concept, but because the current legal and institutional structures are not supportive of private or public-private development in Bangladesh. The basic and poorly maintained zones are symptomatic of this public-sector approach, and their restrictive policy regime and inadequate infrastructure leave few opportunities for these zones to serve as models for other infrastructure development opportunities in Bangladesh. At the same time, it must be recognized that given Bangladesh’s constrained industrial land market, simply abandoning public zones in favor of pure private development is not an option. In this environment, zones require a public-sector champion who can proactively assemble land and package economic zone projects in a way that responds to market demand and can attract private capital and expertise into the development, operation, and marketing of new zones. Opening up public land for development, including “khas” land and land owned by state-owned enterprises, is a particular priority. Shifting to this new approach will require a concerted investment in time, political capital, and financing on the part of Government in order to succeed. In order for this strategy to achieve the objectives described in the previous chapter – to successfully attract foreign investment, generate positive spillovers for the national economy, and play an active role in the broader economic development agenda – it will have to focus on creating new opportunities. In this process, the EPZ program serves as a logical point of departure. The industrial estates program has a more limited set of objectives and, as such, is not a central element in the development of a new, growth-oriented zones regime in Bangladesh. While there is certainly room for improving the way in which these estates are planned, developed, and managed, they would play more of a supporting role to larger economic zone developments that can make demonstrable contributions to the economy over the medium-term. 9 For a detailed discussion of best practices, see Free Zones: Performance, Lessons Learned and Implications for Zone Development, FIAS, November 2004. 9 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Table 5: Summary Benchmarks of Bangladesh Zones against International Best Practice = Good Practice = Poor Practice Policy Area International Best Practice Rating Comments CORE POLICIES, INCENTIVES, AND REGULATORY FRAMEWORK Extra-territoriality • Extra-territorial status, i.e. outside domestic • EPZs meet international standards in customs territory principle • Eligible for national certificates of origin • Eligible to participate in national trade agreements/arrangements Zone Development and • Reliance on private and PPP development of • Pure public ownership and operation Operation zones based on commercial feasibility in practice • “Level playing filed” between private zones • Private EPZ framework exists on and legacy public zones paper only Linkages with • Sales to the domestic market: liberalized; • Mixed environment for EPZs Domestic Economy provided on a blanket basis rather than case- • Sales to domestic market restricted to by-case; treated as import into domestic 10% for most sectors, prohibited for market, subject to payment of import duties ready-made garments and taxes • Purchases from domestic market • Purchases from domestic market: treated as permitted, indirect exporters eligible exports from domestic market; enterprises for duty rebates eligible for indirect exporter benefits Eligibility for Benefits • No minimum export requirement • Falls short of best practices in some • Manufacturers & services respects • Foreign & local firms • Minimum 90% export requirement • Expansions of existing enterprises • Different provisions for foreign vs. domestic firms • Private developers of zones • Private developers not entitled to zone benefits Fiscal and Non-Fiscal • Duty-free privileges on construction materials • Duty-free privileges largely aligned Benefits and equipment, production inputs, machinery, with international practices equipment, spare parts, and, in some cases, • Room exists for rationalizing and consumables and non-production machinery harmonizing the tax regime with and equipment national policies • Other non-fiscal incentives Licensing and • Transparent criteria • Falls short of best practices in some Permitting • One-Stop Shops and streamlined approvals respects • Automaticity • BEPZA one-stop window not very effective • No automaticity Customs Controls • Minimum controls • More streamlined than in domestic • Primarily at perimeter territory, but improvements possible • Record-based mechanisms to monitor • Over-reliance on physical controls compliance 10 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework Policy Area International Best Practice Rating Comments SOCIOECONOMIC POLICIES Labor Policies • Full consistency with ILO labor standards • Improved, but still not up to best • Specialized dispute settlement mechanism practices • Delay in implementing freedom of association in EPZ • Specialized dispute settlement mechanism has been problematic in practice Environmental Policies • Consistency with national regulations • Lack of effective monitoring and • Promotion of good environmental practices enforcement of environmental rules ZONE INSTITUTIONAL STRUCTURES Agency Powers and • Division of development and regulatory roles • BEPZA has overlapping authorities Authorities that may create conflict of interest • Executive Cell is untested • BSCIC has limited powers and authorities in zones outside physical development Private Participation • Strong private sector participation • BEPZA and Executive Cell generally on Governing Boards aligned with international practices • No private sector participation in BSCIC Private Sector • Clearly defined in legislation; specific zone • BEPZA & BSCIC regimes do not Development Roles and designation criteria allow for private sector development Responsibilities • Eligible for full benefits • Private EPZ regime is untested, but • Development of onsite infrastructure and will face competition from BEPZA facilities zones • Provision of value-added services • Competition from government-run zones on a level playing field PHYSICAL DEVELOPMENT AND MANAGEMENT PRACTICES Location and Access to • Proximity to population centers • Many sites selected on political Markets • Access to infrastructure linkages (water, grounds, regional development power, gas, transportation) imperatives – have been less successful in attracting investment Zone Designation • Clear designation criteria, including minimum • Lack of designation criteria land area, location, etc. Onsite Infrastructure • Serviced land available for sale or on long-term • Utility connections hassle-free and Facilities lease/leasehold • Uninterrupted supply of electricity in • Private sector participation in provision of EPZs utilities • Lack adequate utilities infrastructure • Value-added facilities and services on • Lack of central effluent treatment commercial basis plants have led to pollution • Lack of commercially-driven services 11 Bangladesh: Piloting Reform through the Development and Management of Economic Zones I. Core Policies, Incentives, and Regulatory Framework An important trend in zone development has been the expansion and liberalization of the core set of policies and privileges of most free zone programs, especially EPZs. In general, these have taken the form of removing many of the distortions and restrictions previously associated with EPZs, rationalizing incentives, simplifying and streamlining (through one-stop-shops where possible) investment and other approvals, facilitating expatriate work permits, removing import and export licenses, as well as expediting on-site customs inspection procedures and automatic foreign exchange access. Typical provisions include: Extra-territorial status for customs purposes; Providing for private zone developers and treating them as indirect exporters; Providing for private utility providers and treating them as indirect exporters; Pro-active policies to encourage linkages with the domestic economy; Allowing a wide range of economic activities to take place within the zone; Providing equal treatment of different investors and investment forms; Harmonizing zone tax policies with national policies; Automating approvals and permits based on transparent rules and negative lists; Streamlining procedures for business registration; Facilitating secondary permits and authorizations; and Developing special customs rules and regulations drawing upon WCO and WTO provisions, including simplified documentation, onsite clearance, and reliance on inventory controls rather than physical inspections; and fast-track implementation of automated customs systems, with proper inventory controls and audit systems. a. Territorial Status The EPZ Act does not explicitly define the territorial status of the Bangladesh EPZs nor do the Customs EPZ Rules. The latter, however, does define the “Tariff Area” as “any area in Bangladesh outside the limits of a zone,” and applies to both public and private EPZs. While a more explicit definition of extra- territoriality may be preferable, this approach is largely in line with the spirit of Specific Annex D1 of the Revised Kyoto Convention. The industrial estates, which are not classified as free zones, are within the domestic customs territory and do not benefit from any extra-territorial status. Exporters are currently eligible for national certificates of origin, in line with best practices. b. Zone Development and Operations New generation zones are developed and operated by the private sector, which can often provide a better range of facilities and services for tenant enterprises and reduce the fiscal burden on the public sector. Where government-run zones exist, the legal framework should ensure that competition among private and public zones is on a “level playing field” and that public zones do not have unfair advantages (such as subsidies) that undercut private projects. Applicable legislation must therefore provide a clear definition of private zones, benefits, obligations, rights, and modes of public-private partnerships for zone development—such provisions apply to both EPZs and industrial estates. In most jurisdictions where both public and private zones exist, they operate under a single legislative and institutional structure in order to ensure consistency in implementation and regulation. Industrial estates in Bangladesh are currently wholly public-owned by BSCIC. The public and private EPZ regimes exist in parallel but under two separate legal and institutional regimes (though private EPZs benefit from the concessions offered under the EPZ Act). The Private EPZ Act provides only a very broad framework for the development of private zones and no criteria are established directly in the law for the application and approval of private zones. The experience of the Korean EPZ’s protracted licensing process provides some indication of the difficulties associated in getting necessary approvals for private zone development and the potential lack of transparency in setting such a process. 12 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework Also problematic is the presence of two parallel institutional/regulatory bodies. Though membership in the respective governing Boards of the public and private zone regimes is broadly similar, with the majority of members overlapping, they operate as separate entities, with separate authorities and decision- making. This can result in very different implementation and regulatory approaches to the two EPZ regimes, inconsistent with best practices and with the potential to conflicting regimes and confusion in the marketplace. c. Linkages to Domestic Market In Bangladesh, the zones regime is mixed in terms of its alignment with best practices. While the EPZ legislation promotes backward linkages through purchases from the domestic market (Customs EPZ Rules, which apply to both public and private EPZs, treat inputs – including construction goods – from the domestic tariff area as exports eligible for any exemptions and/or repayments of import duties and taxes on exported goods), sales to the domestic territory are more restrictive. Best practice (e.g. Jebel Ali, UAE) allows for unlimited sale to the domestic market, provided that all applicable duties and taxes are paid. In Bangladesh, by contrast, sales to the domestic market are restricted to 10% of exports (and 0% for garments) in the previous financial year, and must be authorized by BEPZA on a case-by-case basis. Bangladesh’s ability to create a more integrated development strategy for zones, in which backward and forward linkages are maximized, will have a critical bearing on the contribution of zones to export, employment, and GDP growth. d. Incentives Regimes The incentive framework should not discriminate between exporters and non-exporters. This is best done by removing export obligations and allowing zone enterprises full access to the domestic market on a duty-paid basis. As discussed above, this is an area for improvement in Bangladesh. Compared with domestic units in Bangladesh, EPZ enterprises benefit from significant fiscal incentives, including corporate income tax holidays, duty exemptions, and other direct and indirect tax exemptions (see box below). Reform of the zones regime should be leveraged as an opportunity to rationalize corporate income tax incentives with national policies according to performance incentives. 13 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Box 3: Investment Incentives in Bangladesh EPZs Fiscal incentives for EPZ enterprises include: Ten-year corporate income tax holiday from the date an industry goes into commercial production, followed by a 50 percent reduction in income taxes for an additional five years Accelerated depreciation on plant and machinery (excluding office appliance and transport equipment), upon application and approval of BEPZA within 4 months of installation Exemption from tax on dividends during tax holiday, and re-invested dividends thereafter; Full repatriation of investment capital gains, profits and dividends Three-year personal income tax holiday for expatriate workers, provided that such salaries are not subject to income tax outside Bangladesh Duty, VAT and other import tax exemptions, including supplementary duties, on production inputs and materials, capital equipment and machinery, and construction materials; three duty-free vehicles are permitted Non-fiscal incentives for EPZs enterprises include: Investment protected under Foreign Private Investment Promotion and Protection Act 1980 100% foreign ownership permissible with no ceiling on foreign investment Full repatriation of investment capital gains, profits and dividends No import licensing required and no import policy restrictions No utilization declaration, import/export registration certificate & bond license renewal Subcontracting with EPZ enterprises and export oriented DTA industries is allowed Bangladesh EPZs enjoy Most Favored Nation (MFN) status Foreign currency loan from abroad under direct automatic route Non-resident Foreign Currency Deposit (NFCD) Account permitted for wholly foreign owned enterprises; Foreign Currency account by joint venture and local enterprises allowed Residency / citizenship scheme available for certain investors Additional incentives for investment in EPZs located in disenfranchised areas of the country (i.e. Uttara, Mongla, and Ishwardi) include a subsidy of 50 percent on land and/or factory rent beyond the below market- value lease rates available in the other EPZs, and a 30 percent cash incentive on investment for agriculture- . based industries in these three zones. EPZ investment incentives in Bangladesh are similar to benefits offered under zone programs in many other countries, and reflect international best practices in some respects (e.g. duty-free privileges). However, they fall short of best practices in some other respects, including the differential treatment of exporters and non-exporters (the latter are not qualified for investment incentives). While tax holidays may appear generous, the actual period of benefit may be shorter as the holiday takes effect from the beginning of operations. Many enterprises operate at a loss for the first few years of operation, making any exemptions unimportant; therefore, in many zones, tax holidays may be exercised from the first year of profit in order to increase the advantage. Other zones, such as Jebel Ali Free Zone, offer a tax-free environment, while still others, such as the Aqaba SEZ, provide for a reduced level of taxation for the project life. 14 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework Table 6: Zone Fiscal Incentives National Corporate Sales to Local Tax Exemptions/ Holidays Duty-exemptions Tax Rate Market 100% on capital equipment, 10 years, plus 50% reduction for production inputs and construction Bangladesh EPZs 25% Up to 10% additional five years materials, as well as up to 3 vehicles Bangladesh 25% None None Not applicable Industrial Estates 3-5 years, plus concessionary tax EPZ Program, Sri 35% (for income 100% exemption on capital goods rate of 10% for 2 years and 20-30% Lanka over Rs. 300,000) and production goods maximum 15% thereafter 5 years, plus 50% reduction for SEZ Program, 37.5% on domestic additional 5 years (for re- 100% exemption on all goods Up to 100% India 42.5% on foreign investment only) Jebel Ali FZ, 100% exemption on all goods, 0% 100% exemption Up to 100% Dubai, UAE including consumer goods Aqaba SEZ, 100% exemption on all goods, 15% Reduced rate of 5% Up to 100% Jordan including consumer goods The evidence on EPZ performance in Bangladesh strongly suggest that the incentives regime has not yielded the expected results, as incentives themselves cannot compensate for the more critical weaknesses in the investment environment in Bangladesh. e. Enterprise Eligibility and Approvals The openness of an EPZ regime is defined in terms of the absence of minimum export requirements, a broad range of eligible activities, and equal treatment of foreign and domestic investors. While foreign and/or larger investors not explicitly denied entry into Bangladesh’s industrial estates, the properties and orientation of BSCIC favors smaller enterprises. Bangladesh EPZs, both private and public, remain relatively restrictive compared to best practices, with a minimum export obligation, absence of a negative list of activities that provides the opportunity to restrict eligibility without clear criteria, and different policies for foreign and domestic/joint venture investments. Moreover, foreign investors fall under the provision of the Foreign Private Investment Act, which permits the Government to screen investments without any negative (or positive) lists, opening the door for a high-level of discretion. The Korean EPZ’s protracted licensing process under the Private EPZ regime provides some indication of the potential lack of transparency in approvals. Best practice lends itself to greater transparency and automaticity – e.g. transforming investment approvals from a case-by-case evaluation to simple registration meeting explicit criteria. f. Licensing and Permitting In Bangladesh, licensing and permitting procedures have been largely centralized within the zones to provide a more streamlined investment environment, in line with international practices. Registration within BEPZA EPZs typically takes 1-7 days, relatively quick by international standards. Under the public EPZ regime, BEPZA offers a number of other simplified approvals and/or acts as a window to process approvals that remain under the authority of other agencies – e.g factory inspections, labor, building approval, import/export permits, and utility connections. However, zone licensing and permitting remains very centralized in Dhaka, and investors (senior managers) routinely have to travel to Dhaka in person for paperwork, increasing costs and reducing the potential benefits of a “one-stop” 15 Bangladesh: Piloting Reform through the Development and Management of Economic Zones window. In fact, in a survey of zone tenants conducted for a study by ICRIER, firms gave relatively low marks to the EPZs’ quality of governance of the “simplified rules”.10 g. Customs Control The main customs principles for zone operations are: rapid physical transfer of merchandise; reduced documentation and flexible physical controls during processing. Customs control in Bangladesh EPZs, however, not only does not rely on a single administrative document, but procedures require goods to be escorted to zones rather than relying on a bond system; this increases costs by potentially delaying transport of goods and requiring personnel to travel to the port to clear customs. Legislation is silent on any required record-keeping (e.g imports, use of imported materials, and exports), thereby making post- audit controls difficult. Instead, paper or physical inspections are left to the discretion of customs officials. It is not surprising that the ICRIER study found that the frequency of irregular payments for customs clearance ranked high (4.2 out of 5). Customs does allow BEPZA to facilitate import and export documentation, one of the very few instances where the economic zones regime can serve as a model for administrative reform in Bangladesh. II. Socioeconomic Policies In addition to core zone policies, incentives, and the regulatory framework discussed above, a zone’s competitiveness in attracting quality investors is largely based on the productivity of its workforce and the quality of its labor-management practices. Many multinationals corporations have imposed codes of conduct on suppliers in foreign markets to ensure that good labor practices are in place. At the same time, developing country governments are increasingly building sustainable development strategies that promote economic growth and ensure that both human and other natural resources are not overexploited. Typical provisions of good socioeconomic policies include: Adoption of international labor standards, including freedom of association, collective bargaining, and occupational health and safety regulations; Environmental management that promotes sustainable economic development; and Promotion of corporate social responsibility to meet or exceed existing standards. a. Labor Regulations Consumers in industrial country markets have provided an additional level of scrutiny, with the trials and tribulations of multinationals’ overseas operations displayed on the evening news. Many multinationals have imposed codes of conduct on suppliers in foreign markets to ensure that good labor practices are in place. New zones tend to have a much-improved track record in applying and enforcing effective labor and environmental laws and regulations and promoting corporate social responsibility. Zones can also directly address health and safety related to building codes and standards, zone security, traffic safety in the zone, shared health facilities, and the provision of housing. These are areas where a zone can provide lower-cost shared services, making it an easy win-win opportunity for zone developers, tenants, and workers. In Bangladesh, national labor legislation is largely consistent with ILO commitments and applies within industrial estates but not EPZs. Bangladesh is one of a few countries that openly and officially exclude zones from the national labor legislation and system of labor-management relations. Instead the EPZ Act, in an apparent effort to provide a more favorable investment environment, suspended the application of the 1969 Industrial Relations Ordinance and subsequent amendments, which provide for the right to 10 Aradhna Aggarwal, “Performance of Export Processing Zones: a Comparative Analysis of India, Sri Lanka and Bangladesh,” for Indian Council for Research on International Economic Relations (ICRIER), March 2005. 