Special Economic Zones in Central Asia - macro

Special Economic Zones in Central Asia
Geoff Wright, Trade Policy Conference, Astana, 1 July 2014
Deloitte Consulting LLP
Introduction

CIS nations began developing Free Economic Zones in the early 1990s
Economic performance of Free Economic Zones was mixed over the 1990s
due to a number of reasons, including:
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Challenging macroeconomic environment
Uncertainly over application of investment incentives
Local versus central government control
Bureaucratic burden on investors
Risk of corruption and illegal activities
New Special Economic Zone regimes have been introduced over the last
decade in many CIS countries including the Russian Federation (2005),
Uzbekistan (2008), Kazakhstan (2011) and Kyrgyzstan (2014)
What experience can be applied from SEZ performance in other countries to
the new or planned SEZ regimes in Central Asia?
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
What is a Special Economic Zone (SEZ)
 SEZs
are geographically bounded areas of land, ranging from 5 to 50,000
hectares, often near a port or international border, used to attract
manufacturing, service and logistics activities in specialist or multi-use SEZs
 SEZs
are commonly developed by a single private or public sector entity who
may contract sub-developers and an operator to manage the SEZ
 The
developer invests in necessary physical infrastructure and the provision of
utilities within the SEZ and leases/sells individual plots to enterprises locating in
the SEZ
government agency administers
regulatory functions at the SEZ, generally
including business licensing and building
permits and may also administer special
fiscal and customs procedures.
The International Labor
Organization estimated in
2006 that 3,500 zones and
industrial estates are
operating in 130 countries,
employing 66 million workers
– including 40 million in China
alone.
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A
SEZ as Catalyst for National Reform
 Within
the right policy framework, SEZs
program can serve as a catalyst for
national reforms
 SEZs
can also attract pioneer investors
into emerging markets, encouraging other
domestic and foreign investors to locate in
the country and further stimulating new
reforms as the private sector grows
SEZs provide a known product,
lower risk and offer greater
certainty to foreign investors,
especially if they are operated by
a large international SEZ
operator.
 As
the appropriate policies and practices are refined within SEZs, impact is
observed over time and the public accepts the changes they can be applied
nationally
can still rely on their location and infrastructural comparative
advantages to continue attracting investment
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 SEZs
Taxonomy of Zone Types
Incubators
Single
Factory
Zones
Worldwide,
enormous variety
exists in Zones
Programs.
Most fall under
these common
headings
Bonded
Warehouses
Free Trade
Zones and
Export
Processing
Zones
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Freeports
Industrial
Estates
(No Fiscal
Incentives)
Distribution of Estimated Number of Operational SEZs (Latest Year Available)
Central Asian countries have recently developed new SEZ regimes – often
replacing their former zone regimes from the 1990s
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300
250
Kazakhstan
9
200
Kyrgyzstan
4
150
Tajikistan
4
100
Turkmenistan
1
Uzbekistan
1
Russian Federation
20
50
0
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Central Asia SEZs
Summary of Economic Impacts
Most zones have a significant economic impact in terms of
 Rapid employment generation especially for women
 Higher
pay levels and growth rates
 Exports,
 Skills
especially in smaller countries
and technology transfer
But success has been more limited in other areas
 Low net exports due to low local value-added
 Few
economic linkages with domestic economy
 Located
for political not economic reasons
 Unclear‫‏‬cost/benefit‫‏‬structure‫‏‬with‫‏‬incentives,‫‏‬infrastructure…
 Continued
levels of administrative barriers
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 Corruption
Why Have Other Zones Succeeded?
Many zones that have succeeded are characterized by some or all of
the following features
 Streamlined legal and regulatory framework
 Public-private
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 Clear
partnership approaches for zone development
Largely private sector-led; lead role for one developer
zone designation and development criteria
 Top-level,
integrated support of government e.g. Jordan, UAE
 Competition
on the basis of facilitation and services rather than
incentives
authority is autonomous, flexible, and focused on regulation
 Minimization of public expenditures by locating zones carefully/use
existing facilities and private participation
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 Zone
Issues With Traditional Concept
Public sector development of zones
 Subsidized
or over-designed facilities
 Poor
locations away from business and urban centers (growth pole politics)
 Poor
maintenance, services, promotion, and crowded facilities
Uncompetitive policies
 Rigid
eligibility requirements
 Poor
labor policies and labor relations, suppression of unions
 Competition
on the basis of incentives rather than facilitation and services
 Zone
authorities often non-autonomous, inflexible, and focus on regulation
 Poor
backward/forward linkages with supplier companies and customers
high levels of administrative barriers
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 Continued
Issues With Traditional Concept
Lack of an integrated development approach
• No provision of off-site infrastructure
• Lack of public-private partnerships
• Poor zone designation and development criteria
• Mismatched regulatory authority capabilities and requirements
• Poor linkages with the national economy / low net exports
Bureaucratic procedures and controls
• Complex investment approval procedure
• Cumbersome customs procedures
• Excessive monitoring/reporting requirements
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Inadequate institutional structure
• Too many agencies involved in regulation
• Lack of authority and funding in regulatory body
Emerging Concept for Success
Physical features
 Integrated,
mixed-use, large-scale‫“‏‬mega‫‏‬zones”
 IT systems & networks
 Purpose-built facilities
Development Approach
 Public-private
partnerships OR Private developer
builds/owns/operates zones on cost-recovery basis
Policy Framework
 Special‫“(‏‬First‫‏‬World”)‫‏‬Regulatory‫‏‬Environment
 Multi-market,
not just export
 Full range of activities and ownership permitted
 Deregulation and competition policy
 Streamlined procedures, automation
 Adherence to universal labor rights
Institutional Framework
authority regulates activities within just one zone
 One-stop shop for zone regime regulation
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 Zone
