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Dr Gift Mugano

Special Economic Zones (SEZs), export processing zones, free zones, export free zones, investment promotion zones or foreign trade zones are increasingly a policy tool of choice for governments seeking to attract foreign investment, promote export-oriented growth, and generate employment.Recent estimates, according to World Bank, indicate that there currently are more than 2 300 SEZs established in 120 countries. SEZs are spatially delimited areas, which offer a combination of high-quality infrastructure, expedited customs and administrative procedures, and a range of fiscal and non-fiscal incentives to overcome barriers that hinder investment in the wider economy.

Well-designed SEZs have been successful as instruments for export-led development, particularly in Asia and Latin America where many zone programmes have been in place for several decades.

However, despite high profile successes, many SEZs around the world have failed to meet their potential. Although multiple factors contribute to the failure of an SEZ programme, in most cases, they can be traced back to the initial planning stages, and derive from an ineffective regulatory and institutional framework.

In common with many other countries in Africa and elsewhere, Zimbabwe sees the development of Special Economic Zones (SEZs) as a critical element of a programme to facilitate private sector investment and transform the manufacturing sector to enhance competitiveness and industrialisation for job creation.

Undeniably, SEZs traditionally have been used to address the very constraints facing investors in Zimbabwe and as “quick-win” measures to exploit the potential for private sector driven job creation as enunciated in the Zimbabwe Agenda for Sustainable Social Economic Transformation.

It is, therefore, crucial that the policy and institutional aspects of the SEZ regime are designed and implemented effectively to ensure that it delivers on its potential role as a facilitator of investment, competitiveness, and job creation.

In recent weeks, background reports shows that Government of Zimbabwe is working on establishing an authority for SEZ. This article therefore provides analysis concerning the institutional framework under which the zones programme should be developed and administered in Zimbabwe basing on international best practice.

It examines various institutional and administrative structures for managing an SEZ programme, focusing on the alternative approaches taken in different SEZ programmes around the world and highlighting both good practices and those that have been less successful, and drawing lessons for Zimbabwe.

Against this background, the article is structured around two key principles for designing an effective institutional framework for SEZs: 1) clarity in roles and responsibility and: 2) authority and co-ordination.

Clarity of roles and responsibilities

The operation of an SEZ includes the roles of zone owner, zone developer, zone manager or operator, and zone regulator. Up until the 1990s, when most zone programs remained fully in the hands of governments, it was usual for the same government body to carry out all these roles simultaneously.

This approach remains common in many zone programmes around the world, particularly in East Asia where most zone programmes were established much earlier.

However, not only are few governments experienced in planning and developing economic zones, given the large investments required to support zones and their uncertain return, development of zones can be a risky proposition for governments. Private sector development (or public-private partnerships) can not only provide critical expertise, but can reduce Governments’ risk in zone programmes and ensure greater transparency.

With the growing participation of the private sector in zone programmes around the world, the multiple mandates of government in the traditional approach to zones is increasingly problematic.

Specifically, it creates a conflict of interest, where the government is responsible for regulating and promoting all the zones in a country, including zones developed and operated by the private sector as well as those developed and operated on behalf of the government.

Certainly, more often than not it is actually the same Government agency responsible for regulation and the development, so in effect they are regulating themselves. Regardless of the transparency or effectiveness of the regulator, a bias will be perceived by the private sector, which acts as a significant barrier to attracting private sector developers, and becomes a point of contention in cases where disagreements arise.

This overlapping mandate currently exists in Tanzania, with the Export Processing Zones Authority (EPZA) acting as both the regulator of all zones and also the developer and operator of the SEZ.

While the SEZ is the export processing zones but it was four years before it become operational when the EPZA was established. A Special Economic Zones Act was passed in 2006 but implementing regulations has never been defined.

Development of the zones programme was slow in the initial years in part as a result of the poorly defined institutional framework and the overlapping mandates for the EPZ and SEZ programmes. The EPZA has also been affected by a lack of authority and resources.

The best practice approach to avoiding this conflict of interest is to separate the regulatory role as much as practically possible from the roles of owner, developer, and operator.