16 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework organize labor unions and enter into collective bargaining, as well as other labor-related legislation, including the Employment of Labour (Standing Orders) Act (1965) and the Factories Act (1965). Consequently, labor unions have been prohibited in the EPZs. In its stead, BEPZA issued in 1989 a set of rules that established minimum wages and annual increases (higher than outside the EPZs), annual leave provisions, factory conditions, and maximum hours to provide workers with a minimum set of working conditions. In addition, each of the zones has an Industrial Relations Department (IRD) that is responsible for grievance handling, conciliation and inspection. Workers or employers who have a grievance are expected to take it up at the factory level first; however, if after seven days the issue has not been resolved, they can report it to the Industrial Relations Department who will make a decision. No legal representations are allowed and the IRD’s decision is final. According to a 2004 report by the Fair Labor Association, many EPZ workers reported that the IRD system was not effective in its enforcement of standards. While some efforts were made to provide minimum working conditions in the EPZs, Bangladesh remained under pressure from ILO supervisory bodies to allow freedom of association and collective bargaining in concordance with Bangladesh’s commitments under ILO Conventions. Bangladesh has also come under pressure from the United States to reform EPZ labor regulations in line with ILO Conventions or risk the non-renewal of GSP privileges. As a result, the Bangladeshi Government issued a declaration in 2001 announcing the withdrawal, from January 1, 2004, of restrictions imposed on trade union rights in the EPZs. In July 2004, the EPZ Workers Association and Industrial Relations Act was passed to establish a new parallel labor regime in the EPZ with strengthened worker rights, in line with ILO standards. The Act grants limited workers’ association rights in the EPZs from November 1, 2006. In the interim, a provisional arrangement has been established to allow the formation of Worker Welfare Committees (WWCs) within each EPZ, with elected representatives of the workers. The WWCs have the power to negotiate and sign collective agreements. The bill provides for the formation of formal trade unions from November 1, 2006. Trade unions of a particular EPZ will be allowed to form a federation, but there should not be more than one federation in an area. The individual EPZ federations will not be allowed to form a single body or join any national trade union, political party or its labor front. In other words, each EPZ can have a federation specific to it, but these federations cannot group together into a single body. There also remain concerns by some EPZ enterprises—the Korean EPZ Corporation that represents 22 Korean investors in Bangladesh has been particularly vocal on this issue—that the unionization will mark the return of turbulent industrial relations and may, as a result, harm rather than help workers if poor relations result in factory closings.11 Clearly, the turbulent history of unions in Bangladesh is perceived negatively by investors. However, experience from other countries, including those with histories of turbulent industrial relations (most notably, South Africa, Mauritius, and the Philippines), shows that the introduction of trade unions and other internationally accepted labor practices in zones has not led to increased strife, has improved the welfare of workers, and can also serve to improve the image and bottom line of those zones and resident zone enterprises. As for compliance with the interim regime, a recent study suggests that EPZ enterprises are largely in compliance with BEPZA’s labor rules, and have contributed to a higher level of worker welfare than outside the EPZs in terms of pay, working conditions and safety, and employment practices.12 Bangladesh has also made significant improvements in the EPZs in terms of child labor, which had historically been a 11 SGS Bangladesh Limited, pp. 3-5. 12 SGS Bangladesh Limited. 17 Bangladesh: Piloting Reform through the Development and Management of Economic Zones fact of life in Bangladesh, both inside and outside the zones. In 1995, Bangladesh’s garment exporters association signed a memorandum of understanding (MOU) with the United Nations Children’s Fund (UNICEF) and the ILO under which child laborers in the EPZ textile factories were removed and enrolled in education programs. While child labor outside of the EPZs remains rampant, ILO-assisted monitoring teams, which found child laborers in 43 percent of EPZ factories in 1996, found fewer than 5 percent in 2001. The growth of garment and other female labor-intensive sectors in the EPZs has contributed to increased welfare through new job creation for women – 65 percent of the EPZ workforce is female. At the same time, female employees in the zones continue to face issues such as harassment and the lack of upward mobility into management roles. Nevertheless, evidence suggests that the EPZs have provided a more favorable work environment for female employees though the zones still lack adequate dormitory and childcare facilities. A 2000 World Bank study found, for example, that gender relations in EPZ factories are better than those in non-EPZ factories.13 Factories located in EPZs also appear to provide more safety to women workers than those outside. b. Environmental Policies While EPZ and industrial estate enterprises are bound by the same environmental laws and clearances as elsewhere in the country, the lack of adequate facilities, as well as monitoring and enforcement, has led to excessive pollution. Existing EPZs in Bangladesh currently do not provide any central effluent treatment facilities and fundamental environmental controls are lacking. While tenants are required to conduct pre-treatment prior to discharge, the lack of adequate monitoring and enforcement has led to untreated effluents to be discharged into nearby waterways. Few companies have attained ISO 1400 series certification. The industrial estates have likewise been significant polluters and have an even poorer track record in terms of solid waste collection (see Annex C for more details). This aspect of the EPZs has implications for being able to attract FDI as well as for the health and safety of workers and residents in the surrounding areas. While BEPZA and BSCIC do not appear to be concerned about their own liability for poor environmental performance of tenants, this will certainly be an important consideration for private developers interested in establishing new industrial property projects. III. Institutional Structures Another major factor behind the success and failure of zone programs is the autonomy and effectiveness of the body charged with regulating zone operations. Successful institutional arrangements exhibit the following characteristics: Clearly articulated legal rights and responsibilities of zone regulators, developers, operators, and tenants; Clear division between zone development and regulatory functions; Clearly delineated responsibilities between zone authorities and other government agencies (esp. customs, tax, labor, planning, environment); Zone authority autonomy over its staffing, budgeting, and policy-making; Private-sector participation on governing boards; Level competition between private and public zones; and Focus on private service provision, outsourcing, and value-added services. 13 Pratima Paul-Majumder and Anwara Begum, "The Gender Imbalances in the Export Oriented Garment Industry in Bangladesh," Policy Research Report on Gender and Development, Working Paper Series No. 12, June 2000, p.25. 18 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework a. Export Processing Zones BEPZA is the Government entity charged with promoting, attracting, and facilitating investment in the 6 existing EPZs currently operational and the 2 additional EPZs that are under development. BEPZA is a stand-alone entity with a mandate to develop EPZs in Bangladesh, which it has done with a degree of success – when it is left to identify, plan for and develop estates on its own. It is arguably far less successful when the location decision of EPZs is made politically. BEPZA’s poor track record in developing properties in areas where the project’s feasibility was not established signals that mechanisms to institute greater transparency, less discretion, and rigorous market rationale in site selection should be important design factors in any new zones regime. A separate Executive Cell in the Prime Minister’s Office is tasked with licensing and regulating private EPZs. This existing framework attempts to set up a distinct regulator for private EPZs but does not apply the same principle to public EPZs (BEPZA is both developer and regulator of public zones), thus creating potential distortions if the private EPZ regime ever becomes operational. In addition, the institutional disparity between an autonomous BEPZA responsible for public zones and an Executive Cell within the Government structure responsible for supporting private EPZs puts public zones at an advantage – particularly since the Executive Cell has no independent financial capacity. The composition of BEPZA’s and the Executive Cell’s unique Boards of Governors represents both an advantage and a disadvantage for Bangladesh’s zones. These Boards are certainly high-level (membership includes, among others, the Prime Minister, multiple Ministers, and the Central Bank Governor) and vested with sweeping decision-making power that insulates the EPZ regime from competing Government entities. However, the Boards’ “policy formulation” role is interpreted as a micro-management role, with individual zone approvals being decided by the Boards rather than through a transparent approval process administered by technical staff. In addition, the lack of private-sector participation does not conform to best practices. Decision makers should carefully consider whether in attempting to develop institutions that are highly insulated from political influence, they have instead imported much of that influence into the institutions through the Boards of Governors. (A detailed institutional review of BEPZA, BSCIC, and the EPB can be found in Annex D). b. Industrial Estates BSCIC is the primary Government organization engaged in small and cottage industries development in Bangladesh. BSCIC’s remit extends far beyond the development of industrial estates. It is involved in a very wide range of SME development and poverty alleviation activities that are not directly related to industrial estate development. BSCIC carries out these functions not as an independent agency but effectively as a unit within the Ministry of Industry. The existing industrial estates are not run on a commercially-viable basis and lack services that would be provided on a commercial basis. It is clear that BSCIC’s industrial estates need to be run more efficiently, should provide more services, and should generate more revenue. Given BSCIC’s operating constraints and broad mandate, it appears that BSCIC needs to be significantly restructured in any event, even if the overall zones regime is not liberalized. BSCIC does have decades of experience in planning and obtaining Government approval for industrial estates, which involve the acquisition of land and going through the process of developing it into industrial plots and renting these plots to small and cottage industries. However, this experience may not be relevant in the development of larger modern industrial estates aimed at attracting foreign and large domestic investors. 19 Bangladesh: Piloting Reform through the Development and Management of Economic Zones IV. Physical Development and Management Practices The success of zones is critically linked to the way in which they are located, developed and managed. Management of zones is enhanced when they are operated on a cost-recovery rather than subsidized basis, and are market-oriented and customer-focused. This is best done when zone development and operation is undertaken by private sector groups on a commercial basis, rather than government organizations who frequently are subject to political pressures and funding constraints. At the same time, the rapid proliferation of private zones can place significant, unanticipated costs on governments especially in terms of offsite infrastructure and facilities. Physical development and management of zones is guided by certain best practices: Demand-driven site selection; Clear site designation criteria and site development guidelines; Clear public/private division of roles in utility provision; Emphasis on commercial orientation and private developers/ service providers; Flexible, scaleable design that can respond to shifting demand; Market-driven mix of serviced land and pre-built facilities; Emphasis on value-added services to complement real estate business; and Effective planning, zoning, design, and environmental controls. In Bangladesh, zones have only followed some of these principles to date. The greatest infrastructure advantage conferred by EPZs has been the ease in obtaining utility connections (Bangladesh is notorious for the extended delays and high informal costs involved in obtaining utility connections outside EPZs) and the uninterrupted power supply. However, no dedicated utility networks exist for zones, in large part because the high cost of dedicated stations cannot be sustained by the relatively small and subsidized properties run by BEPZA – the larger SEZs in China, by contrast, have dedicated networks. As such, EPZ enterprises are exposed to the capacity constraints faced by external networks – Chittagong EPZ tenants, for instance, report consistent under-supply of water and the need to make private arrangements to truck additional water in. Historically, many EPZs and industrial estates have been sited for regional development purposes rather than according to market demand (though recent EPZ developments have been focused in higher-demand locations). Private sector participation – be it in zone development, operation, or service provision – has not been a part of the Bangladeshi zone experience to date. Neither the EPZs nor the industrial estates are well maintained. The EPZ program has made an attempt to introduce some common facilities in its zones and is able to provide at least some maintenance (in contrast to the industrial estates program), but the EPZs are still characterized by a variety of infrastructure deficiencies. Aside from poor external road connections and old facility designs, there are a number of internal (on-site) management deficiencies, including: Environmental management. EPZs generally lack adequate supplies of water, central effluent treatment facilities, and effective solid waste collection as well as proper environmental monitoring and enforcement mechanisms. Upkeep and aesthetics. Despite low labor costs in Bangladesh, EPZs are not well maintained or landscaped. In addition, basic on-site features such as signage are either lacking or in disrepair. Security and pedestrian access control. The EPZs lack access control despite the labor-intensive nature of most operations. This has implications for both physical security of factories and worker safety. 20 Chapter 2: Strengths and Weaknesses of the Existing Zones Framework Bus transportation and parking. Bus transportation provided in some EPZs is unstructured and loading/unloading takes place in the middle of roadways, in close proximity to the main pedestrian access points. This interferes with traffic circulation and increases the potential for traffic-related accidents. Maintenance. While EPZs are better maintained that industrial estates, they also lack basic maintenance manuals and schedules. BSCIC sites share all of these problems and have much more severe shortcomings in terms of maintenance. In addition, they are constrained by their smaller size, making the provision and management of the infrastructure costly on a per-unit basis. These small estates may not allow for efficient installation of dedicated effluent treatment or water treatment plants (see Annex C for a more detailed evaluation of off-site as well as on-site infrastructure at selected EPZs and IEs). 21 Chapter 3: Options for Zone Development Policy-makers in Bangladesh want to modernize their economic zones regime so that their performance and impact on the economy can be maximized. The existing zones, with their limited scope, scale, and ambition, have not produced the desired results and have not introduced physical development or public management practices that one would like to see replicated elsewhere in Bangladesh. Learning from other countries’ reform experiences, the broad consensus is that poorly performing zone programs have been able to transform themselves by liberalizing their policy regimes and aggressively pursuing private sector participation. Applying this principle in Bangladesh requires not just an understanding of good practice but also a consensus on the scale of reforms that can be absorbed within Bangladeshi market conditions. Translating broad policy objectives into the institutional, legal, regulatory, and physical development frameworks required for economic zone implementation means that there must be some consensus regarding how ambitious the future economic zone program should be. In Bangladesh, the options that have been suggested for enhancing the existing zones regime include the following, starting from the most restrictive and progressing to the most ambitious: 1. Rehabilitate and commercialize existing properties 2. Privatize existing properties; implement new BOT projects under current regimes 3. Modernize existing regimes; implement new PPP and private-sponsor projects 4. Introduce a master-developed, contiguous SEZ 5. Introduce a regional, multi-project SEZ program Rather than independent and mutually-exclusive, these options really offer several Tracks; pursuing a few of them in parallel fashion is certainly possible. These options are each discussed below, followed by a discussion of the advantages and disadvantages posed by each option to provide guidance on selecting those options best suited to Bangladesh. Policymakers will need to decide on what combination of these options they would like to pursue, accordingly develop a final design and implementation strategy package. I. Option 1: Rehabilitate & Commercialize Existing Properties The most modest approach is to rehabilitate existing industrial parks and EPZs and to introduce commercial management principles through reliance on performance-based management contracts, service outsourcing, and other commercial mechanisms to improve the industrial property offering for investors. BEPZA would continue to own its 6 current EPZs and develop its 2 new EPZ projects, but would pursue new approaches in its operations. First, in order to address some of the major infrastructure shortcomings in existing EPZs, additional investment would take place, including new gate access control, improved bus parking and pedestrian circulation, signage, landscaping, underground power lines, manual-based maintenance, separation of storm water and effluent drains, new water and wastewater treatment facilities, and improved shared value added services (perhaps including dormitory space). Such improvements would cost between $10 and $20 million per EPZ at a minimum, and it is unclear whether BEPZA could finance this level of improvement or recover the investment through user fees. Second, new EPZ development/expansion such as the current projects at Karnaphuli and Adamjee would be developed based on modern planning principles and zoning control, at an estimated cost of $45 million (see Annex 3 for cost estimates). Third, BEPZA would cease to operate its EPZs and instead issue one or more management contracts for the operation of the EPZ facilities. Such improvements would of course have to be financed, and would likely require re-negotiation of existing lease terms simply to be able to properly maintain the EPZs. 23 Bangladesh: Piloting Reform through the Development and Management of Economic Zones BSCIC would adopt the same approach to infrastructure rehabilitation, though costs for rehabilitating the small industrial estates would be lower – up to $5 million per estate. However, commercialization of BSCIC’s 67 small properties may not be feasible in all cases, and would concentrate only on the more successful properties (see Annex C for ranking of industrial estates according to specified scoring criteria). Given the small size of the estates, regional management contracts for multiple properties may be required. While it could also be possible to create cooperative estate management associations, indifferent treatment of estate infrastructure by BSCIC’s tenants to date suggests that current tenants may not value the properties sufficiently to form such cooperatives, or to fund better maintenance through increased fees. In such cases, rehabilitation would have to be undertaken on a subsidized basis, perhaps in conjunction with improved enforcement of maintenance standards by tenants. This approach could include significant third-party transactions (e.g. captive power), but the core investment and service delivery responsibility would remain with BSCIC and BEPZA. These organizations would still allocate sufficient capital and maintenance budgets to improve existing facilities, and would finance new property development. Investor incentives, investment restrictions, and export requirements would remain in place under the prevailing legal and regulatory framework, though implementation of some procedures could be delegated to private service providers. BSCIC’s and BEPZA’s on-site management staff would be reduced, and some positions could be reallocated to management contractors. The main advantage of this approach is to improve the quality and operations of existing industrial parks and EPZs. However, it is unclear how BSCIC and BEPZA could make available the funding required to upgrade existing properties, unless significant cost savings can be achieved through private management contractors. Leaving aside the public sector development approach of oil-rich countries in the Persian Gulf, the successful experience of counties such as the Dominican Republic, Kenya, and the Philippines suggests that the private sector is better positioned to make these improvements on a financially sustainable basis – particularly since Bangladesh’s zones would offer a management contractor few opportunities to cut costs in the delivery of the low level of existing facilities and services. Given the basic services that are not provided, it is not clear that such savings would be sufficient to offset the new capital and maintenance requirements. In addition, the private-sector contractors would work primarily to meet performance targets specified in their contracts rather than seeking out new value-added business opportunities. The overall impact would be limited to marginal improvements to the existing regime, without the kind of substantive innovation that could serve as a model for reform and improved development in the rest of Bangladesh. 