Key SEZ Strategy Questions for the Government
1. What type of SEZ and set of
policies is most likely to
succeed given likely demand
conditions?
2. Is there sufficient economic
benefit to justify public sector
support for an SEZ program
and one or more SEZ
projects?
The various
elements of
the Strategic
Planning
Process are
designed to
answer these
fundamental
questions.
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3. Is there a sufficient
expectation of financial
return to attract a private
sector firm to develop and
operate the first SEZ?
Selecting the Right Type of SEZ Regime
The first question depends on demand forecasts of the kind of investors likely
to be attracted to the proposed site, their likely activities and investment.
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Comparative
Benchmarking
Demand Results
SEZ Type
Demand from
SMEs for Space
Mini-estate
Demand
Assessment
Demand for
Manu/services
for local market
Light Industrial
Estate
Site
Assessment
Demand for
Heavy Industry
Heavy Industry
Estate
Demand for
Logistics and
Warehousing
Logistics and
Warehousing
Demand for
Export
Manufacturing
Manufacturing
Free Zone
Competitive
Situation
Analysis
Comparative
Benchmarking
Demand
Assessment
Site
Assessment
Advantages?
Demand Profile?
Duty Regime
No
Customs
Control
Customs
Controlled
What Kind of SEZ?
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Initial Assessment
Estimate Private and Social Returns
Government
Takes Lead to
Develop Initial
SEZ for eventual
Transfer to
Private
Developer
Economic Benefit
Government
Approaches
Market to
Negotiate
Agreement with
Private SEZ
Developer
Financial Rate of Return
Consider
Alternate SEZ
Site with lower
infrastructure
costs or
redesign type of
SEZ regime
Government
Limits its
Involvement to
Regulating
Activities of
Private
Developers
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The answer to the second
and third questions,
economic benefit and
potential financial return,
together equip a government
to determine how much—if
at all—it should intervene in
the development and
operation of the first SEZ.
If there is little or no
expected economic benefit,
public support should be
very limited.
Key Roles in the SEZ Development Process
Regulator
• The regulator is the public sector body responsible for
designing and administering the SEZ regime.
Developer
• The developer is the entity responsible for physically
developing the SEZ site, including financing, designing and
constructing infrastructure and facilities.
• The operator is the entity responsible for day-to-day
management of one or more SEZs.
Enterprises
• Private sector investors in the SEZ. This generally refers to
the end-users of the SEZ, but it may also include ancillary
service providers that enhance the value-add of the SEZ.
Other
Stakeholders
• Entities and groups that have a vested interest in the SEZ
and its environs. This may include community
organizations, local leaders, NGOs, labor unions, etc.
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Operator
Private vs Public Development and Operation
Strategic
Planning
Establish
SEZ
Framework
Develop
SEZ
Project
Operate
SEZ
Project
Public Sector Leadership
The private sector should
play a consultative role
throughout the process.
However, when the private sector takes the lead
depends upon a variety of factors. Ultimately it is
based on market Perception of Risk.
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Private Sector
Leadership
The Role of the SEZ Regulator
 The
national SEZ regulator leads the
government’s‫‏‬efforts‫‏‬to‫‏‬plan and
regulate the SEZ Program, independently
from the developer and operator.
 The SEZ law should legally empower the
regulator to exercise regulatory
authority in each SEZ in terms of:
With limited capacity and
experience, the newly
established regulator should
cooperate with existing
public agencies to exercise
these authorities.
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– Customs
– Income tax
– Business registration and licensing
– Other regulatory functions.
Effective SEZ Policies
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In addition to providing secure, serviced industrial or commercial land to
investors, SEZs also provide a package of policy and procedural reforms to
overcome impediments to the existing business climate.
Major policy areas addressed by the SEZ regime include:
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Income Tax
Customs Duty
Restrictions on Foreign Ownership
Land Use and Building Permitting
Business Licensing
Company Law Regime
Labor
Environment
Dispute Settlement
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
Roles of Government and Developer
During the development stage the Developer is generally
responsible for on-site activities and the Government is
responsibility for off-site activities
Government
(Regulator)
Developer
(Public or Private Sector)
• Project planning
• Coordinate preparation of
land use master plan with
developer
• Off-site infrastructure and
utilities
• Approve‫‏‬developer’s‫‏‬plans‫‏‬
for construction
• Monitor construction
against building code
standards and agreed
construction schedule
• Detailed feasibility
analysis
• On-site infrastructure &
utilities
• Secure financing and
other resources
• Prepare design
• Select construction firm
• Build first phase of project
(off-site/on-site build-out)
• Launch marketing effort
• Mobilize investment
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Develop
SEZ
Project
Roles of Government and Operator
For the government, operation covers the day-to-day
management of the SEZ program, while the developer
manages the SEZ project itself
Government
(Regulator)
Developer
(Public or Private Sector)
• License tenants
• Issue building and
environmental permits
• Administer customs
operations
• Monitor developer for
compliance with
concession agreement
• Monitor tenants for
compliance with
regulations
• Enforce compliance
• Support marketing efforts
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• Market the SEZ to
prospective tenants
• Lease tenants
• Provide agreed core and
ancillary services to
tenants
• Maintain infrastructure
and common areas
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Operate
SEZ
Project
Partial Privatization Models
 International
experience almost universally demonstrates the effectiveness of
private sector control of the design, development and operation of SEZs
 Precisely how the partnership works, and to what degree the private sector is
involved, differs widely
 The result has been an evolution of models, with varying degrees of private
sector participation.
 Partial privatization models can be broadly described in four categories:
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– Private zone development and operation
– Joint venture development
– Outsourcing of other functions and services
– Management support programs

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