This allows the regulatory role to remain fully independent from any individual zone. As part of this process, the Tanzanian government with the help of World Bank designed an institutional framework which outlined clearly the specific responsibilities of the different actors, that is, government, regulator, developer and operator as:

Government

Contacting strategic planning;

Selecting site(s) and package land/establish land use guidelines;

Contact initial feasibility studies;

Select and enter into agreement with the developer;

Develop offsite infrastructure;

Training and delivery of social services;

Regulation and administration of the SEZ programme (see the regulator).

Regulator

Designate SEZs: Designate public and private land as SEZs and public or private SEZ developers and/or operators;

Facilitate government services: Facilitate licensing, registration and permits (environmental, building, work permits etc), regulate services within the SEZs such as utilities, provide for dispute resolution; the regulator may set fees commensurate with the cost of service delivery.

Monitor compliance: Monitor compliance with the SEZ legal framework, including SEZ policies, standards and requirements, and enforce compliance through appropriate penalties independently from other public agencies.

Developer

Land use planning: Create a final land-use master plan, and prepare the land (grading, leveling, other pre-construction activity).

Provision of infrastructure: internal road networks, drainage and sewerage, and infrastructure for provision of utilities.

Operator

Facility leasing: Managing lease and rental agreements with individual investors and responsibility for main services of the zone (including maintenance, security, etc.);

Transacting utilities: Ensuring provision of on-site utilities (electricity, gas, water, telecommunications) through own provision or via domestic providers.

Provision of other value-added services: May include a wide range of other services including business and training centres, medical and childcare, transport, recruiting, etc.

Marketing: Experienced private developers often have a network of multinational clients across a range of industries to which they can market new SEZ opportunities. Note that the SEZ authority/regulator and other parts of government (such as an investment promotion agency) typically also carry out some marketing activities

The free zone programme in Ghana, under the authority of the autonomous Ghana Free Zones Board (GFZB) is a good example of a programme which makes a clear separation of these roles.

GFZB is responsible for planning, regulation, and promotion of the free zones, as well as for packaging of sites for development (through leases to private developers). From the outset of the program (1995) GFZB was restricted from involvement in zone development and management.

In contrast, in Lesotho, where the public developer of industrial parks also acts as the promoter, regulator, and administrator of the licensing regime, provision of land and factory shells and below-market rates has been cited as a key factor undermining private sector provision, resulting in an acute shortage of industrial facilities.

In Bangladesh, where the same authority is responsible for zone development, management, and regulation, the first privately developed zone languished for 8 years awaiting approval for its operating license and has since struggled to move forward on construction due to lack of guarantees from the government on accessing energy supplies.

Of course, leaving zone development to the private sector does not mean the zone authority has no role in the development process. Its role as a regulator is critical to ensure that development processes are both transparent and effective.

It is critical that the legal framework establish an unambiguous set of rules and procedures guiding the entire process of site selection, investment, development, licensing, and operations of private development.

The zone authority, in its regulatory function should ensure that private developers adhere to specific criteria in terms of the locations in which they develop, the nature of physical development, and environmental practices, among other things; they should also ensure that developers are vetted in terms of their financial capacity and record of experience.

Authority and co-ordination

Key operational principles to ensure the SEZ regulator delivers effectively on its mandate are: authority and coordination.

These principles are intrinsically linked to the organisational positioning and structure as discussed in the previous section.

But also derive from the powers mandated to the agency, the resources made available to it, and the degree to which the institutional structure facilitates constructive interaction across stakeholders.

Given the concerns over the existing institutions – that they are often sources of inefficiency and poor service provision – it is critical that the SEZ authority provide guidance and be capable of working with the agencies to improve their performance standards of the services they deliver to the regulatory authority.

However, where existing institutions are known to be sources of corruption, it is necessary for the SEZ authority to take over their regulatory functions. This is most common in the area of customs.

Cross-agency co-ordination is also important for marketing and promotion of the zones, as in most countries the SEZ authority has primary responsibility for marketing and promotion and (nearly always) investor after-care, while a separate national investment promotion authority as in Zimbabwe Investment Authority (ZIA) as in Zimbabwe’s case performs these same roles for the country overall.

Both institutions typically operate as autonomous agencies, often with both reporting in through the same ministry.

 

Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or [email protected]