24 Chapter 3: Options for Zone Development Box 4: Growth in Industrial Land Markets While the current zones regime has a number of weaknesses, it is operating in an environment of increasing demand. A study of five industrial land market locations in Bangladesh (undertaken by FIAS/ SEDF as an input to the current Report) indicates that the average price of industrial land has increased 71.18 percent and the demand of industrial land has increased 69.75 percent between 2000 and 2005. The following chart illustrates the increase in both the price and supply of industrial land in these markets. Market Rate of increase in Rate of increase in demand Ranking (increase Location price of land (%) for industrial land (%) in demand) Savar 94.29 190.00 1 Chittagong 122.22 60.71 2 Comilla 70.00 49.50 3 Gazipur 42.97 47.00 4 Khulna 20.00 6.38 5 Average 71.18 69.75 More fundamentally, rehabilitating existing properties is a low-risk strategy that also yields few tangible benefits. Concentrating on existing properties limits the potential employment impact, and reliance on public sector development of new properties would not maximize market-driven service and infrastructure provision in these areas. While decision makers should not neglect the maintenance and administration of existing properties, this should not serve as the focal point of a new modern economic zones strategy. Table 7: Rehabilitate & Commercialize Existing Properties Policy Framework No future developments under existing policy regime Commercialize and unbundle existing properties Institutional Reengineer and transition BEPZA towards a public asset owner role Framework Create a new Industrial Estates Authority (IEA) Legal/Regulatory Amend to accommodate asset transfer from BSCIC to IEA Framework Accommodate management contracting through rule-making Physical Development Development responsibilities retained by Government Framework Operation/maintenance provided by private contractor(s) Advantages Low-risk strategy Disadvantages Few tangible benefits, little economic development impact Lacks sustainability (maintenance) Not a pilot for national reforms II. Option 2: Privatize Existing Properties and Implement New BOT Projects Under Current Regimes A more aggressive approach would take at least the well-performing properties (see Annex C) through some form of privatization and rely on BOT or similar arrangements to transfer risk to a private developer/operator. This approach expands the role of the private sector and reduces BSCIC and 25 Bangladesh: Piloting Reform through the Development and Management of Economic Zones BEPZA’s capital investment, but also creates new challenges, particularly in terms of competition and capacity of public-sector regulators. In terms of physical development, this arrangement is quite flexible and can be adapted to both marginal and profitable projects, depending on the composition of assets to be included in the transaction. While the scale of such projects lends itself to BEPZA’s larger EPZs, BSCIC parks with high levels of demand could be developed on a similar basis. Both organizations would have to accommodate their new developments under the current legal and regulatory framework, and would continue to apply the current policy frameworks (incentives, customs control, etc.) to tenants. Institutionally, this approach would have to resolve issues related to BSCIC/ BEPZA’s role as concession regulators and operators of any remaining properties that cannot be privatized. It may also be that the existing legal framework would lend itself to treatment of BOT projects as private EPZs, thus bringing the nascent Executive Cell into the development framework. BEPZA would incorporate its existing properties, carry out an analysis of their financial position, and prioritize them based on their financial viability. Individual EPZs would then be packaged for privatization. This process would require a number of issues to be dealt with, including assignability of existing leases; legal basis of the transaction; jurisdictional issues between BEPZA and the Executive Cell; and improvements and service standards required of the acquiring party. Because many of the current EPZs have limited expansion space, their transactions would have to be structured primarily around an existing user base, which would be less attractive to private developers than a transaction that balances a current income stream with future growth potential. New projects – including Karnaphuli, Adamjee, and the Comilla extension – would likely be structured as BOT projects and could be designed based on modern design, zoning, and management principles. Such projects would be more attractive to private developers if the legal basis and design/award framework for the transaction were clear and predictable. BSCIC would adopt much the same approach for its properties, but would have to identify its project opportunities more carefully. Many of the existing industrial estates would not be sufficiently attractive to private developers due to their modest size, uneven occupancy, and low willingness-to-pay for services. The small-scale and cottage industry user base simply has fewer financial resources and is less likely to represent a market for value-added services. In these cases, BOT development of new properties also represents a greater opportunity than privatization of existing estates. This approach would broaden the role of private operators and create real incentives for seeking out and providing new value-added services to tenants. It would also reduce public-sector financing requirements. It would open up some important opportunities to use the zones regime as a pilot for private participation in public infrastructure and for sound property management practices. However, the approach remains based on the existing rigid policy regime and continues to rely on government to identify new industrial property opportunities. Again, privatizing existing properties and developing BOT projects under the current regime would not capture the full potential of new developments. While this approach would result in an improved and expanded supply of serviced industrial property, the substantial resultant physical improvements would be subject to the same competitive constraints as the current regime. Decision makers should consider whether a focus on private infrastructure provision without a parallel policy reform effort would reduce the return on scarce public investment in this area. However, depending on the amount of time required for a more comprehensive economic zone reform program, it may be advisable to accelerate private development by launching one or more pilot BOT projects under the current regime while the broader reform effort is formulated. 26 Chapter 3: Options for Zone Development Table 8: Privatize Existing Properties and Implement New BOT Projects Under Current Regimes Policy Framework Accommodate for transfer of existing assets to private operators and BOT developments for new zones Institutional Resolve conflict of interest between BEPZA/BSCIC role as concession regulators and Framework operators of any remaining properties not privatized Legal/Regulatory Would have to accommodate privatization and BOT transactions, probably through Framework internal rule-making Physical Projects identified and packaged by Government (BEPZA/BSCIC) Development Rehabilitation/development/operation/maintenance by private investors Framework Advantages Harnesses private capital for zone development Private sector seeks out new infrastructure facilities/services to provide Could be quick-win pilot initiative while broader reform effort is implemented Disadvantages Underlying zone regime remains limited, few linkages to domestic economy, which in turn limits potential success Public sector drives project identification and design III. Option 3: Modernize Existing Regimes and Implement New Public- Private Partnerships (PPP) and Private-Sponsor Projects The next option would be to reform the legal and organizational basis for industrial park and EPZ development to allow a broader range of medium-sized zone activity to develop in Bangladesh. This could include development of different forms of industrial parks as well as the introduction of more liberal free zones to replace the current EPZ regime. The main emphasis of this option would be to develop new greenfield economic zones (EZ) in the most promising locations available aimed at new investors. Physically, new EZ developments would continue to fall into the traditional industrial park-type category, though larger than the existing regime and encouraging more value-added services, increased investment in infrastructure, and modern planning and design standards (see box below). The regime would be flexible enough to accommodate “hybrid” developments, in which an industrial park includes both a free zone area and related infrastructure and facilities (such as housing, commercial buildings, recreational facilities, utilities, and other amenities). Such developments, which typically are at least 250 acres in size, are less risky for private developers because they appeal to a broader user base and offer better returns because of the opportunity to provide value-added services and facilities. They also tend to generate greater economic benefits due to the increased forward and backward linkages with the economy and because they provide benefits to more users. 27 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Box 5: Economic Zones and Value-Added Services Industrial parks and free zones increasingly provide value-added services to tenants. This trend arises from both the need to compete with other parks and from the opportunity park operators have to add additional revenue streams to the basic industrial real estate business. Such services can range from basic business support services in commercial parks to highly specialized engineering centers and testing laboratories in parks aimed at specific industry clusters. Common value-added services provided include: Logistics centers, container freight stations (CFS) and common warehousing Customs brokerage and freight forwarding services Shared training facilities, conference space, and video conferencing nodes Recruitment and labor placement offices and payroll services Materials testing, product quality testing, and certification laboratories General business support services (secretarial, banking, insurance) Worker transportation, housing, and cafeterias Social amenities, health care, and child care facilities Factory site security The policy regime would be liberalized to create greater linkages between free zones and the customs territory through the removal of export requirements or limitations on domestic sales. This would not only expand opportunities for Bangladeshi firms to supply exporters and for exporters to access some domestic markets, but it would also transform the tenant base of the zones. Removal of existing restrictions, coupled with improved infrastructure, would enable the zones to diversify their occupants to include both more sophisticated export manufacturers and firms servicing the domestic economy. This diversification in turn enables more complex relationships with Bangladeshi suppliers and service providers. Administrative procedures should also be streamlined as part of this process, including customs procedures. In the new free zone regime, accountability for duty-free inventories and production processes should shift from the current input/output controls to post-audits of inventory and in-process stocks – combined with stringent penalties for any violations. Opening up the zone to a broader range of users would in turn create greater opportunities for fee-for-service arrangements, different types of pre- built space offerings, and greater pricing power by zone developers. On the other hand, this liberalization would require a careful revision of the EPZ incentive regime, preferably in line with the recommendations of the FIAS Incentives Review.14 The new regime would also include a more credible mechanism for developing private economic zones. Bangladesh’s public zones have failed to provide sufficient zone space to meet investor demand, to provide zones of sufficient quality to attract investors in any but the most basic industries, and to provide proper maintenance and service provisions in the zones that have been established. International experience shows that public zones are consistently unable to overcome their financial and administrative constraints to develop successful, market-oriented zones, and Bangladesh’s budget constraints and inadequate institutional capacity imply that public zones are even less likely to succeed in Bangladesh. Only private investment in public infrastructure can bridge financial resources, efficiencies, and know-how required to make economic zones a success. 14 See Bangladesh Investment Incentives, Volume 1- A strategic Way Forward, FIAS, June 2005. 28 Chapter 3: Options for Zone Development Given the scarcity of land in Bangladesh, PPP transactions in which the Government provides land and off-site infrastructure and enters into a concession-type arrangement with a private developer for on-site development would play a key role in the implementation of new projects. In addition, economic zones that are established without Government initiative or planning should be supported by the new regime. In this regard, Bangladesh will have to overcome the negative experience of the Korean EPZ, which has helped to create the impression that industrial property projects initiated by the private sector will not be actively supported by Government. Initiatives such as the pharmaceutical industry’s proposed API Park could be an early success for a revitalized private zone/industrial park project. Other sector-specific parks have also been proposed by industry associations in the areas of automotive workshops, information technology, garments, leather, and plastics, though (with the exception of IT) these initiatives are largely oriented towards relocation of existing industries rather than generating new investment. Where successful, such sectoral parks can realize important scale economies around shared services (e.g. specialized effluent treatment, volume discounts on shipping costs, shared laboratories, clustered suppliers) and generate agglomeration benefits as new investors gain confidence in a park where competitors or related industries are already succeeding. The Government’s main role would be to regulate economic zone activity, promote the zone regime, and aggressively identify, assemble, and make available land suitable for industrial development through PPPs. The most difficult challenge under this option is to design an institutional framework that supports this development without losing existing capacity within BSCIC and BEPZA or creating uncertainty for current industrial park and EPZ tenants. This would require careful transition planning, but the institutional end-state would have to clearly separate regulatory and development responsibilities. Important issues to resolve in this context include whether multiple regulators are required, or whether one single entity can oversee all zones. At a minimum, a new zone regulatory entity would have to be created, and a separate independent development entity would then be required to manage BEPZA’s physical assets and assume the responsibility for identifying new land for development, based on market demand. The Government would provide the development entity with land ownership, and the development entity, in turn, would use this land to support economic zone development. The regulatory entity would thus regulate (i) existing zones whose ownership has been transferred to the development corporation, (ii) new BOT zones on land assembled by the development corporation, and (iii) purely private zones developed on private land. In order to improve the efficiency of this new entity, it would be beneficial to remove it from existing civil service requirements and allow it to hire professional managers receiving market-based salaries – of course subject to market-based performance appraisal. Under this configuration, the Executive Cell would become redundant. BSCIC’s industrial estates, with their limited size and mandate, would probably not operate under this regime, though a separate effort to improve industrial estate panning, development, and maintenance would certainly be advisable. Private developers would be licensed by the regulator and, in the case of privatized or BOT properties, would be accountable to the development corporation for complying with performance standards established as part of these transactions. Private investor tenants of zones would also be licensed by the regulator, but many routine permits would be issued and enforced by private developers rather than through a Government agency. This approach represents the minimum requirement for an economic zone regime that seeks to bring private investment into industrial property in a significant way and creates real opportunities to use economic zones as reform pilots both for property development/management and for liberalized trade policy and trade facilitation. It sets the stage for a market-driven approach to economic zone designation (including single-factory zones), modernizes the incentive and duty-deferral regimes, creates a more 29 Bangladesh: Piloting Reform through the Development and Management of Economic Zones vibrant industrial property market, and rationalizes the institutional framework. It does, however, require a significant commitment to: Re-engineering the development and regulatory functions that are currently spread across BSCIC, BEPZA, the Executive Cell, and related Government entities; Developing a robust mechanism to designate new projects, select a developer, and implement PPP projects; Identifying suitably located contiguous land parcels (ideally 250 acres or larger) and managing them through an integrated planning approach for delivery of external infrastructure and services, including land use and environmental controls; and Reaching out and promoting opportunities to prospective EZ developers and prospective tenants, both internationally and in Bangladesh. Modernizing the regime while enabling new PPP transactions offers significant economic potential, but requires substantial government commitment. While this approach balances the infrastructure and competitive elements of an improved economic zones regime, policy makers must also be committed to improving public administration (in tendering, customs, physical planning) if the benefits from private sector participation are to be realized. However, this option requires broad reforms of Bangladesh’s zone policies, institutions, laws, and physical development framework and as such would take time to implement. Table 9: Modernize Existing Regimes and Implement New PPP and Private-sponsor Projects Policy Liberalized – eliminate export requirements and local sales restrictions, streamline customs Framework controls, encourage private sector development of new economic zones Simplify and automate approvals of zones and zone tenants Institutional New independent regulatory entity created (perhaps based on BEPZA) to administer regime Framework New independent development corporation created to manage public sector assets, identify and package new land for development Executive Cell eliminated Legal/Regulatory New legal framework to unify private and public EPZs and implement liberalized policy and Framework institutional frameworks Physical Government responsible for identifying and making available sites for development Development Private land owners can develop private zones based on transparent criteria Framework Privatization of existing zones is a secondary priority; main emphasis on making land available Advantages Harnesses private capital for zone development Accelerates industrial land made available to allow for investment Private sector seeks out new infrastructure facilities and services to provide Could be combined with Option 2 pilot initiative Serves as pilot for zone management and policy liberalization Disadvantages Ambitious, longer lead time Requires strong and consistent government commitment IV. Option 4: Introduce a Master-Developed, Contiguous SEZ This approach differs from the previous option primarily in the scale of the development to be undertaken, and the resulting implications for decentralized policymaking authority. It is intended to allow for the development of a large-scale Special Economic Zone that, unlike the industrial free zones anticipated above, allow for multiple uses, to be implemented on a single property by a master developer. A single private master developer would be responsible for developing a large property (for example, 30 Chapter 3: Options for Zone Development 2,500 acres) that could include industrial, commercial, residential, and recreational uses. The master developer could in turn work with sub-developers to implement individual components of the SEZ. However, the master developer would be responsible for the entire project vis-à-vis the government regulator. Conceptually, a small SEZ could look much like the proposed Korean EPZ, and adoption of this model would have to be done in coordination with the current Korean EPZ project in order to avoid any “crowding out” or other disruption of this ongoing investment project. This type of SEZ may require some adaptations to the policy regime, especially in terms of whether the entire SEZ is duty free and, if so, whether duty-free consumption or retail sales are to be allowed within the SEZ. However, the main difference in terms of the enabling regime for such a development concerns the institutional framework, which must be able to support a broader range of regulatory and support functions. For example, either the regulatory entity itself or cooperating government entities would have to be responsible for building codes, health and safety, security, inspections, labor issues, and related matters for many different activities and in a multi-use environment that may include residents and visitors in addition to investors and workers. As in the previous option, the SEZ tax regime would require a careful revision of the EPZ incentive regime, preferably in line with the recommendations of the FIAS Incentives Review. This kind of project could be regulated by the same kind of entity envisioned under option 3 above, though the regulator would have to acquire a greater range of regulatory expertise, either directly or by serving a coordinating role with other government entities. This approach is the logical extension of the previous free zone/industrial park option in that it expands the scope and scale of activities within the SEZ. It still relies on a single development partner (the master developer) who may in turn use sub- developers to realize different components of the SEZ. However, given the scarcity of sites in which such a project can be implemented and the relatively high cost of creating the required regulatory capacity, implementing this option should be determined based on the specific economic costs and benefits of a proposed project. Table 10: Introduce a Master-developed, Contiguous SEZ Policy Framework Liberalized – eliminate export requirements and local sales restrictions, streamline customs controls, encourage private sector development of new zones Simplify and automate approvals of zones and zone tenants Institutional Could operate under same framework as Option 3, but would require Framework additional capacity within the new regulatory body Legal/Regulatory Could operate under same framework as Option 3, but would require Framework additional regulatory functions Physical Master developer responsible for large area Development Sub-developers can be engaged to implement components of the Framework project Advantages Private capital for large-scale zone development Integrated development Disadvantages Must overcome Korean EPZ legacy in order to persuade investors Few potential sites of this size available Development of a master-developed contiguous SEZ may offer important advantages but would have to overcome a significant legacy and create substantial regulatory capacity. Unlike dedicated free zones and industrial parks, large multi-use SEZs have broader policy objectives and must be configured to serve different user categories. This type of development may make sense in Bangladesh if the feasibility of 31 Bangladesh: Piloting Reform through the Development and Management of Economic Zones such a development on a suitable site can be established, but such a project would have to overcome the political and bureaucratic obstacles that have plagued the Korean EPZ project for the past decade. V. Option 5: Introduce a Regional, Multi-Project SEZ Program This approach is the most complex and would require the highest degree of public investment of effort and resources in creating the supporting infrastructure, regulatory reform, and institutional oversight. Rather than establishing a single development, this approach designates a large contiguous geographic area – hundreds of square kilometers in size – as a special pilot area for liberalized economic development and creates a dedicated policy regime and institutional framework to support this liberalization. These SEZ initiatives represent a different order of magnitude from option 4 in terms of their physical development and administration. The underlying rationale is generally that while such market-oriented reforms are too ambitious to introduce at the national level, the SEZ can act as a “test bed” to experiment with liberalization and demonstrate success, thus building momentum for future national reforms. Box 6: Examples of SEZs SEZ programs are very diverse, and designed around the specific geography and economic context in which they are introduced. They are often, but not necessarily, separated from the main economic center by distance or geography (islands are often proposed as SEZ locations). Transportation nodes (and ports in particular) are often central to SEZ economies. The zones offer liberalized operating environments and encourage private investment in public infrastructure. Locations and program designs are determined only after detailed feasibility analyses are completed, given the scale and sensitivity of such programs. Physically, these projects are generally large-scale, without the “fenced” aspect of many smaller zones, and tend to create pressures for broader policy liberalization in the economy. Examples include: • The 420 square kilometer Subic Bay Freeport in the Philippines, administered by the Subic Bay Metropolitan Authority, is home to 3,000 residents and includes a deep-water port, an international airport and air cargo hub, and a nature preserve. The Freeport has attracted private investment in residential and retirement communities, marinas, a technology park, and two industrial parks. The port is being upgraded. • The 375 square kilometer Aqaba Special Economic Zone in Jordan, administered by the Aqaba SEZ Authority, is home to 80,000 residents and borders on Israel, Egypt, and Saudi Arabia. The zone includes three port facilities and an international airport and hosts private investors in an IE, a logistics park, and two master-planned tourism/ residential communities. Two new logistics facilities and two tourism areas are under development. • The 2,020 square kilometer Shenzen SEZ in China is home to over 4 million residents. The zone has attracted both tourism and industrial investment and includes a port, an airport, 130 hotels, and several industrial zones. Unlike option 4 above, these regional SEZs do not have a single developer, but provide a liberalized environment in which many different developers and investors can operate. Such regional SEZs often host one or more free zones such as the ones described under option 3 or can even include one or more mixed-use, master-developed project described under option 4. 32 Chapter 3: Options for Zone Development In general, the SEZ policy regime would establish some form of duty-deferred treatment of activities within the zone (again, this could include duty-free consumption within the zone), liberalize the SEZ’s investment climate, radically streamline administrative procedures within the zone, and actively promote privatization and private investment in all aspects of the SEZ’s development. This is usually achieved through significant consolidation of authority and decision-making power in a dedicated authority, such as the Subic Bay Metropolitan Authority, the Aqaba Special Economic Zone Authority, or the Penang Development Corporation. Given the large area and multiple uses, such SEZs could have different tax and incentive regimes for individual projects, but the trend is towards simplified, unified tax treatment for all activities (e.g. low flat tax) in the zone. Within this SEZ program, multiple industrial property, infrastructure, commercial, tourism/ recreational and residential developments can then be accommodated. These individual projects are often enabled through specific land concessions, and based on a carefully developed physical master plan, zoning plan, and design guidelines that achieve a variety of economic and spatial planning objectives. This configuration supports the widest range of linkages between foreign zone investments and domestic residents and enterprises as industrial, residential, service, and even tourism uses of the SEZ are brought together under one umbrella. Table 11: Introduce a Regional, Multi-project SEZ Program Policy Framework Liberalized – eliminate export requirements and local sales restrictions, streamline customs controls, encourage private sector development of new zones Simplify and automate approvals of zones and zone tenants New decentralization of government authority to regional SEZ agency Institutional Requires new, dedicated SEZ agency Framework Legal/Regulatory Requires new SEZ law and implementing regulations Framework Encompasses greater scope of authority than other options Physical Designation of very large area (hundreds of square kilometers) Development Can accommodate many different master-developed components Framework Implementation contingent on careful project design and cost/benefit analysis Advantages Most ambitious approach, reforms both economic regulation and overall governance and public service delivery within the SEZ Disadvantages Very ambitious, perhaps beyond current scope of reform for Bangladesh This type of SEZ regime has been a powerful catalyst in areas where existing public infrastructure assets have under performed and where national-level administrative inefficiency and lackluster privatization efforts have constrained economic development. At this scale, SEZs can serve as pilot project for sweeping reforms in terms of government administration and efficient regulation of a wide range of economic activities. However, in such environments it requires a concerted high-level effort to create an SEZ regime that truly overcomes national-level obstacles and does not simply replicate them in the SEZ. A regional, multi-purpose SEZ program would require sweeping administrative reforms that may not meet the GOB’s immediate objectives and capacities. A regional SEZ program would still have to develop individual industrial property projects. Policy makers should consider what specific objectives they wish to achieve with such a program that could not also be achieved under more conservative programs that may be easier to implement politically. VI. Strategic Objective – Evaluating Options Which of these options should Bangladesh pursue in reforming and expanding its economic zones regime? In developing an appropriate economic zones strategy, these options must be evaluated against 33 Bangladesh: Piloting Reform through the Development and Management of Economic Zones their economic development potential, implementation cost, and political feasibility. This interrelationship of potential impact, resource requirements, and likelihood for success will ultimately guide Bangladesh’s decision makers in selecting a “future state” for economic zones that is to be pursued and developing an action plan to achieve that future state. The following table outlines the inherent advantages and disadvantages of each of the five economic zone options described above. These are examined based on three main criteria: 1. Economic development potential. This includes the extent to which the regime can attract more and different kinds of investors and generate new employment. 2. Implementation costs. This includes public-sector investment requirements associated with both infrastructure development/maintenance and public administration requirements. 3. Political feasibility. This includes both the public support to be gained by developing new projects and potential opposition by vested interests. 34 Table 12: Economic Zone Development Options Option Main Attributes Economic Development Potential Development Cost Political Feasibility 1. Rehabilitate Reliance on performance- Pros: Pros: Pros: and based management Improved infrastructure quality Private-sector efficiencies Not controversial, only constituency commercialize contracts and service levels realized primarily against pre- to oppose change are current existing BSCIC/BEPZA retain Potential to attract higher value- defined service targets BEPZA and BSCIC employees – properties investment and service added tenants with improved Cons: some jobs may be at risk delivery responsibility infrastructure High-level Board of Governors Policy regime unchanged Expensive, continues to rely on Cons: public infrastructure funding could support project Limited expansion potential in Experience to date with public- Cons: current property portfolio; main sector maintenance funding is Few visible benefits of limited beneficiaries are existing investors not encouraging, especially in reform effort Retains existing policy regime; no the case of BSCIC estates improvement in zones’ competitive positioning 2. Privatize Privatize existing properties Pros: Pros: Pros: existing where possible (aim to Broader range of private-sector Reduces public sector Reform effort to generate visible properties and package marginal projects) efficiencies can be realized (value- infrastructure financing results and improved projects implement new Develop new projects on added services) responsibility High-level Board of Governors BOT projects BOT basis, following Cons: Cons: could support project under current market demand Cons: regimes Policy regime unchanged Competition issues between Public-sector financing remains private investors and public to be defined case-by-case Unproven concept, mixed PPP developers/regulators (especially off-site experience in Bangladesh Retains existing policy regime; no infrastructure requirements) Negative experience with private improvement in zones’ Unproven market, few participation in zones (Korean competitive positioning precedents in Bangladesh EPZ), highly politicized process Reliance on government to identify new projects 3. Modernize Create liberal free zone Pros: Pros: Pros: existing regimes regime to replace current Broader range of private-sector Reduces public sector Focus on new projects limits and implement EPZ regime efficiencies can be realized (value- infrastructure financing opposition by entrenched interests new PPP and Remove export and local added services) responsibility Cons: private-sponsor sales restrictions Greater integration with domestic Cons: projects Diversify zone user base Unproven concept, mixed PPP economy 35 Option Main Attributes Economic Development Potential Development Cost Political Feasibility and permissible activities True alternative to duty deferral Public-sector financing remains experience in Bangladesh Rationalize investment regime to be defined case-by-case Negative experience with private incentives Increased confidence for private (especially off-site participation in zones (Korean Switch to post-audit duty- zone projects; private investors infrastructure requirements) EPZ), highly politicized process free compliance and can identify projects Greater investment in Potential conflicts with government penalties Cons: regulatory capacity (concession agencies and municipalities Better support for private Competition issues between monitoring) Land acquisition difficult zone projects and single- private investors and public Unproven market, few factory zones developers/regulators precedents in Bangladesh 4. Introduce a Builds on Option 3 with Pros: Pros: Pros: master- broader range of uses Expands scope of Option 3 to Focus on one or two Focus on new projects limits developed, May deal with duty-free allow for integrated planning and transactions concentrates opposition by entrenched interests contiguous SEZ consumption realization of synergies public-sector administrative Cons: regime (visitors/residents) Cons: requirements Site-specific evaluation Unproven concept, mixed PPP Few projects concentrate risk; Cons: experience in Bangladesh little room for balancing project Greater investment in dedicated Negative experience with private portfolio between conservative regulatory capacity participation in zones (Korean and speculative developments Significant public investment in EPZ), highly politicized process (geographic distribution) infrastructure and Potential conflicts with government administrative capacity agencies, regional government required even if master units, and municipalities developer takes on bulk on-site Land acquisition very difficult development 5. Introduce a Designation of large Pros: Pros: Pros: regional, multi- contiguous area as SEZ Enables aggressive liberalization Broad-based enabler of private Opportunity for ambitious project SEZ Creation of dedicated SEZ and privatization not possible in investment in public demonstration of improved program authority with substantial national context infrastructure governance for business and delegated powers Increases efficiency of existing Cons: existing population Implements wide-ranging and new infrastructure Cons: economic liberalization and Greater investment in dedicated Introduces good spatial and regulatory capacity Ambitious project, requires privatization not possible in infrastructure planning at regional national context Longer lead time sustained high-level support level; avoids site-specific Significant public investment in No obvious project sponsor; Extensive administrative infrastructure “patches” reform/simplification infrastructure and requires broad regional alliance of Increases economic potential administrative capacity public-sector supporters Often located at important through improved infrastructure required even if private Potential conflicts with government 36 Option Main Attributes Economic Development Potential Development Cost Political Feasibility transportation nodes and governance developers take on bulk on-site agencies, regional government Enables multiple sub- Broader range of project development units, and municipalities projects (industrial, beneficiaries (e.g., residents) Development may be large Potential for regional jealousies commercial, residential, Cons: enough to have fiscal Failure to implement SEZ tourism) High-risk approach; will fail if implications successfully can create negative new administrative regime is publicity bureaucratic and not efficient and investor-friendly 37 Bangladesh: Piloting Reform through the Development and Management of Economic Zones These options were discussed during a number of meetings with the Government’s PSD Core Group and presented at a workshop on Enhancing Economic Zones and Reducing Administrative Barriers to Investment held in February in Dhaka. Recommendations were subsequently discussed and validated with senior Government decision makers, including Kamal Siddiqui, Principal Secretary to the Prime Minister, and Mahmudur Rahman, Executive Chair of the Board of Investment and Energy Advisor to the Prime Minister. Based on these discussions, a consensus emerged regarding the opportunities that Bangladesh has to pursue elements of three of the options, with varying degrees of emphasis: Option 3, an aggressive development of smaller-scale modern Economic Zones (EZ) based primarily on a public-private partnerships (PPP) development model, holds the most immediate promise for realizing economic benefits in the Bangladeshi political and institutional context. Option 5, developing a large-scale regional SEZ Program, enjoys significant support among decision-makers, but also requires substantial preparatory groundwork and commitment and requires a longer-term implementation horizon than the EZ PPP approach. Option 1, rehabilitating and commercializing existing properties under BSCIC and BEPZA, is not an appropriate approach for new developments, but some form of improved operation will have to be created to allow these existing properties to remain productive and serve the needs of their tenants, even if only as a transition strategy. The recommended strategy is thus one of three parallel, inter-related implementation Tracks. A central objective to develop a modern economic zones regime is accompanied by a complementary effort to put in place the foundations of an SEZ regime and supported by near-term support to put existing properties on a sound footing so they remain viable under the new EZ regime. This strategy works to build momentum for a revitalized economic zones program and support this program as a pilot effort and catalyst for complementary reforms in Bangladesh as a whole. It aims to build on initial successes with commercialized existing properties to enable a more ambitious economic zone regime that can serve as a model for private investment in other forms of public infrastructure such as utilities and transportation infrastructure. This in turn supports the move towards a regional SEZ program that can serve as a model for improved Government performance and service delivery in Bangladesh. The following chapters discuss how these parallel Tracks can be implemented from the policy, institutional, legal/regulatory, and physical development perspectives. 38 Chapter 4: PPP-Based Economic Zone Development Track This PPP-Based Development Track (option 3 in the preceding chapter) is central to the modernization of the current zone regime. It sets the stage for broader reforms related to the introduction of an SEZ and creates the operating environment within which the existing BSCIC and BEPZA properties will operate. Before separately discussing the policy, institutional, legal, and physical development elements of this Track, it should be noted that Bangladesh’s track record with private EPZ development to date, particularly the long and unsuccessful Korean EPZ experience, represents a cross-cutting challenge in all of these areas that has seriously eroded the credibility of any similar initiative that is proposed. While there are certainly competing views about whether the project should be licensed or not, the decade-long political debate that has taken place in a regulatory vacuum about what should have been a simple foreign investment approval and zone license will only deter foreign investment. Overcoming this negative experience is an important aspect in each of the issue areas described below. I. Policy Regime An improved economic zone policy regime can play an important role in boosting the competitiveness of new industrial properties to be developed, existing properties that can be converted to economic zones, and suppliers bases. Based on the discussion in chapter 2, several aspects of the current regime should be modified to conform to modern economic zone management principles. These include: • Elimination of restrictions on sales of economic zone products into the domestic customs territory (currently limited to 10 percent for most sectors and prohibited for ready-made garments). This will be critical if Bangladesh is to transition away from enclave-style developments and promote a more integrated and sustainable approach to zone development. Moreover, the imminent expiration of Bangladesh’s LDC exemption from WTO subsidy requirements will necessitate the elimination of de facto export requirements. This liberalization does not jeopardize domestic manufacturers since sales into the customs territory will be allowed only on a duty-paid basis. • Achievement of full compliance with ILO labor standards, including freedom of association and collective bargaining. Bangladesh is one of very few countries that currently exempt zones from national labor legislation. The experience from other countries suggests that improving labor standards in zones can contribute to, rather than detract from, a more competitive zones regime. • Introducing effective environmental management infrastructure, monitoring and enforcement in economic zones. The EPZs and industrial estates currently have a poor record when it comes to the environment, lacking both adequate infrastructure and management tools. Sustainable development requires an approach that protects Bangladesh’s natural assets. The emergence of “ecological zones” and other “green” zone development approaches across developing Asia indicates that more effective environmental management of zones must be viewed not simply from the perspective of increased implementation costs, but from the market value that can be created for both the zone developer/operator and its tenants. • Providing for equal treatment of foreign and domestic firms. Bangladesh is one of only a few zones worldwide that discriminate between foreign and domestic enterprises in terms of approvals that can, in practice, discourage rather than promote foreign direct investment. 39 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Removing such policies will create a more level playing field for investment and will promote FDI. • Allowing private developers and operators to benefit from zone benefits. In order to promote private participation in zone development and operations, many zone regimes allow developers and operators to benefit from the full range of fiscal and non-fiscal benefits, including duty-free privileges on construction materials and equipment, as well as any tax advantages. • Adopting post-audit monitoring and enforcement of duty-free inventories. One critical area where Bangladesh falls short of other zone regimes is in the application of customs controls and procedures, which are overly burdensome. Creating a better facilitated environment for imports and exports, including the adoption on standards and guidelines set out for free zones in the Revised Kyoto Convention, will require the reduction of physical controls and increases reliance on post-audit monitoring and enforcement. In order to implement this Track, Bangladesh will have to take on a policy reform effort that substantially transforms the status quo in order to create modern zones of sufficient quality and scale to support increased FDI inflows and economic diversification. It is important to base this policy reform strategy on reasonable aspirations that can be accomplished in the medium-term, and to achieve some initial near-term successes to build reform momentum. Implementing these policies requires not only high-level decision-making but will necessitate the development of added Government capacity in some areas (e.g. land planning, environmental compliance, post-audit customs control) and perhaps reliance on external advisers and contractors in others. In addition, while the points listed above concern amendments to the existing regime, the application of the regime to individual properties will also have to be revised. The current regime, under which the Government designates its own zones through the functioning BEPZA and BSCIC entities while private initiatives are stalled in the nascent Executive Cell, creates confusion and discourages private development. For example, proponents of the API park express reluctance to develop a purely private initiative because projects lacking Government participation are seen as less likely to succeed in the existing bureaucratic environment. The strategy for developing a new economic zone policy framework should thus include the following: 1. Quickly resolve the pending Korean EPZ issue. Any discussion of new, private sector-oriented zones in Bangladesh will be overshadowed by the arduous and politicized experience of the Korean EPZ project, which remains unlicensed 10 years after the adoption of the Private EPZ Act. The Executive Cell’s Board of Governors and Cabinet (who is currently considering the Board’s proposal) should resolve this matter immediately. In doing so, the Board should publicize the basis on which it will make its decision as well as the Board’s determination whether the Korean EPZ meets or does not meet these criteria. The PSD Task Force should engage the Board of Governors on this matter if required. 2. Assemble a public-private reform coalition for economic zones. The PSD Task Force and the SEZ Working Group have carried out important groundwork in preparing the way for a new economic zones strategy. As the strategy is defined and implemented, a broader supporting coalition should also be brought together to support the reform process and the creation of a new economic zones regime, including current EZ tenants, property developers, municipal planners, customs brokers, logistics providers, and other potential users of and investors in new zones. Their experience should inform policies as they are defined, which in turn generates stakeholder buy-in, diffuses information and publicity, and broadens support for the effort. 40 Chapter 4: PPP-Based Economic Zone Development Track 3. Reach agreement on a new economic zone incentive and market access regime that is aligned with the anticipated national regime. Bangladesh’s incentive regime will have to change eventually, as its LDC exemption from WTO requirements comes to an end. In addition, FIAS has made a series of recommendations on how the overall incentive regime in Bangladesh should evolve, including a convergence of national and EPZ incentives. If this is not feasible, then at a minimum, the new zone incentive structure should eliminate export requirements and allow full duty-paid access to the domestic market. 4. Design a new duty deferral regime that can be applied to both economic zones and individual manufacturers. Improving investor’s ability to import and maintain duty-free inventories of raw materials and finished goods is one of the key advantages conferred by an economic zones regime. The current transaction permit-based control system should be redesigned in favor of a more flexible inventory control and audit approach. This approach should be designed to be applicable to both economic zone enterprises and to individual manufacturers who can comply with record-keeping requirements. 5. Design an economic zones licensing regime. In anticipation of the division between the regulatory, public asset management, and private development responsibilities, the licensing and permitting regime for economic zone developers and tenants will have to be designed from the ground up. This includes the design of zone developer and enterprise licensing criteria, evaluation processes, and renewal requirements as well as procedures and penalties associated with the cancellation of licenses. This design effort should include workflow and service delivery considerations related to the institutional development strategy, and anticipate delegation of enterprise licensing responsibilities to developers, on-site licensing, and electronic licensing. 6. Adapt the economic zones labor regime. Bangladesh is already working to harmonize the existing EPZ labor regime with ILO standards and concerns raised by labor advocates and the AFL-CIO. The new economic zone regime should provide for seamless transition with the 2004 EPZ Workers Association and Industrial Relations Act. 7. Design an economic zone-specific PPP regime. The economic zone policy regime should specifically address methods for implementing both public-private partnerships in which private developers implement projects on public land or in conjunction with private partners and fully private initiatives (including single-factory zones). This should include procedures for project identification, definition of public contributions to the PPP, potential public parties to the PPP, and the hierarchy of authorities among public partners in designing, negotiating, and implementing the PPP (particularly the division of responsibilities between the Economic Zones Regulator and Public Asset Owners). In addition, a broad range of services that can be provided by the private sector should be explicitly anticipated. 8. Identify a mechanism for implementing one or more immediate pilot projects. An available mechanism for implementing a near-term (e.g. within 12 months) under PPP pilot project should be identified. This should include the identification of the pilot project’s legal basis, market demand, design, financing, and regulation/contract administration. 9. Develop a supporting communications campaign. In order to support this policy reform effort, a communications campaign should be initiated to inform key constituencies and the public about the goals and benefits of the new economic zones regime. This campaign will likely evolve from initial information dissemination to policy advocacy to education and outreach training for the developer, business, and trading communities. 41 Bangladesh: Piloting Reform through the Development and Management of Economic Zones II. Institutional Framework Implementation of such a revised policy framework requires important revisions to the current institutional framework for zone development and operation. The core of the economic zones strategy concerns the current EPZ framework and the way forward in regulating and developing new free zone- style properties. This will require separating off BEPZA’s regulatory and development functions and developing the capacity to regulate private developers that in theory should already exist in the Executive Cell. In addition, the roles of BSCIC and the BOI in the new regime must be clarified. As illustrated in the following table, the current institutional framework offers a few strengths and many weaknesses in terms of capacity to regulate zones, develop and manage zones, and promote new zone projects to developers and tenants. Table 13: Strengths and Weaknesses of Existing Institutions Strengths Weaknesses BEPZA Comprehensive Government monopoly, does not allow private development law, some aspects and operation of zones of which conform Manufacturing only; 90% export requirement to international Unequal treatment—different provisions for foreign versus best practice local firms Enclaves, few linkages—restricted domestic sales Emphasis on subsidies rather than value-added services Labor, environmental and land use/zoning policies are weak Licensing and permitting still cumbersome (Dhaka oriented, no automaticity, BEPZA one-stop window not very effective) Customs controls not streamlined Lack of zone designation criteria Lack zoning policies and enforcement Private EPZ Act Broad framework No criteria for designation and approval of private zones for development Does not explicitly allow for hybrid EPZ/industrial estate of private zones projects Unclear and complex licensing (Korean EPZ experience) Minimum export requirement Manufacturing only Limited authority of the executive cell over other Government agencies No regulatory framework BSCIC Basic law that Broader goal—industrial estates is only part of BSCIC provides ability to mission to small and cottage industries establish and Orientation to micro and SM enterprises, not a modern operate small scale industrial estate concept industrial estates Does not provide export incentives Manufacturing only Limited autonomy (unit of Ministry of Industries) and authorities of BSCIC Does not allow private development and operation Subsidized development mandate (e.g., 90 year leases) BOI Comprehensive Single provision in the law dealing with BOI’s ability to investment act and promote industrial estates/areas incentives BEPZA is an important point of departure for this effort – the organization is well-regarded and has done a creditable job in developing and managing public EPZs, streamlining approvals and permitting, 42 Chapter 4: PPP-Based Economic Zone Development Track operating a fairly effective one-stop shop, and exercising authority over other agencies. BSCIC is more constrained in its current operations and, as a unit of the Ministry of Industries, lacks autonomy. The Executive Cell has virtually no capacity at all, and the BOI’s involvement with industrial property development remains tangential at best. For the development of a hybrid EZ regime, this has three important implications. First, there is some experience in regulating zones through BEPZA, but this is limited to basic licensing of zone tenants. Second, there is very little experience in the development and management of modern zones in Bangladesh generally and a particularly poor track record in the case of BSCIC. There is no experience or expertise in facilitating industrial property projects on a PPP basis and, to make matters worse, the protracted KEPZ experience will be interpreted as a “worst practices” case study by many potential investors. Third, there is very little capacity to promote new EZ opportunities to private developers, even within the BOI. In order to create an institutional framework that can actively promote and support hybrid EZ development, three separate functions will have to be created: 1. An EZ Regulator responsible for licensing projects and monitoring compliance with performance, planning, and environmental standards. 2. A Development Agency that serves as the main public sector sponsor of PPP projects by aggressively identifying and making available suitable land for development and facilitating the promotion of projects to private investors. This agency would not have a monopoly on PPP sponsorship – the EZ framework should also allow for other PPPs and purely private initiatives – but it would serve as the Government’s main agent for encouraging private investment in an expanding EZ regime. 3. One or more Public Asset Owners who retain ownership and management responsibility for public zones that already exists, with a view towards commercializing and eventually privatizing these zones through the PPP process. How to make the transition from the current institutional framework to one that supports hybrid EZ development is at the heart of creating an effective PPP development framework. During the discussions at the February 2006 Workshop on Enhancing Economic Zones and Reducing Administrative Barriers to investment, three main approaches were discussed. First, the unbundling of BEPZA’s operations into separate regulatory and development entities was examined. The main rationale for this approach is to capitalize on BEPZA’s existing capacity in regulating and, to a lesser extent, developing public EPZs, and to avoid disruptions inherent in creating entirely new entities. However, BEPZA’s successor entities would still suffer from an inappropriate staff mix geared towards public zone development and would have to develop significant new capacity to undertake PPP transactions. In addition, this approach would conflate the Development Agency and Public Asset Owner roles, leading to a potential conflict between the new EZ development and existing zone commercialization objectives. Second, the possibility of establishing BSCIC as the foundation for a new EZ agency was considered based on the current BSCIC Chairman’s interest in broadening BSCIC’s ambit and on BSCIC’s existing efforts to facilitate new sectoral industrial estates in partnership with the private sector. However, BSCIC’s lack of capacity in regulating or facilitating zone development and poor track record in managing its existing estates speak against this approach. In addition, BSCIC’s broader economic development mandate is not directly compatible with a focused PPP transaction effort aimed at larger investors. Third, the option of splitting up functions among agencies best able to carry them out was discussed. This approach emphasizes a fresh look at the requirements of the new regime rather than basing 43 Bangladesh: Piloting Reform through the Development and Management of Economic Zones institutional framework decisions primarily on the attributes of existing organizations. This approach would create a new EZ Regulator and remove BEPZA’s regulatory functions. It would separate PPP facilitation and house it in the BOI, which already has an industrial property promotion mandate. BEPZA and BSCIC would then simply act as Public Asset Owners charged with improving operations in existing properties, but not with developing new ones. However, this approach relies more heavily on the creation of new organizations and can appear fragmented in its early implementation. The following table illustrates these options. Table 14: Institutional Framework Options Summary Unbundle BEPZA BSCIC as Foundation Split Functions Among for New Agency Agencies EZ Regulator BEPZA regulatory BSCIC New entity assumes functions/One Stop BEPZA regulatory Shop authority, granted new regulatory powers Development BEPZA development BSCIC Packaging and Agency functions facilitation through BOI Asset Owner/ BEPZA Private developers Private developers Developer Private developers BEPZA BEPZA (limited) BSCIC BSCIC (limited) Operator BEPZA BEPZA Private developers and BSCIC BSCIC management Private investors Private investors contractors BEPZA (limited) BSCIC (limited) While all three options are tailored to the Bangladesh context, they do not equally contribute to the economic growth objectives of the new EZ regime. Based on the lackluster performance of zones in Bangladesh to date, it is important for the new institutional framework to be designed specifically around the planning and facilitation of privately developed Economic Zones, primarily on suitable land made available by Government. When evaluated against this objective, the splitting of functions to explicitly distinguish between an EZ Regulator, a Development Agency, and Public Asset Owners best serves this purpose. The institutional framework recommendation for implementing the hybrid EZ Development Track is thus to establish: A new EZ Regulator who assumes BEPZA’s regulatory functions as well as the regulatory powers for private zones that now rest with the Executive Cell; Designating the BOI as the Development Agency and developing its capacity to identify suitable PPP projects, sponsor land assembly, and facilitate private investment in PPPs; and Limiting the remaining responsibilities of BEPZA and BSCIC as Public Asset Owners whose main role is to separate existing zones as independent business units and improve their operations through improved management, commercialization, and preparation for eventual PPP transactions. BEPZA and BSCIC would not undertake any new zone development projects except as passive landlords through the PPP process. In addition to BEPZA and BSCIC, the BOI in its role as Development Agency will likely promote PPP transactions that draw on land from other sources, including SOEs and Government entities as well as “khas” land. Meanwhile purely private initiatives would deal directly with the new EZ Regulator. 44 Chapter 4: PPP-Based Economic Zone Development Track In developing an institutional strategy to enable the transformation of the current EPZ/industrial park regime into a more flexible and competitive hybrid EZ framework thus requires that several important issue be addressed: 1. Define workload requirements. Based on the market demand analysis carried out as part of the physical development strategy (see below), the general volume of work to be carried out for both the EZ Regulator and the BOI must be determined. This analysis will form the basis for allocating staff and other resources among entities and site offices. 2. Define service delivery requirements. Once the type and size of properties to be administered by the regime are understood, the level of service delivery that the relevant institutions should deliver to developers and tenants must be defined. For example, one would expect that the issuing of approvals to developers and tenants would occur on-site and not at headquarters in Dhaka, as is currently the case. 3. Define organizational roles and responsibilities. In addition to the relationship between the EZ Regulator and the BOI, all additional Government relationships must be defined as well (including utility providers and regulators, planning and engineering authorities, environmental authorities, environmental authorities, occupational health and safety authorities, etc.). 4. Design the new Economic Zones Regulator. Based on the preceding analyses, an organizational design should be developed. In addition to functions, responsibilities, structure, workflow, funding, position descriptions, and standard operating procedures, this should include projected development of the organization over its first five years. Establishing the Regulator outside the constraints of existing civil service regulations should be considered. 5. Design the BOI’s new Development Agency role. Based on the preceding analyses, an organizational design should be developed. In addition to business model, functions, responsibilities, structure, workflow, funding, position descriptions, and standard operating procedures, this should include projected development of the organization over its first 5 years. A critical element of this design is the extent to which the Development Agency role should be retained within BOI or spun off as a separate agency over time. 6. Implementing a capacity building program. While the private sector will take on the primary responsibility for new economic zone infrastructure development and operation, the public sector must support and regulate this development with important investment in new administrative capacity. This includes training staff and implementing systems in the areas of investment promotion, site identification and evaluation, planning approvals, project analysis, privatization design and negotiation, concession contracting, contract monitoring, financial management, project financing, and environmental management. In addition, a separate capacity building program for customs officers will be required to implement streamlined duty deferral procedures. 7. Implementing supporting information technology. The new institutional structures should be supported with modern information technology tools to replace outdated paper-based systems that require in-person appearances in Dhaka offices. IT investment and training will be required in areas including customer relationship management, electronic permitting and licensing, electronic payments, inspection scheduling, customs and inventory control, and land management. 45 Bangladesh: Piloting Reform through the Development and Management of Economic Zones III. Legal and Regulatory Framework The new framework will have to be enshrined in a legal and regulatory framework that articulates the new policy regime, clearly delineates the new institutional structures and responsibilities, broadly enables private-sector participation in all aspects of zone development and operation, and defines the rights and responsibilities of developers and tenants. The current legal and regulatory framework is fragmented and weak and codifies a number of the inadequate aspects of the policy regime described above. The BEPZA law does not allow for private zone development and management and restricts access to EPZs based on a 90 percent export requirement in an enclave environment. The Private EPZ Law does allow for private development but retains similar enclave-style restrictions and establishes an even weaker Government authority (the Executive Cell) than the BEPZA law. The BSCIC law is even weaker in terms of zone development and oriented towards small, micro, and cottage enterprises, while the BOI act, which does provide for a powerful overall investment regime, contains only one provision allowing the BOI to acquire and designate land as “industrial areas”. In addition to these weaknesses in the legal framework, the current regime lacks a transparent regulatory mechanism governing the issuing of licenses and permits and other relationships with investors and tenants. Addressing these deficiencies is central to the success of the new Economic Zones regime, but policy makers must chose among several options for doing so. These include: Amending the BEPZA, BSCIC, and/or Private EPZ laws; Facilitating individual projects through individual concession contracts; and Developing a new legal and regulatory framework. Table 15: Legal Framework Options Summary Option Advantages Drawbacks Amend BEPZA Existing, relatively Required amendments will be so extensive they are tantamount to legislation successful regime and a new law strong organization Concern about tinkering with BEPZA success Based on obsolete zone model Amend BSCIC Existing framework Totally unsuited to establish a modern EZ regime legislation Much broader, developmental, BSCIC mandate Amend Private Existing, private sector- Required amendments will be so extensive they are tantamount to EPZ Act oriented a new law Bad legacy, based on obsolete zone model Enable through Practical, task-oriented Unstable legal basis, can be reversed by new Government individual and perhaps faster Creates special exceptions and individual deals contracts Develop a new Get it done right Lengthy, possible political obstacles framework Confusion in market with multiple zone regimes As the above table illustrates, enabling the new EZ regime through amendments to existing legislation is not a preferred option because the sweeping nature of such amendments would be tantamount to creating a new law without realizing the full benefit of a new law drafted specifically for a new regime. Obsolete aspects to the existing legislation, coupled with negative legacies of the BSCIC and Private EPZ frameworks, further argue for a different approach. Enabling new PPP transactions through individual, transaction-specific contracts rather than specific legal provisions is also possible and can be attractive in cases where impending deals cannot wait for 46 Chapter 4: PPP-Based Economic Zone Development Track improvements in the legal framework. However, this approach will be inadequate for attracting private investment due to its unstable legal basis and the opportunity for changes in Government to reverse the contracting decisions. At best, this approach could be useful for enabling priority PPP transactions with domestic investors while a more robust regime is being developed. The most viable option is to develop a new legal framework to systematically reflect the revised policy and institutional frameworks and enable new types of PPP zone development. This process can of course be lengthy, given the need for both improved legal and regulatory mechanisms. In addition, the new legal framework must clearly address the revised role of BEPZA and BSCIC to avoid confusion about multiple zone regimes in the marketplace. Such a legal framework should: Develop a new framework legislation that gives a clear priority to hybrid, privately managed zones developed on a PPP basis; Support different Economic Zone concepts and approaches, including multi-use EZs, sector- focused EZs of different sizes, and single-factory zones; Amend the BEPZA and BSCIC laws, eliminating their regulatory functions and ending the development of new zones under these laws; Allow Government EPZs and Industrial Estates to continue operating, but under a greater cost- recovery and commercialization basis; Harmonize income tax incentives, preferably granting enterprises within an EZ and promoted enterprises outside the EZs the same incentives; and Cancel the private EPZ law, grandfathering any private EPZ licenses or giving the investor an option to convert to a hybrid EZ (which is likely, given all the advantages). In developing this strategy, decision makers should anticipate a series of important issues: 1. Select an appropriate level of autonomy for the EZ Regulator and BOI/Development Agency. An important element of the economic zones regime is the level of confidence that it gives to investors that decisions will be taken on the basis of strict legal and regulatory requirements rather than on political considerations. In this regard, the existing EPZ laws attempted to empower the regime through the creation of the high-level Boards of Governors. However, this arrangement appears to have done little to accelerate decision-making, particularly in the case of private EPZs. An improved approach should be selected for the new entities either through the introduction of independent boards with expanded private sector participation or by delegating greater authority to a board akin to the Executive Board (by curtailing what is considered a “policy decision”). 2. Draft and enact a new Economic Zones Law of 2006. The revised policy and institutional framework should be reflected in a new law that supersedes the EPZ Act and the Private EPZ Act. 3. Draft and adopt implementing regulations pursuant to the Law. A full set of implementing regulations should be developed in tandem with the law to avoid any regulatory gaps and ensure that all policy and institutional transitional issues identified in the transition plans are enabled through the legal and regulatory framework. 4. Develop a lobbying strategy. The draft legislation will have to be shepherded through the legislative process. The reform coalition and the communications campaign discussed above should be harnessed to support this process. 47 Bangladesh: Piloting Reform through the Development and Management of Economic Zones 5. Draft transaction documents for pilot projects. As initial pilot projects are identified in the physical development strategy, contract documents to support the transaction should be prepared. These contracts should be developed early in the project development process and incorporated into the project promotion campaign. IV. Physical Development The policy, institutional, and legal/regulatory considerations discussed above must ultimately lead to improved physical and economic development if they are to be successful. The discussion of the institutional framework already pointed to the importance of understanding the potential scale and scope of the new economic zones regime. While the project team carried out an Infrastructure Needs Assessment of three EPZs and thirteen industrial estates as well as a regional industrial land market study, it remains to be seen where large contiguous properties for economic zones can be made available.15 It has been suggested that some of Bangladesh’s state-owned enterprises (SOEs) could be sources of suitable land for EZ development (see Annex A for a list of SOE properties provided by the Ministry of Industry). A major criteria for success of new economic zones will be the extent to which they can provide facilities and services that are superior to those in existing EPZs. Existing zones are in such poor repair that many companies will simply prefer a well-managed economic zone because its aesthetic appearance better conforms to their corporate image. In addition to improved design, construction, and maintenance, effective environmental management will be a critical differentiator in the establishment of new zones. Improved environmental management will create value for zone developers because it will allow them to attract a wider range of tenant companies who are either more sensitive to their own environmental impacts or who rely on technologies that require a greater degree of environmental control. By setting a reputation for environmental compliance, zone management practices will benefit even tenant firms that do not place a premium on environmental sustainability as they are able to cater to a wider international consumer base that differentiates among products based on measures of corporate social responsibility. As these firms realize that environmental standards make business sense, an even greater demand will be generated for zones with modern environmental management practices and ripple effects will be felt in the economy. In this context, decision makers must consider a number of factors in defining the physical development strategy for the new economic zones regime: 1. Carry out a market demand analysis specific to each project. New physical developments will have to be scaled to the anticipated investor demand and located where that demand can be realized. A site-specific market demand study of domestic and international investors should be carried out to inform the total size of development to be undertaken, services to be provided, facility design standards to be adopted, and pricing constraints that projects will be subject to. Appropriate safeguards need to be instituted to ensure that the site selection process is transparent and that the process is not politicized otherwise new developments will be beset by similar problems as those facing existing zones. 15 The BOI is following up with Ministry of Land in the identification of large tracts of government khas land in Chittagong, Khulna, Comilla, Dhaka, and Gazipur. However, due to the decentralized land record keeping, it has been difficult to procure information on land availability from the Ministry of Land, despite attempts over the last 9 months. 48 Chapter 4: PPP-Based Economic Zone Development Track 2. Identify available Government land for new zone development. The fragmented nature of land ownership in Bangladesh, combined with the country’s population density, severely limits the private sector’s access to suitable contiguous sites for industrial development. Based on an understanding of market demand, an analysis of Government land holdings must be carried out to identify how Government can support new economic zone development by serving as the project landlord. This identification has to take into account existing uses and populations, and explicitly study resettlement issues in cases where residents would be displaced by the development. Where possible, benefit sharing with such populations should be considered. Box 7: Land Designation in Bangladesh The identification of suitable properties for zone development is hindered by Bangladesh’s outdated land designation and management system. Neither land use master plans nor zoning plans are systematically developed or adhere to, and land records are not computerized. There have been some modernization attempts (such as the recently completed Modernization of Land Records & Maps for sustainable Environment Management (SEMP) project), but land recoding procedures continue to be based on the Survey & Land Record Manual of 1935. The current system of land management (used to administer, transfer, tax, and register properties) distinguishes broadly only between agriculture or non-agriculture land, though some government procedures further differentiate among agriculture, residential, commercial, industrial, and forested areas. Land information is administered by the Directorate of Land Records and Survey (DLRS) through physical verification of land use. This system primarily recognized changed uses rather than controlling the use that has been assigned to specific property. 3. Carry out a feasibility assessment for pilot projects. The initiation of a pilot EZ project developed on a PPP basis should be strongly considered. This would be done by working closely with domestic private investment groups (such as the Pharmaceutical Association) that are ready to implement pilot projects quickly and willing to do so under an evolving legal and regulatory framework. A feasibility study should be carried out to determine whether and how initial pilot projects can be configured and successfully implemented under the current regime. 4. Design a medium-term industrial property development program. Based on the site identification and market demand analysis, a site development program for the next five years should be prepared. This program should address site acquisition and management as well as support programs for private zone development and designation. 5. Design a medium-term infrastructure development program. In parallel with the property development program, a supporting infrastructure development program should be designed to enable private development through supporting investments in transportation and utility networks. Regardless of how this public/private division is determined, Government will retain a substantial financing responsibility - both in terms of public administration and infrastructure development and maintenance – that it will have to meet. The financial and economic planning that is carried out to advance the economic zones strategy must incorporate this important public finance element if the projects resulting from the strategy are to be sustainable over time. 6. Develop environmental standards and monitoring framework. Environmental and occupational safety standards for economic zone development must be developed, along with an effective monitoring and enforcement framework. Under this private development model, the governing transaction document should explicitly include environmental performance 49 Bangladesh: Piloting Reform through the Development and Management of Economic Zones requirements, monitoring responsibilities, and penalties that apply to the developer, as well as the developer’s responsibilities for enforcing environmental compliance among tenants. 7. Develop planning, zoning, and design guidelines. Minimum standards for economic zone planning and design should be developed, to be applied and enforced by the Economic Zones Agency. These standards should be adapted to individual projects based on their location, prospective tenant base, and market orientation. 50 Chapter 5: Regional SEZ Development Track In contrast to the hybrid Economic Zone regime described in the previous chapter, which is familiar to potential developers and investors from a number of countries, regional SEZs of the type contemplated under this Development Track are more diverse and adapted to the specific circumstances of their host economy. The opportunity for Bangladesh would be to establish a single, large-scale SEZ, modeled after Freeports and SEZs in other countries. Leading examples include the Subic Bay Freeport and Clark Field SEZ in the Philippines; Labuan Island in Malaysia; Batam Island in Indonesia; the Aqaba SEZ in, Jordan; and the various new SEZ initiatives in India. These SEZs range from 100-500 km2 in size and offer a mixed-use, master planned community environment. They are generally implemented by governments or, less commonly, through a private master developer and sub-developers and a major partnership with government. Such SEZs are enabled through special legislation that is usually separate from legislation governing smaller free zones and require dedicated government regulatory bodies to administer the SEZ regime. These SEZs are ambitious “country within a country” projects that can require $3-20 billion in investments if developed on undeveloped “greenfield” sites. In order to lower net government capital outlays and ensure positive net economic benefits, many new projects seek to reuse existing facilities, including ex-military bases (e.g. Subic Bay, Clark Field) and existing cities (e.g. Aqaba). The rationale for taking on such ambitious projects includes: Generating truly integrated, multi-use rather than enclave development; Creating regional growth poles; Creating a focus for world-class infrastructure with significant scale and impact; Operating at a size and scale that can support large-scale private investments in infrastructure and manufacturing; and Generating significant economic results (Subic Bay, for example, alone accounts for 15% of national exports). Balanced against these opportunities are major planning and implementation challenges. SEZs on this scale require major pre-investment, planning and design analyses in the initial decision-making process alone. Subsequent implementation entails significant work to set up the dedicated legal, regulatory and institutional framework as well as the considerable public infrastructure investment – even when private developers and investors take on a major role. As such, it is necessary to identify 2-3 feasible sites and develop complete land use and infrastructure development master plans before selecting a final area for the SEZ. In addition, as the requisite skills and experience for developing modern SEZs is currently lacking in Bangladesh, the country would stand to gain if an international zone developer was brought to plan and develop an initial pilot zone. Pairing this international developer with local sub-developers would not only ensure that the design of the zone tailored global best practices to local conditions, but it would also generate a local capacity for the second generation of public-private partnerships in zones. Attracting an international party to Bangladesh to develop an SEZ, however, is a challenging task without ensuring a stable, predictable, and rational policy and institutional framework within which it would operate. The Government must not only strive to create such an environment that will reduce the risks and increase the attractiveness for an international private developer, but must also actively market and promote itself to such developers to generate interest. Based on the formidable challenges and Bangladesh’s poor track record in both economic zone development and private participation in public infrastructure, this Track should be undertaken in parallel with the setting up of a hybrid EZ program, but it is critical to recognize that the two should 51 Bangladesh: Piloting Reform through the Development and Management of Economic Zones not be confused with or treated as substitutes for one another. The first steps in pursuing this Track should be placed on clarifying and fine-tuning how the SEZ concept can apply to Bangladesh, developing a consensus at the highest policy levels about the SEZ concept, and identifying potential large-scale development areas. I. Policy Regime Together with the physical location of the SEZ, the policy regime that applies to residents, investors, visitors, and developers in the SEZ is a critical first element in determining how the project will be structured and implemented. Because of the applicability of the regime to a large area, strong government commitment at the very highest levels to the process is a clear prerequisite for pursuing such initiatives. In addition, most SEZs in developing countries rely on significant and sustained donor technical assistance and financial support in both the planning and implementation phases. In the case of Bangladesh, the key policy issues revolve around the degree to which an SEZ would receive a special, liberalized policy regime. International experience shows that there is a broad spectrum of policy choices, with the most ambitious being dedicated regimes such as those in Subic Bay or Aqaba with a full complement of incentives. At the other extreme are SEZs that are simply large-scale, master planned communities without special fiscal benefits, developed with private participation but under a government authority. The Jubail Industrial City in Saudi Arabia is an example of a massive industrial site developed under this model. In the Bangladeshi context, where policy reform and PPPs have been notoriously difficult to implement and land is very scarce, it may well be that the policy regime does not create ambitious regional policy change but rather focuses on making SEZ land available under single management and planned to the highest standards, at least initially. A “best practice” SEZ that includes a large duty-free area where all non-prohibited activities eligible; residential and recreational areas; the consumption of duty-free goods at the retail level; simplified and e-enabled regulations; special resident visas; separate customs regime and force, etc; may not be possible or even sensible in Bangladesh. In designing this policy regime, several important issues must be resolved: 1. Define the rationale for an SEZ in Bangladesh. Policy makers must first determine what the objective of the SEZ is – to implement bold economic reforms that are not yet feasible but can act as a catalyst for reforms on the national level, to unlock economic value in existing infrastructure, to realize scale economies from new infrastructure investments, or some mix of these and other objectives. Is Bangladesh ready for a large-scale project of this type, and is it politically possible to demarcate an area of the country and to provide special benefits to some residents and businesses at this scale? This discussion will be closely interwoven with the specific area or areas that are considered for SEZ location because large-scale SEZs should have policy regimes that are geared towards their location-specific advantages and anticipated user base. This discussion will be controversial among policy makers and should be explored in detail before the discussion is broadened. 2. Develop a mechanism for building a national consensus on the SEZ concept. Once policy makers have narrowed down the specific objectives of the SEZ, a broader consensus-building effort will be required to accurately gauge the political feasibility of the SEZ. Over time, it will become important to actively engage the SEZ’s anticipated residents and enterprises early in the process, particularly if the SEZ is to be developed in a populated area with existing investors and infrastructure. This process will also be controversial as regions try to compete for SEZ development resources and existing bureaucratic institutions, political representatives, SOEs, and public utilities try to establish their position within an SEZ. 52 Chapter 5: Regional SEZ Development Track 3. Prepare a feasibility study for establishing an SEZ. Once it is established that the development of an SEZ is desirable, a multi-disciplinary feasibility study should be initiated. The study should combine an analysis of and recommendations for the SEZ’s policy regime, market positioning, legal and regulatory framework, institutional arrangements, governance, site selection and demarcation, physical development, transportation planning, environmental concerns, financing, economic impacts, PPP approach, and implementation plan. It is important to note that this study is not primarily an engineering study but rather the preparation of a business model and implementation approach for the SEZ. This study will serve to integrate the planning work required across issue areas required for a final go/no-go decision by Government. 4. Define the policy regime that would apply to the SEZ. The policy regime applicable to the proposed SEZ will quickly have to be fleshed out in general terms. It is important to understand that the basic concept of the SEZ needs to be tailored to Bangladesh’s unique context — economic, institutional and especially social and political. Basic decisions will be required on the extent of tax and duty simplification and relief to be provided within the SEZ; whether residents as well as businesses enjoy special advantages; the extent of political and administrative autonomy and decentralization granted to the SEZ; how land and infrastructure planning and provision is to be improved; whether labor regulations will be addressed as part of the SEZ regime; how licenses and permits will be streamlined; how private participation in the provision of public services can be maximized; and the role that large-scale developers will play. This process should to be carried out in parallel with the national consensus-building effort to lend focus and specificity to the discussions. 5. Implement the policy regime through the legal/regulatory and institutional frameworks. Once agreed to, the policy regime will be reflected in the legislation, regulatory framework, and institutional development areas that are adopted. II. Institutional Framework Creating the applicable institutional framework governing the SEZ is the first element in delivering the SEZ services and benefits defined by the policy and legal/regulatory framework to the SEZ’s current and future residents, investors, and visitors. In all cases – whether the SEZ is granted broad policy freedoms and incentives or simply offers a simplified planning regime – this requires a strong regulatory and promotional body to administer the SEZ regime, combining national, state, and local/municipal functions. This usually involves significant devolution of authority and streamlined governance — the Aqaba SEZ Authority, for example, has its own customs force. It is important to recognize that the SEZ Authority will have broader powers and a more specific mandate than the Economic Zones Regulator discussed under the previous Track. While it would be desirable to have a degree of policy and procedural convergence between the EZ Regulator and an SEZ Authority (particularly in areas such as investment incentives, customs documentation, and licensing), the SEZ Authority has a much broader ambit and must operate independently of an EZ Regulator if it is to be effective. For example, it will have to license and regulate a much broader range of economic activities, and will have to set and enforce compliance with environmental and land use standards for many different types of land uses and facilities. In general, creating the institutional framework required to develop an SEZ will require the following: 1. Define the division of responsibilities among existing and new institutions. While some form of SEZ Authority will be required under any project configuration, the specific roles and responsibilities between this Authority and other Government entities will have to be defined. 53 Bangladesh: Piloting Reform through the Development and Management of Economic Zones This involves defining areas strictly under the Authority’s control (for example, physical planning control is usually the exclusive responsibility of the SEZ Authority), areas where other Government entities retain their authority (such as national and internal security), and areas where coordination – explicitly governed either by adapted regulations or issue-specific Memoranda of Understanding – between the Authority and other agencies is required (for example, in the area of public infrastructure maintenance). 2. Design and/or revise organizational structures. Based on this division of responsibilities, the SEZ Authority will have to be designed. This should include a full organizational chart, position descriptions, governance structure, authority tables, and internal procedures. To be effective, the new SEZ Authority should enjoy considerable freedoms, including the ability to operate outside the established civil service structure, ability to pay market salaries for talented managers, and streamlined asset management, procurement, and service delivery procedures. In addition, related organizational changes will have to be made in other Government agencies who are either surrendering powers to the SEZ Authority or who have to add internal capacity to support the Authority in the development of the SEZ. 3. Develop a change management plan. The new SEZ Authority will not be created overnight, which necessitates a change management plan that transfers authority, assets, systems, and perhaps even staff among public sector entities. The change management plan must include effective communication strategies aimed at both the affected civil servants and their customers (citizens, businesses, other Government employees) who are affected by the change. 4. Create a new, dedicated SEZ Authority. Once the new organizational structure is designed and the transition plan for implementation is completed, the SEZ Authority must be established. This includes creating the legal entity, establishing its finances, endowing it with assets, hiring staff, equipping offices, and putting in place the tools (including IT systems) required for near-term operations. 5. Design and implement a capacity building and management support program. Implementation of the new institutional framework will require the development of modern skills in change management, asset management, infrastructure planning, performance management, contract management, and investment promotion and facilitation that are not widespread in Bangladesh. This process should be supported with an appropriate capacity-building and management support program for both the SEZ Authority and related Government agencies. III. Legal and Regulatory Framework Creating the SEZ legally requires the development of a specialized legal and regulatory framework that goes well beyond a simple EPZ regime. This includes, for example, the legal and regulatory instruments governing residential activities, possibly duty-free consumption, special immigration benefits, tourism/recreation activities, and other aspects of the SEZ regime not found in smaller zones. However, the basic steps for designing and implementing the regime are quite similar to those already described under the Economic Zone Track in the previous chapter. 1. Select an appropriate level of autonomy for the SEZ Authority. The SEZ Law will have to establish the SEZ Authority with an adequate level of operation authority so it can meet its mandate. Depending on the powers granted to the SEZ Authority, this could be an independent regulatory body, a regional development agency, a Government-owned corporation, or a similar entity. 54 Chapter 5: Regional SEZ Development Track 2. Draft and enact a new SEZ Law. The law should create both the overall SEZ regime and the new SEZ Authority. In establishing relationships between the SEZ Authority and other Government agencies, the SEZ Law should supersede existing legislation in the case of any legal conflicts. 3. Draft and adopt implementing regulations pursuant to the Law. A full set of implementing regulations should be developed in tandem with the law to avoid any regulatory gaps and ensure that all policy and institutional transitional issues are enabled through the legal and regulatory framework. IV. Physical Development The SEZ’s physical location and demarcation will be the fundamental driver behind the SEZ’s strategy and market position. The SEZ’s basic attributes – greenfield vs. populated area, transportation infrastructure and linkages, natural resources, local economy – largely define the project’s opportunities. These opportunities can be maximized and leveraged by the SEZ policy regime, but the policy regime cannot overcome the negative impact of poor site selection. In general, an SEZ should be located strategically, on well-identified land areas of at least 2,500 acres, and chosen not only to minimize public sector outlays but contain the requisite population, commercial and transportation centers to ensure rapid development. To illustrate the importance of site selection, international examples are instructive: Developing the barren Batam Island in Indonesia required more than 20 years before it yielded concrete benefits, compared with three years for the Aqaba SEZ, which contained an existing town, port, and airport. The ultimate site selection must be directly linked to the definition of the SEZ’s objectives discussed above. For example, creating a “Greater Chittagong SEZ” aimed at maximizing the economic value of Chittagong as a multi-modal transportation hub has very different implications form creating a “Coal SEZ” in northern Bangladesh aimed at attracting investment in coal extraction, energy generation, and related downstream industries. In both cases, a feasibility study must first clearly establish whether the proposed project can be successful. However, irrespective of the precise site selected16, the physical development of an SEZ should address the following issues: 1. Identify and demarcate the SEZ area. Once the SEZ has been identified, the exact SEZ boundaries must be surveyed and demarcated. Depending on the geography and policy regime (e.g. duty-free status), this may or may not include physical demarcation/fencing and entry checkpoints. Resettlement issues are almost certain to arise as part of this site selection process, and must be considered in the site identification and subsequent site planning activities. Benefit sharing with displaced populations should also be integrated into the SEZ feasibility study. 2. Confirm, appraise, and transfer physical assets. The SEZ will include physical assets such as land and public infrastructure that are to be developed through private-sector participation. Such 16 No specific sites with SEZ development potential have been identified, though general areas in which an SEZ could be located have been discussed. BEPZA has recommended three corridors as high-potential SEZ locations, including 1.) Dhaka – Comilla – Feni - Chittagong, 2.) Jamuna bridge - Bogra, and 3.) Trishal - Mymensingh. In addition, the SEZ Working Group suggested that some of Bangladesh’s islands could be considered for SEZ development. 55 Bangladesh: Piloting Reform through the Development and Management of Economic Zones assets should be inventoried, appraised, and where necessary transferred to an owner identified as part of the institutional framework development. 3. Prepare land use, utility, transportation, and zoning plans. The overall SEZ feasibility study should include an initial land use and utility development program for analysis and costing purposes. Once the SEZ is confirmed, this basic information should be developed into a full, phased SEZ land use master plan, utility master plan, transportation master plan, zoning plan, and related design guidelines and environmental standards. These plans will then serve as the basis on which SEZ regulations for building codes, signage, and environmental enforcement will be based. 4. Prepare a public infrastructure improvement program. In developing the SEZ, certain enabling public infrastructure investments will be required. These investments should be programmed over time, including investments made by different public agencies and based on the organizational division of labor agreed to in the procedures and memoranda of understanding developed as part of the institutional framework implementation. 5. Prepare a private infrastructure investment program. The SEZ will attract investment in two areas: First, individual investors will choose to locate in the land set aside for industrial, commercial, tourism, and residential uses. Second, the SEZ’s financial plan will include specific infrastructure development projects (including land, utility, and tourism and transportation infrastructure development) that are to undertaken with private-sector participation. These projects should be specifically identified and incorporated into a time-bound private infrastructure investment program linked to the overall SEZ master plan. 6. Develop infrastructure planning and maintenance capacity. In addition to its general administrative capacity, the SEZ Authority will have to develop a formal, modern infrastructure planning, land management, asset management, and maintenance capacity. 7. Carry out privatization and PPP transactions. Over time, private infrastructure investments and PPP projects should then be brought to market in line with both the SEZ master plan and the private infrastructure investment program. This program will be adjusted and updated, based on the actual development pattern and investor interest the SEZ experiences. 56 Chapter 6: BSCIC/BEPZA Property Transformation Track This third Track is a medium-term transition initiative to achieve two objectives. First, the introduction of the new economic zones regime should not disrupt the operations of existing tenants in EPZs and industrial estates. Second, these subsidized EPZs and estates should not compete unfairly with new EZs that are developed, and should be exposed to market forces over time. However, the extent and timing of this liberalization will require a more detailed analysis of individual property assets. In general, experience in countries such as the Philippines and the Dominican Republic suggests that even highly subsidized public zones cannot compete with private zones once they are enabled by a supporting framework because public zones generally have a poor track record in providing value-added services in response to customer demand and because many investors have an inherent preference for modern, well-maintained facilities that public zones rarely provide. The following policy, institutional, legal/regulatory, and physical development actions will help to achieve these objectives. I. Policy Regime The policy regime described under the PPP-Based EZ Development Track calls for the transfer of BEPZA’s regulatory functions to the new EZ Regulator and the eventual transformation of BEPZA into a Public Asset Owner. In addition, BSCIC’s role will be recast to focus more directly on supporting small- scale industries and away from promoting the location of larger firms in its Industrial Estates or establishing sectoral parks aimed at larger investors (e.g. the proposed API park). This will require several important intermediate steps: 1. Commit to channeling future development exclusively through the new economic zones regime. BEPZA and BSCIC should immediately desist from developing new projects that duplicate the new economic zone regime’s development mandate in order to avoid any potential distortions between new, privately developed zones and older, subsidized properties. Existing zones will continue to cater to their current user bases but, over time, are likely to be out- competed by new private zones. Remaining Government-run zones may, instead, focus on niche areas with public good characteristics or demonstration effects. 2. Define a policy regime transition framework. Once the core EZ policies are defined in detail, a substantial effort should be devoted to planning a transition process for their implementation. This includes a time-phased transfer of obligations and responsibilities that will then be reflected in the legal/regulatory framework, the institutional framework, and asset ownership/transfer. 3. Define Bangladesh’s SME support strategy. The role of BSCIC’s industrial estates, discussed in terms of the institutional framework below, depends heavily on the future scale and scope of Bangladesh’s SME support programs. The current industrial estate program appears to lack alignment between the development ambitions for industrial estates and the financial and managerial resources available for implementation. The future role of subsidies for SME industrial property should be defined in terms of available financial resources, subsidy allocation, target SME profile, co-financing, performance criteria, and a subsidy “graduation” mechanism. II. Institutional Framework There are two primary institutional challenges affecting BEPZA and BSCIC. The main challenge for BEPZA is to re-cast itself as an asset manager and operator capable of operating its properties along commercial principles. This process will require BEPZA to understand its existing portfolio of properties 57 Bangladesh: Piloting Reform through the Development and Management of Economic Zones as individual business units, improve the current operations within those units, and develop commercialization strategies to increase efficiencies and put the units on a sustainable financial footing, with a view towards eventual privatization of its properties. While BEPZA will have a range of specific commercialization/privatization options to choose from over time, these will largely fall into one of the following categories, from least to most ambitious: Restructuring: BEPZA can restructure its property portfolio by isolating its individual business units (which may include both individual park operations and central services), devolving greater managerial decision making authority and financial autonomy to those units, and strengthen management capacity to operate these units to achieve greater levels of service provision and efficiency. In parallel, BEPZA would restructure its finances to isolate its current subsidies and financing shortfall to quantify its true funding shortfall and develop strategies for achieving greater cost recovery through a combination of increased operating efficiencies, reduced subsidies, and increased service fees. Outsourcing: BEPZA can unbundle its physical asset and service provision businesses and begin outsourcing individual functions and services to private companies to achieve cost savings and provide better services to tenants. However, given the basic service and maintenance levels currently in evidence at the EPZs, it is unlikely that private sector efficiencies will help to address BEPZA’s funding shortfall through efficiencies alone. It is more likely that higher-quality private service provision will allow BEPZA to charge higher rents as the EPZ properties are upgraded. This approach will require BEPZA to acquire new skills in contract and performance management. Lease/PPP Concession: Following a successful restructuring that isolates EPZs as individual business units, BEPZA can lease out parks to private operators and issue concession contracts for private investors to upgrade/expand and operate the parks for a fixed period of time. This approach may only be possible with the most successful EPZs, and will require BEPZA to add capacity in the areas of procurement tendering and contract monitoring and administration. In the case of a PPP transaction that substantially improves, redevelops, or expands an EPZ, this process should fall under the purview of the BOI in its capacity as the Development Agency. Divestiture: BEPZA can sell some or all of its operations outright, either partially or in their entirety. However, given the dearth of industrial property in Bangladesh, it may be preferable to retain Government land ownership and performance standards through a PPP transaction. The main issue to resolve with BSCIC is how to deal with its regulatory and development responsibilities for industrial parks. BSCIC now lacks the capacity to effectively administer its estates and is permanently constrained in doing so by its broad mandate and lack of institutional autonomy. To overcome this constraint, BSCIC should spin off the industrial estates portion of its mandate into a new Industrial Estates Authority, outside the umbrella of the Ministry of Industries and not subject to BSCIC’s broad social welfare objectives. Such an authority would have few regulatory functions and would thus operate largely in parallel with the BEPZA, also primarily as a Public Asset Owner. However, this institutional restructuring alone is unlikely to improve operations at existing Industrial Estates in which maintenance is lacking, services are poor or entirely absent, and tenants often do not value the industrial estate asset sufficiently to keep public areas clean. From the organizational aspect, several approaches can be considered. The common theme in all of these approaches is to introduce some measure of sustainability and maintenance discipline into the industrial estates program. Restructure the Industrial Estates into tenant-managed cooperatives. It has been suggested that at least some of the estates could be turned into tenant-owned cooperatives responsible for 58 Chapter 6: BSCIC/BEPZA Property Transformation Track their own maintenance. Such cooperatives could develop their own agreements regarding the maintenance responsibilities of the tenant base, the services to be provided by the cooperative, service fee levels required, and mechanisms for individual tenants to leave the cooperative and transfer plots to another party. Internationally, this approach is not common – Turkey is one country that relies heavily on cooperatives to develop new workshop space for small businesses, but does so with substantial Government support.17 Restructure the Industrial Estates into SME incubators. The focus of the estates, to provide subsidized space to small-scale businesses, suggests that a model based on business incubation could be considered. Business incubators generally provide subsidized, small industrial or research space and technical assistance to new start-up companies, sometimes in return for minority equity participation in the business. The incubator tenants are then given a specific time horizon (usually about two years) to “graduate” to a larger facility where they pay commercial rents or leave the program. However, the existing BSCIC industrial estates appear to be primarily aimed at existing rather than start-up SMEs, many of which are “sick” or under-performing and unlikely to graduate to unsubsidized facilities. This approach is unsustainable and needs to be changed. Restructure the Industrial Estates into stand-alone business units and develop a sustainable subsidy regime. Under any approach, the BSCIC portfolio should be broken down by business unit and subjected to a financial analysis. While the relationship between BSCIC’s budget, estate operations, and fee income must be clearly understood before a specific restructuring proposal can be made, it is safe to assume that all industrial estate tenants do not value their subsidized facilities equally. Given the limited available SME support funding in Bangladesh, it would be preferable to have the Industrial Estates Authority operate on a full cost recovery basis, but complemented by an SME support program that subsidizes rents or other services through BSCIC, but on a conditional basis – based on pre-specified development criteria and for fixed time periods. The option that is finally adopted will have to be based on a financial analysis of BSCIC’s industrial estate operations and on a realistic assessment of the level of SME support services that the estates’ tenants are likely to receive in the future. However, the transfer of the estates into a new, independent Industrial Estates Authority and their separation from BSCIC’s myriad other development programs and objectives will be a prerequisite in all cases. The main institutional issues to be addressed under this Track are: 1. Carry out a financial assessment of both BEPZA and BSCIC and their properties. This assessment will describe the two organization’s financial position in terms of their cost and profit centers for estates, estate services, and centrally provided services. 2. Survey the existing BEPZA and BSCIC tenant base. This survey will describe the current client base, provide feedback on client satisfaction with facilities and services, assess demand for 17 Turkey has relied on Construction Cooperatives to develop small-scale industrial estates for workshops since the 1960s. The program was initiated to provide properly serviced workshop space to small entrepreneurs and to create incentives for relocation from unserviced workshops in urban locations. The Cooperatives, usually linked to the Turkish Tradesmen and Craftsmen Confederation, receive subsidized long-term construction credits from the Turkish Ministry of Industry and Trade. In addition, estates with more than 100 workers are provided with on-site training centers by the Ministry of National Education. 59 Bangladesh: Piloting Reform through the Development and Management of Economic Zones improved facilities and services, and provide information on tenant growth and performance. This information will then be used to identify priority public investments and to understand the extent to which public subsidies for EPZs and industrial estates correlate with improved performance, particularly in the case of SMEs. 3. Prepare a business plan for the Industrial Estates Authority. A business plan should be prepared for operating, rationalizing, and/or closing industrial estates, based in the financial assessment, the tenant survey, and an agreement with policy makers regarding the level and form of subsidies that estate tenants will be able to qualify for in the future. This subsidy discussion will inform the business model that is finally adopted, and whether it includes cooperative management arrangements or a business incubation function. 4. Prepare a business plan for the restructured BEPZA. A business plan should also be prepared for the new BEPZA, operating as a Public Asset Owner. This plan will include time-phased strategies for restructuring, leasing/concessioning, or divesting properties and for outsourcing services, based in the financial assessment and the tenant survey. 5. Develop an institutional transition plan. A critical step in implementing the new framework is the development of an institutional transition plan that defines how responsibilities, staff, assets, and reporting lines are transferred among and between existing and new entities when the EZ regime becomes effective. This step is critical in ensuring continuity for existing investors, maintaining effective control over the exiting property portfolio, and enabling rapid development of new projects. 6. Create the Industrial Estates Authority and transfer BSCIC assets. A new Industrial Estates Authority, separate from the Ministry of Industry, should be established and endowed with ownership of the entire BSCIC industrial estate portfolio. This includes transfer of ownership of public assets and the assignment of exiting tenant leases and obligations. This transition should include clear stakeholder communication and pre-identified decision points and assessments to ensure that the transition is widely perceived as an improvement rather than as a bureaucratic requirement. 7. Re-engineer BEPZA. BEPZA will require substantial re-engineering to meet its new non- regulatory mandate, including a revision of internal rules and procedures and the addition of capacity in modern property management, operations and maintenance, and contract management and administration. III. Legal and Regulatory Framework Legal and regulatory steps related to the BEPZA and BSCIC transformation include: 1. Analyze existing lease. Both BEPZA and BSCIC leases must the analyzed to determine the extent to which they can be cancelled, modified, and re-assigned, and what rights and obligations the leases provide for. This analysis will form the basis for the asset transfers between BSCIC and the Industrial Estates Authority, the changes to the industrial estate subsidies, and BEPZA’s commercialization efforts. 2. Amend the BEPZA and BSCIC Acts, regulations, and internal rules. Both laws will have to be amended to specific each entity’s revised mandate, harmonize the Industrial Estate Authority 60 Chapter 6: BSCIC/BEPZA Property Transformation Track with the BSCIC mandate, and formalize the new, limited development roles of these entities in the development of industrial property. 3. Create the Industrial Estates Authority as legal entity. This new Authority will have to be created as a legal entity, most likely through a dedicated law, separate from the law establishing the Economic Zones Regulator. The Authority should be autonomous, ideally with significant private sector predication on its governing board. IV. Physical Development In terms of physical development, the main focus of the BSCIC and BEPZA transformation is to critically examine existing EPZ and industrial estate properties, identify those properties that either are or can be performing adequately, and phasing out poorly performing properties that are not likely succeed. The existing successful EPZs in Dhaka, Chittagong, and Comilla are enclave-style developments, while unsuccessful EPZs in locations that do not lend themselves to export processing (such as Mongla, Ishwardi, and Uttara) have been unable to attract significant foreign investment and may not be tenable even if the liberalized economic zone regime is introduced. The BSCIC industrial estates are more diverse, reflecting primarily regional economic patterns (though some do host large-scale garment assembly businesses, the BSCIC mandate notwithstanding). Food processing and engineering workshops predominate, but chemicals, pharmaceutical, garment, and textile businesses are also common. The presence of a large number of food processing enterprises suggests that the industrial estates have established more extensive linkages with the surrounding economy than the EPZs, though both the actual estates and the level of economic activity are much smaller. While the scope of this study does not permit detailed analysis of the performance and success factors of individual estates, in general it can be said that the 10 estates reviewed from an infrastructure perspective are woefully inadequate by any standard, lacking even the most basic infrastructure maintenance (see Annex C). In addition, the estates are burdened by a high proportion of “sick” enterprises to operating businesses – 12 percent on average and much higher in some cases (e.g. 33 percent in Khulna and 46 percent in Feni). While the final determination of which properties are viable will require a more detailed assessment of the property’s operations, its tenant base, its leases, and its market opportunities, the initial review suggests that there is significant room to rationalize the current properties and re-focus scarce resources on the most promising opportunities. This includes examining both the commercial attributes and likely economic development impacts as a basis for determining which opportunities to pursue. Here, investment in rehabilitation will have to be carefully weighted against new PPP-Based Economic Zone Development Track. While an upgraded EPZ may be able to attract more sophisticated investors than the labor-intensive operations who now make up the bulk of EPZ tenants, it would do so by displacing investors who have been able to make a success of the current EPZ arrangements. Developing new economic zones or even SEZs can have an impact beyond garments and footwear operations by attracting investors in more technology-intensive operations. In the case of the BSCIC estates, this may not be possible. In most cases the BSCIC estates are in very poor condition, small-scale, and inherently local. It would not be prudent to invest in the rehabilitation of these estates without putting in place a robust mechanism for ensuring that newly installed infrastructure can be maintained over time and is sufficiently valued by the estates’ tenants that they treat the property as something they have a stake in. This also applies to environmental upgrading efforts in these facilities 61 Bangladesh: Piloting Reform through the Development and Management of Economic Zones – these may not be valued by the current tenant base and would perhaps have to be introduced purely as a remediation effort in the public interest rather than as an investment that creates value for tenants willing to pay for the improvements. A diffused development of several new, small BSCIC estates would have to be measured against a larger zone development that can achieve some scale economies in terms of physical development, political capital required for policy and institutional reform, and a critical mass of visible change that can attract a new kind of investor to Bangladesh. While the commercial benefits and economic benefits of upgrading EPZs and industrial estates has to be examined on a case-by-case basis, a number of sites were ranked based purely on infrastructure attributes (for a detailed discussion, see Annex 2). The parameters included such factors as availability and cost of land, distance of transport hubs, and availability of utilities. Among three EPZs examined, Chittagong emerged as the best site for rehabilitation/expansion funding. Among the BSCIC estates, Bogra and Jessore emerge as the two highest-potential sites. Specific issues to address include: 1. Prioritize EPZ and Industrial Estate portfolios. Based on the financial analyses and tenants surveys, a clear distinction should be draw between properties that should be commercialized and upgraded and properties that should be phased out. 2. Phase out under-performing properties that are unlikely to recover. Both BEPZA and the Industrial Estates Authority should stop investing in properties that are not meeting their objectives. Depending on existing lease provisions and the degree of subsidization of these properties, this could be accomplished over time through attrition, lease buy-outs, sale, and/or land grants. 3. Initiate an infrastructure improvement program for BEPZA properties. Based on the new BEPZA business plan, an infrastructure improvement program for high-potential EPZ properties should be initiated. Physical infrastructure improvements could be supplemented with positive incentives for improved maintenance and environmental compliance. For example, public information campaigns, independent ratings of facilities (perhaps carried out by NGOs), and discounts for waste minimization or the introduction of environmental management systems (e.g. ISO 14000 certification) could be introduced. Government- or donor-funded challenge funds could also be designed to further enhance environmental compliance. 4. Determine whether the industrial estates program be upgraded or expanded. Depending on the policy decisions regarding SME support and the Industrial Estates Authority business plan, new industrial estates specifically aimed at SMEs may be initiated after the existing property portfolio has been consolidated. 62 Chapter 7: Implementation: Sequencing and Risks I. Implementation Sequencing The following Gantt chart illustrates how the three Tracks discussed above, their components, and components tasks could be sequenced for implementation. The Gantt chart assumes a “day zero” start date and sequences tasks over generic quarters. Individual tasks are scheduled based on assumptions about their duration that include both the minimum duration to accomplish the work required and allowances for anticipated review and authorization processes. Assumptions about political processes such as the time required to pass new legislation are based on best-case experience with similar projects. Such timing is difficult to predict and could in practice lead to a much longer implementation timeline. The PPP-Based Economic Zone Development Track schedule indicates that the policy regime could be agreed to within the first three quarters, while the institutional and legal prerequisites could be in place as early as quarter 6. Infrastructure development would begin in earnest by quarter 9, when the applicable planning regime would be in place. The Regional SEZ Development Track focuses on the early development of a national consensus on the SEZ’s purpose and location, followed by a 12-month technical evaluation and design period. Based on the scale of such a development, the SEZ law and institution would not become effective before quarter 10. The BSCIC/BEPZA Existing Property Transformation Track requires a number of technical analyses that can be prepared early in the process, but the bulk of the institutional and legal/regulatory tasks are dependent on progress achieved in the Economic Zone Development Track. A consolidation of under- performing properties could begin in quarter 5. It should be noted that the policy regimes for the Economic Zone Development Track and the Regional SEZ Track share many fundamental policy aspects and assumptions, with the Regional SEZ Track amplifying and adding to many of the policies that must be put in place for the Economic Zone Development Track. In this sense, the policy regime and its enabling legal framework may be thought of as part of one overarching reform strategy. However, the institutional framework required does differ significantly between the two Tracks. 63 64 Bangladesh: Piloting Reform through the Development and Management of Economic Zones The following table summarizes the responsibilities and completion indicators associated with implementing the three Tracks outlines above. Responsibilities are indicated for the primary party accountable for delivering the action – in many cases, secondary parties (e.g. government agencies, consultants, donors) will have to provide assistance. Timing refers to the quarter in which the task is completed. Responsible parties and indicators are necessarily broad at this stage. As the Tracks are implemented, responsibilities should be assigned to specific organizations and individuals, and completion indicators should be supplemented with approval and quality requirements. Table 16: Implementation Responsibilities and Indicators Component Action Responsible Timing Indicator (Quarter) Economic Zone Development Track Policy Assemble public-private GOB 1 Coalition meets Regime reform coalition Resolve KEPZ issue GOB 1 License issued or denied with explanation Agree on EZ incentive Reform Coalition 2 Policy paper approved regime Design duty deferral regime Reform Coalition 4 Design completed Design EZ licensing regime Reform Coalition 3 Design completed Adapt EZ labor regime GOB 3 Design completed Design EZ PPP regime Reform Coalition 4 Design completed Identify pilot project Reform Coalition 4 Final mechanism agreed mechanism Develop communications Reform Coalition 5 Campaign initiated campaign Institutional Define workload Reform Coalition 4 Requirements Framework requirements description Define service delivery Reform Coalition 5 Requirements requirements description Define organizational roles Reform Coalition 4 Roles agreed Design the new EZ Reform Coalition 5 Design completed Regulator Design BOI Development Reform Coalition 5 Design completed Agency role Implement capacity building Donors 5-12 Advisory team in place program Implement supporting IT Donors 5-11 Systems installed and program operating Legal and Define autonomy for EZ Reform Coalition 3 Governance structure Regulatory Regulator and BOI agreed Framework Draft new EZ law Reform Coalition 4 Law drafted Draft implementing Reform Coalition 5 Regulations drafted regulations Develop lobbying strategy Reform Coalition 4 Strategy being implemented 66 Chapter 7: Implementation: Sequencing and Risks Component Action Responsible Timing Indicator (Quarter) Enact new EZ law and adopt Parliament 7 Documents gazetted regulations GOB Draft pilot transaction Reform Coalition 4 Documents prepared documents Physical Carry out market demand Reform Coalition 3 Analysis completed Development analysis Identify available GOB 4 List compiled government land Carry our pilot feasibility Reform Coalition 5 Analysis completed analysis Design industrial property Reform Coalition 5 Design completed development program Design infrastructure Reform Coalition 5 Design completed development program Develop environmental Reform Coalition 6 Standards completed standards Develop planning, zoning, Reform Coalition 8 Guidelines completed and design guidelines Regional SEZ Development Track Policy Define SEZ rationale Reform Coalition 2 Policy paper approved Regime Develop national consensus Reform Coalition 3 Buy-in mechanism mechanism developed Prepare SEZ feasibility Reform Coalition 6 Study completed study Define SEZ policy regime Reform Coalition 4 Policy paper approved Implement policy regime GOB 10 Government decision Institutional Define division of Reform Coalition 5 Responsibilities defined Framework responsibilities Design organizational Reform Coalition 6 Design completed structure Develop change Reform Coalition 6 Plan adopted management plan Create SEZ Authority GOB 10-12 Authority staffed and equipped Implement capacity building Donors 10-19 Advisory team in place program Legal and Define autonomy for SEZ Reform Coalition 6 Governance structure Regulatory Authority agreed Framework Draft new SEZ law Reform Coalition 7 Law drafted Draft implementing Reform Coalition 8 Regulations drafted regulations Enact law and adopt Parliament 10 Documents gazetted regulations GOB Physical Identify and demarcate SEZ GOB 8 Boundaries mapped Development Confirm, appraise, and GOB 11 Appraisals completed, transfer assets titles transferred Prepare land use, utility, Reform Coalition 10 Plans completed transport, and zoning plans Prepare public infrastructure GOB 8 Program designed program 67 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Component Action Responsible Timing Indicator (Quarter) Prepare private Reform Coalition 9 Program designed infrastructure program Develop infrastructure Donors 10-15 Advisory team in place management capacity Carry out PPP transactions GOB 10-34 Ongoing BSCIC/BEPZA Property Transformation Track Policy Define policy transition Reform Coalition 4 Framework defined Regime framework Commit to channeling new GOB 1 Policy announcement projects through EZ regime Define Bangladesh's SME GOB 3 Strategy defined support strategy Institutional Carry out financial Reform Coalition 3 Assessment completed Framework assessments of BEPZA and BSCIC Survey BEPZA and BSCIC Reform Coalition 3 Survey completed tenants base Prepare Industrial Estates Reform Coalition 7 Plan adopted Authority business plan Prepare BEPZA Reform Coalition 8 Plan adopted restructuring plan Develop institutional Reform Coalition 8 Plan adopted transition plan Create IEA and transfer GOB 10 Agency staffed, assets BSCIC assets transferred Re-engineer BEPZA Reform Coalition 11 Organization and procedures revised Legal and Analyze existing leases Reform Coalition 2 Analysis completed Regulatory Amend BEPZA and BSCIC Parliament 7 Documents gazetted Framework law and regulations GOB Create IEA legal entity GOB 7 IEA staffed and equipped Physical Prioritize EPZ and IE Reform Coalition 6 Priorities announced Development portfolios Phase out under-performing IEA 6-11 Properties removed from properties entities BEPZA Initiate BEPZA BEPZA 6-18 Ongoing infrastructure improvements Determine whether to GOB 6 Decision announced expand IE program 68 Chapter 7: Implementation: Sequencing and Risks II. Implementation Risks There are a number of implementation risks that must be anticipated and mitigating measures that can be developed; these are summarized below. Table 17: Potential Risks and Mitigating Measures Risk Rating Mitigating Measure Lack of political support for Moderate Effective communication of limited benefits zone regime reform leads to conferred by limited reforms adoption of only “Option 1” Private developers remain High Speedy resolution of the KEPZ license skeptical of purely private Rapid implementation of new PPPs serves as initiatives demonstration effect for efficacy of new regime Suitable sites for new projects Moderate Systematic site identification effort cannot be identified Lack of market demand for Low Risk is absorbed by private developer, who in new zone facilities turn mitigates through phased project implementation Demand-driven site selection Lack of willingness-to-pay for Moderate Demand-driven project design improved zone facilities Privatization of existing properties reduces price competition from subsidized zones Ambitious SEZ project leads Low Economic zone strategy development that is to political stalemate and sensitive to political feasibility delays economic zone SEZ initiative pursued on parallel track, not development contingent on economic zones regime Zone-based development High Emphasis on infrastructure, administrative, challenged by supporters of and PPP aspects over pure fiscal incentives national-level reforms Success of existing zones III. Monitoring and Evaluating Success A monitoring and evaluation framework should be developed (see Box 10 for some suggested indicators. As the final strategy is adopted and the Action Plan prepared, specific milestones and “go/no-go “decision points can be identified to monitor progress regarding: Finalizing the legal, regulatory, and institutional actions required to implement the new regime; Converting the existing EPZ and industrial estate properties; Designing new projects, taking them to market, and bringing them on-line; Achieving improved public sector service provision to developers and tenants; Generating employment, industrial output, and exports; and Diversifying the manufacturing and services economy. 69 Bangladesh: Piloting Reform through the Development and Management of Economic Zones Box 8: Indicators for Monitoring and Evaluation Zone Program Development: Number of zone developers licensed Raw land area developed Total investment in zone development Investment per square meter Direct employment by developer/operator Percentage of developer revenue from value-added services Assessed land value Zone Program Performance: Direct employment created Number of leases signed Investment by tenants Space occupied by tenants Total wage bill Average monthly wage Net output Export sales Zone Program Management: Days to approve developers Days to approve tenants Days to lease signature Number of customs violations Number of health/safety violations Incidence of power failure Incidence of work stoppage Effluent BOD/COD 70 World Bank Bangladesh Development Series publications Paper No. 1 Bangladesh PRSP Forum Economic Update – Recent Developments and Future Perspectives (Nov. 2005). Paper No. 2 End of MFA Quotas: Key Issues and Strategic Options for Bangladesh Ready Made Garment Industry (Dec. 2005). Paper No. 3 Bangladesh Country Water Resources Assistance Strategy, (Dec. 2005). Paper No. 4 Comparative Advantages of Health Care Provision, (Dec. 2005). Paper No. 5 Targeting Resources for the Poor in Bangladesh (Dec. 2005). Improving Trade and Transport Efficiency – Understanding the Political Paper No. 6 Economy of Chittagong Port (Dec. 2005). Paper No. 7 Revitalizing the Agricultural Technology System in Bangladesh (Dec. 2005). Bangladesh Integrated Nutrition Project, Effectiveness and Lessons Learned Paper No. 8 (Dec. 2005). Paper No. 9 Social Safety Nets in Bangladesh: An Assessment (Jan. 2006) Paper No. 10 Bangladesh Country Assistance Strategy (April 2006) Paper No. 11 Economics and Governance of NGOs in Bangladesh (April 2006) Paper No. 12 Bangladesh Country Environmental Analysis (September 2006) Paper No. 13 India-Bangladesh Bilateral Trade and Potential Free Trade Agreement (December 2006) Paper No. 14 To the MDGs and Beyond: Accountability and Institutional Innovation in Bangladesh (February 2007) Paper No. 15 Strengthening Management and Governance in the Health, Nutrition and Population Sector of Bangladesh (March 2007) Paper No. 16 Bangladesh: Piloting Reform Through the Development and Management of Economic Zones Forthcoming Publications Learning for Job Opportunities: An Assessment of the Vocational Education and Training in Bangladesh Dhaka: Improving Living Conditions for the Urban Poor Bangladesh: Strategy for Growth and Employment All Bangladesh Development Series papers are downloadable at www.worldbank.org.bd/bds 71